Hi Everyone,
I am quite interested in a block of flats that has been on the market for over a year. The town it is in has a rather large industrial development proposed, however we won’t know if it is approved until mid next year.
I have heard of an “Option to buy” where you pay the vendor x amount of dollars ( non refundable) which gives you the right to purchase within the next 12 – 24 months.
Can anyone give me some more info on this? Is it very common? what sort of an upfront fee do you need to pay?
Thanks in advance,
Pete
There are a lot of products out there, I am not sure if you are refering to something like a deposit guarantee. This product you buy and the vender is promised the deposit if not settled. You pay a fee to purchase the guarantee and if you do not settle the company that has provided the guarantee for you, will then pay the seller the deposit and claim the deposit back from you
This is not a recomendation; I am just letting you know there is such a product. You need to be sure that you are going ahead or you will loose the initial fee you pay for the guarantee which is something like 1.2% of the deposit amount and then they will be after you for the deposit.
It means however you do not need the cash up front. Further the money is not secured but you do need a significant amount of equity for them to agree to provide the Guarantee
Hope that make sense its late and I am a bit tired
Wayne Skewes
Mortgage Broker
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Refinace, Loan Consolidation, Owner Occupied or Investment Finance. Free Service I come to you!Hi, yes, very common. The fee is up to your negotiation skills. Generally 2% seems to be common, but it would depend on how long the option agreement is for, the agreed on purchase price etc.
Terryw
Discover Home Loans
Parramatta
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What you are talking about is called an ‘OPTION” not “Rent to Buy”
You make your offer to purchase the “OPTION” in the same way as if you were buying the property, except your premium (deposit) is not refundable if you do not exercise the “OPTION”
So you pay the premium and say you will purchase in 6-12 months.
Options are another form of leverage, you are in control of a large asset for a small amount of money by using only a premium (deposit).
You do this IF you know that the realesate is going to worth alot more in the near future, you are banking on something happening that no one else knows about.
SO you obviously offer the Vendor slightly more money than what its worth to make it an attractive deal.
Obviously if the realestate tip you have doesnt come through you dont exercise your “OPTION” and you lose your premium (deposit) and have nothing.
“OPTIONS” are best used when you know you can add value to a site quickly and on-sell the project to another buyer (ie. building or developer) prior to the expiry of the “OPTION”
Make sure you include a clause on the contract that
“Purcahaser can transfer this option to others” so that you can onsell.
“Vendor to give rights to you to approach council with regards to the propety”
I hope this makes sense!!!!! let us know…
There seems to be some confusion here.
An option is an agreement whereby the purchaser has the right, but not the obligation, to purchase something in the future.
eg. say Peter and Jackie’s property, the one they are looking at, is worth $1,000,000. They are not sure if they really want to buy, but think there is potential. So they offer the vendor $20,000 to sell them an option. The agreement may state that this will give them the right to purchase the property for $1mil in 6 months time.
This will give Peter and Jackie time to hold onto the property, without owning it, and wait and see if the development proposal is approved. If not approved, they can walk away, the vendor cannot force them to buy, but they would lose their $20,000. If it is approved, they can then buy the property, or they could onsell the option.
In 6 months the property may then value at $1.5mil because of the new development approval. So they have outlayed $20,000 and made $500,000 potential gain. So maybe able to just sell the option for $400,000. Whoever buys the option, will have spent $400,000, but they can then buy this $1.5mil property for $1mil = total cost $1.4mil.
The good thing about this is there is no stamp duty in some states on the purchase of an option. What is the stamp duty on buying and selling a $1mil property? = heaps! Other states have stamp duty on options, but you will still save as you would be paying stamp duty on a $20,000 option instead of a $1mil house.
The terms can vary, depending on the parties.
eg.:
-option fee, may be $1 or $1mil.
-Strike price, the price you pay for the property, can be more or less then value now, depends on your view of the market.
-The option fee may even come off the strike price
-The term, can be 1 day, 1 week, or 1 year etc
-you can put in that the option can be renewed with the paying (or not paying) of another option feeAnd you could even rent the place in the meantime, and have part of the rent to be credited against the strike price. This is what a ‘lease option’ is.
Why would a seller agree to an option? If this case, the property has been on the market for a long time. The Vendor may not have had many offers, so may accept in the hope they will buy it it 6 months. Even if they don’t he will have made $20k from the option fee.
Never draw up an option contract yourself, always use a solicitor. You wouldn’t want to come around to 6 months and find the vendor can wriggle out of the agreement.
Terryw
Discover Home Loans
Parramatta
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terry do many people do this? where would this be practical, i guess u can only do where you know someone is interested in selling in the future any way.
Same could be said that the property maybe worth 800,000 and the person with the option is stuck paying an over priced property.No you dont only do this is you know someone wants to sell.
If you know something is happening in an area or see added value in a piece of realestate… I have known others to knock on doors! start shacking some hands and giving people that winning smile :>
And of course a realestate option is similar to a share option. You have the option but not obligation to buy… but you do lose your deposit.
Hello Terry
What a clear, easy to follow explination. Thanks. [thumbsupanim]
Hello Vyaw2003
From Terrys’ post
“An option is an agreement whereby the purchaser has the right, but not the obligation, to purchase something in the future.”
If in 6 months it was worth $800K instead of $1M you would obviously not excersise your option to buy.
You could still then turn around and buy it for the new value of $800K if the vendor was willing.
Cheers [smiling]
ElkaHi Pete
Seems these guys are right on the money from what I read and actually understand of this.Hey you could also chat to Jan D on the RESULTS forum if she has dropped off the RP 1 program and you want to contact her let me know I have her contact details.
Warm Regards
SueMIT | Owen Real Estate
Email MeHi everyone,
Thanks for all the great advice and information.
It’s given me a much better insight into options.
The real estate agent dealing with the block of flats had never heard of an option.
Sue I will see if Jan D is still on the RESULTS forum.
Once again,
Thanks everyone,
Regards,
PeteThe good thing about this is there is no stamp duty in some states on the purchase of an option. What is the stamp duty on buying and selling a $1mil property? = heaps! Other states have stamp duty on options, but you will still save as you would be paying stamp duty on a $20,000 option instead of a $1mil house.Anyone no which states do and dont have stamp duty and on the ones that do is it on purchase price or option price – anyone out there doing it these right now with some examples.
Cheer
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Don Nicolussi | Mortgage Broker - Home Loan Warehouse
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I think Richard has stated there is no stamp duty in QLD on options. I have sold some options in VIC and believe there was no stamp duty there too. Think there is in NSW, but not sure.
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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