All Topics / Creative Investing / option to purchase value

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  • Profile photo of stewartstewart
    Participant
    @stewart1605
    Join Date: 2014
    Post Count: 4

    I am selling a property with 2000sm of land. A developer has offered a premium price for a delayed settlement. I would prefer that he pays for an option to purchase.
    The deal is for delayed settlement of upto 6 months with the buyer able to extend by 2 months. He can walk away from the deal at anytime or go unconditional at anytime.
    How much should I charge for this option. Is there a standard formula for calculating this type of deal.
    Thanks
    Stewart

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    I asked a question about how to calculate sale price on lease options recently. Not quite the same issue but you might find something useful in it. I had some pretty helpful responses from a few people and they were quick to correct me when what I proposed sounded unreasonable.

    https://www.propertyinvesting.com/topic/4998273-lease-options-increasing-sale-price-for-long-option-period/

    What conditions is the developer seeking in the contract? When do they expire? What deposit is it paying? If you can’t get it to agree to the option setup then at least you could tighten up the conditions and get a large enough deposit to make sure that it does not have the ability to simply walk away in 8 months time because it changes its mind.

    Profile photo of stewartstewart
    Participant
    @stewart1605
    Join Date: 2014
    Post Count: 4

    Thanks jcb.
    The full story.
    I have bought elsewhere but the developer has offered a good premium if I can give him a 6 month followed by a 2 month option. The offer is for 650, 000.
    I will need bridging finance and also pay upkeep of this place rates water repairs etc.
    In his proposal he can walk away or go unconditional at any time. Further it is 500 deposit, 5000 non refundable after 3 months an 9500 on unconditional with settlement after 60 days.
    I think the deal is a bit one sided in favour of the developer. I would like advice on how to balance the scales.
    Thanks for your help.

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    It does sound a bit one sided. If you draft the conditions properly then there’s no reason you can’t give him all the time he needs while also making sure that he is not just a tire kicker. You risk a fair bit if you hold the property for him for 8 months and then he walks away from it. It’s reasonable for you to ask that he actually put some skin in the game. $500 is a tiny deposit on a property of that value and can not give you any confidence that the developer even intends to see the contract through.

    You say he can go unconditional at any time. What conditions are there?

    A lot can turn on the actual wording of the conditions, so you should see a lawyer to make sure you are protected. What state are you in?

    Regarding the option, there would be a non-refundable option fee payable upfront or in ongoing increments (eg weekly). On residential purchases I understand it’s often calculated to add up to a 10% or 20% deposit by the time the purchaser exercises the option. It would probably be more money than the developer intends to part with at the moment by the sounds of it. I’m still a rookie when it comes to lease options so there will be better people here for you to ask about what to charge him if you do want to go that way. @property-trader Jason Moore was pretty helpful when I asked about them the other week.

    Profile photo of stewartstewart
    Participant
    @stewart1605
    Join Date: 2014
    Post Count: 4

    Thanks again. Your idea of ongoing increments for the non refundable deposit sounds good. I will certainly get my lawyer to write the contract once I have an in principle agreement with the developer.
    The conditions he wants are that he gets DA approval from the council within 6 months with an extension of 2 months if required and settlement 60 days after that if DA approved. However he can pull out at anytime or go unconditional at any time. So he may be done and dusted in three or four months or walk away after 8 months or go unconditional after 8 moths and settlement 2 months later.
    The money he has proposed is
    $500 deposit
    $5000 non refundable after 3 months
    $9500 when unconditional (could be up to 8 months or never)
    So the outcomes for me are
    1. After 8 months he walks away. I then have to sell my property again and the market may be better or worse than now and I have carried the bridging loan interest until my house sells plus the running cost of the property, rates, water, repairs etc. which will be for a minimum of 10 months but realistically 14 months.
    2. He takes the full 8 months to go unconditional and settlement 2 months later. I have carried the interest for 10 months plus running cost of the property, rates, water, repairs etc. for 10 months.
    3. He settles in a fairly short time frame of 4 to 6 months and I have carried the interest and running costs for that period only.

    If I can get him to pay 1% non refundable a month after 5 months he would have over 30K skin in the game plus his DA costs. This would be a disincentive to walk away. What do you think?
    Cheers

    Profile photo of JBCJBC
    Participant
    @jbenjamin
    Join Date: 2014
    Post Count: 34

    It’s up to you what you’re willing to accept. Depends a bit on the market you’re in. If this is the only purchaser you’re likely to see for the next 2 years then maybe you’re happy to do whatever he requests. Personally it still sounds really one sided and I’d be negotiating some different terms.

    If he actually wants you to take the house off the market for him then he should be prepared to put up more than $500 in the beginning. If he’s concerned about whether or not he’ll get DA approval, fair enough, but he should be required to do everything in his power to get that approval, and should only get his deposit back if after doing all of that the Council does not grant approval. Leaving it too open could allow him to change his mind then just not bother to complete the application process with council and then get out of the contract that way. That would not be fair on you and would cost you a lot of money.

    You may wish to include a shorter period clause (that’s what we call it in Tas, may have a different name wherever you are). We usually set it at two days which means if you give him notice, he has two days to go unconditional or else you can terminate the contract. That means you can continue marketing the property to other purchasers, and if a better purchaser comes along you can tell him to either commit or hit the road.

    As there are a few unique circumstances here I suggest contacting your lawyer before making the in principle agreement. People can get grumpy if you make a verbal agreement, then speak to your lawyer and learn something else, then have to come back and reopen negotiations.

    Profile photo of stewartstewart
    Participant
    @stewart1605
    Join Date: 2014
    Post Count: 4

    Thanks J
    I have arranged a meeting to discuss half a percent per month and da submitted in 3 months. Thanks for all your help.

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