What happens to Property Options when Seller defaults?

A good property lawyer should be able to tell you but I would suspect it'd depend on the structure of the option and if any caveat has been registered with the titles office over the property. One for more legal minds than mine, but you can bet a bank would be fighting like …well lots of awful things really.. to get their security back.

Usually the 1st mortgage holder will have priority because of their mortgage. If they enforce their mortgage then any left over money will be available for the next in line. An option holder should lodge a caveat asap to protect their interest and their priority – if they don't and someone else gets a court order, the other person may come in before them.

If you die your estate must still act in your shoes and the option won't expire (unless that is in your contract maybe).

As I said earlier if the deal is rich enough and you want to protect yr interest why don't you pay the interest components as part of the deal … a caveat is only a warning … Your contracts and agreements must be air tight …

Hi everyone,

This is a very important question regarding seller (owner) default which could present problems, however with an experienced approach and a correctly structured option contract the issue like all property issues can be managed to reduce or eliminate the risk to the option holder.

It is really important to remember that an option is a legal purchase arrangement which carries rights and obligations, of the 2 types of Options, the Put and Call Option places obligations to complete the deal on both buyer (Option holder) and owner (seller) this is why we prefer to use a Call Option. The benefit of the Call Option is that the owner is obliged to complete the deal but the buyer is not. This is because a Call Option gives you the right to buy but not the obligation – “you have the option to purchase”.

In our Options we include a paragraph which states that the owner is not allowed to prejudice our rights in the deal by taking out a new or modifying an existing mortgage. The level of the mortgage is therefore known and fixed at the beginning and if the mortgage is too high (too risky) we don’t do the deal. so the issue really is the size of the mortgage relative to the value of the deal and thus if the owner defaults on the mortgage the worst case is we can still have the power to sell the deal ourselves and just give the bank their bit at the end.

Indeed we have done deals where the bank was due to repossess the property, and upon the owner presenting our option to the bank, the bank has been willing to extend to that defaulting owner an extension equal to the length of our Option, which rather than being a tragedy to buyer and seller banks will honour the option contract and can save the owner from bank repossession.

Of course the only real risk is if the buyer pays a large Option fee, but our Negotiation Technique means we have never paid an option fee more than a few hundred dollars, and we have routinely signed multi-million dollar properties in this way.

The other main issue on this question was the death of the owner. In most cases a property is owned by more than one person, e.g husband & wife or 2 directors of the company, and the surviving signatory (owner) will be required to complete the deal, with a share of the proceeds going to the persons estate. Even with just one owner the persons estate would be required to complete the deal

This is the great thing about Options it is able to cater for virtually everything with minimal risk..

Of course liquidation and bankruptcy issues affect all property and real estate equally. Stamp duty also applies to all real estate purchases, but stamp duty does not apply to property Options in NSW or Queensland, and even where it does apply to Options such as in Victoria, it is usually the ultimate purchaser that pays the stamp duty not the Option holder.