Download My Option Agreement…
Man, you guys sure love to swipe our stuff!
I mean, based on the gratitude galore we got from sharing one of our favorite motivated seller postcards recently, it seems pretty clear that the old “Swipe and Deploy” is something we should keep rolling with.
So let’s do another one…
Today’s handy-dandy resource is one of the core essentials every investor should have in your tool-belt–the Option to Purchase Agreement, or “option contract” as it's often called.
But I gots to tell ya — just having this form in your bag of tricks isn't enough… You’ve got to understand it's purpose and how to effectively wield it. Which is exactly why I made you this little video about it.
The essentials on option contracts
In this video you'll learn:
⇢ What an option agreement really is (and what it's not)
⇢ Who exactly is obligated (and who is not)
⇢ Common uses and best practices for deploying this in your day to day business
⇢ Why I don't typically recommend “lease options” as a buying strategy
⇢ Stuff like “equitable interest”, “principal interest” and your “bundle of rights”
⇢ What you can and can't do with an option
⇢ How to fill it out, step by step
If you don't care to know all that, then just feel free to download the form and add it to your arsenal (see below). But for those who want to learn the ropes on how to use this thing, this video will help you wrap your mind around what this is and how to best use it.
Hey, what's up guys? JP Moses here. AwesomeREI.com—real estate investing for awesome people.
Today, I want to share with you a document that is critical in our real estate business. It is the right tool to pull out at the right time when a purchase contract just doesn't quite make sense. It's the option agreement.
You need it in your business, and I'm going to give you mine—the one that we use in our business—with a small disclaimer that you need to run it by an attorney and make sure it's kosher for your area.
Now, why am I doing this?
#1: These documents are important, and I want to share them with you. We like to let you swipe and deploy our stuff. It's part of our culture here at AwesomeREI. So we're gonna let you swipe and deploy this option agreement and your business.
#2: You need to understand how and why to use it and when to use it.
So, what I want to do first is walk you through what an option contract is:
- Why do you need it?
- When do you use it?
- How do you use it?
And then we're gonna walk through the document itself—I'm actually gonna show you how to fill it out. Now if you want to get the document, you're going to need to go to this post on our website, scroll down and leave a comment on the page. After you leave the comment you will get our document—a little give and take.
So you've got to go there and you gotta engage with us. Just leave us a comment. Details are on the page. After you leave a comment, you'll get access to my Option Agreement. You can swipe it, deploy it, and use it in your own real estate investing business to your heart's content.
Okay, let's jump in and take a look at my Option Agreement or The Real Estate Auction Contract.
Before I run through the document and it's very simple agreement, I'll show you exactly how to fill it out and tell you what I think are the best practices for doing so.
First, I'm going to run through what an option is. I don't want to assume anything. I know some of us are already interactively using options and maybe this is just going to be another form in your arsenal…
Others are coming right into this thinking, ‘I don't even know what the difference is between an option and a contract. What the heck is this so that I know how to use it?!’ So I'm going to cover that so you're armed and equipped to be able to swipe and deploy this little goody.
But first I gotta give you the standard disclaimer—it's always true, and I always try to remember to say it:
I am not an attorney. Even more importantly than that, I'm not your attorney.
Please consult your own legal counsel before you apply this. Just consider it for entertainment purposes until you consult your own attorney. Do your own due diligence. This is your business. Treat it like a business. What I'm going to describe may or may not work exactly the same way for you. Do what you need to do and get your docs checked out.
Okay, so the Real Estate Option Contract defined…
A real estate option agreement is a written contract between two parties—
the optionor, which is the seller of the property, and the optionee, which is typically the buyer or the potential buyer—in which one party buys the right to have the first chance of purchasing a piece of property at a specific price at some point in the future.
Now there's a reason that the right is in italics. I'm emphasizing you are not buying the property, necessarily. You're buying the right to buy the property. Therefore, it is your option. Get it?
So point #1: It’s the buyer's option not obligation to buy.
The seller, however, in a standard option contract like the one you're about to see, does have an obligation to reserve the property for you. And that is something called a Unilateral Agreement.
For those of you who've been through any kind of Realtor training or contract law class, you've heard of a Bilateral Agreement and a Unilateral Agreement. Bilateral means it is obligating to both parties the optionor the optionee in this case, or the buyer and the seller.
Side Note: If you ever get confused, just remember that the optionor is the give-or of the option, and the optionee is the receivee, the person receiving the option.
Okay, an option agreement typically is a Unilateral Agreement, meaning only one person, only the optionor—the giver of the option—is obligated to reserve that property under the terms of that option agreement for you.
For X amount of time, you don't have to buy—you have the option to buy during the term of the option agreement. Also, standard contract law applies even though this is not a purchase agreement or a purchase contract, it is still a contract.
So any of the standard stuff in a contract like a contract expiration date, for example. In Tennessee, a contract has to have an expiration date in order for it to be valid. If it doesn't, then it's not a valid contract. Legal consideration has to be exchanged for a contract to be viable. So keep that in mind—standard contract law applies to the option contract.
Also the option can be extended, it can be assigned, and it can be amended unless expressly prohibited.
Okay, if you're wholesaling, a lot of people will write their name as the buyer and then write “and/or assigns” afterward, which a lot of folks seem to think is what gives them the right to possibly assign that contract over to somebody else…
I'm not going to get into what assigning is if you don't know, but really by default, any contract is already assignable. It's extendable, it's amendable by default unless it expressly prohibits it. So keep that in mind
And as I said already: consult your attorney with whatever contracts you decide to incorporate into your real estate investing endeavors.
And, I would suggest you take a contract law class. I did that when I became licensed. And I've been through seasons. I'm not currently licensed. I was licensed for a number of years and there's pros and cons. That's a whole different conversation in and of itself…
But I remember when I first got licensed back in 2004, and one of the classes I took was a contract law class taught by a real estate attorney at the local Board of Realtors. It was two and a half hours, one long afternoon, and I learned a lot about what a legal and binding agreement makes. I recommend it. It's not exciting, but it's a good investment of a couple of hours and you don't have to be.
A lot of people don't know this, but you don't have to actually be a Realtor in order to take classes at your local Board of Realtors. You can just pay a fee. Usually it's a little higher fee than the members of the board, but you can just pay a fee and attend one of those classes. So look into that. That's my recommendation.
Common uses of an Option Agreement. Well, getting equitable interest with little or no risk. Now, an equitable interest is legal interest in a property, and it's something that you need in order to be able to market a property for sale before you actually buy it. I know this may sound a little technical. But this is important.
When I went to the Realtor school, this is the way it was explained to me: Property ownership is not one thing.
It's best to not think of property ownership as just one big right that you have. Instead, you should think of property ownership as a bundle of rights, kind of a bundle of sticks…
Imagine that you're holding a bundle of sticks under your arm. Maybe there's two dozen sticks under your arm. And each stick is a different aspect of property ownership. One stick might be mineral rights, one stick might be rights of easements—there's different aspects to property ownership and, cumulatively, the bundle of sticks—the bundle of aspects of ownership form this thing that we call property ownership.
Now I'm talking specifically to wholesalers here, you know the deal: You want to put a property under contract of some sort and you want to flip that thing before you even close on it.
You can't legally do that unless you have one of those sticks from that owner’s bundle. And the way you get one of those sticks in your possession is to get a contract or an option on the property, secure that, and then you now have equitable interest.
So it gives you the ability to get that equitable interest with really little or no risk to yourself. It's less risk than if you had a Purchase Agreement in place and you can market it for resale. As I said, you are a principal in the transaction. That's why you have that right. So it is a lower risk than a Purchase and Sale Agreement.
A lot of times, you'll hear the option used in conjunction with a lease called a lease option. And typically, a best practice for a lease option is: You have a lease and separately have an Option Agreement. I think it's a great way to sell property in a lot of cases.
It's kind of a rent-to-own type scenario where you can rent a property to somebody, give them a two-year option, and then maybe give them some rent credits that count toward their down payment.
And “owner financing substitute” or “owner financing light” is maybe one way to think about it. It's not a method that I particularly recommend for buying, because I think you don't have enough control in the transaction, unless it's a very short-term lease option. (I wouldn't recommend a long-term lease options for investors, but that's just me.) And I do think it is a solid exit strategy—lease options, specifically.
One great approach to using an option is:
- Find a good deal
- Tie it up with an option (and I mean tied up ethically). Get your equitable interest in return for having an option agreement in place, but always be honest when you put an option on a property—don't make the owner believe that you're going to be closing with certainty, that you’re going to be buying this property. Just be honest and say:
“You know, I'm not sure if this is going to be a deal or not. I have a network of investors I work with, and I’ve got to talk to a number of them and see if any of them are interested in partnering with me on this. So give me an Option Agreement so that'll give me time and the equitable interest that I need to be able to shop this around to my partners and see who's interested.”
I think that's a real honest, ethical way to go about it.
Side Tip: If your seller is nervous about letting you tie up the property with an Option Agreement, one of the things that you can do to skirt around that is to incorporate a secondary offer cancellation with a right of first refusal clause. Basically, that's a clause that in so many words is going to say:
“Mr. Optionor/seller property owner guy, let's do it this way. Give me the Option Agreement so that I have the equitable interest I need, but if somebody brings you another offer and it's better than my offer, then I will give you the option to cancel the Option Agreement. I'll give you the choice to cancel our Option Agreement as long as I get a right of first refusal to match that person's price.
So if I got an option for $100,000 on your property and somebody comes along and offers $101,000, you can't just take their offer. You have to come to me and say, ‘Hey, I haven't been marketing the property, but somebody brought me an offer for $101,000,’ and then I have to either match that and close or we can just part ways. Match their new offer or release them.”
It really can be a great way to help mitigate the seller's risk in those situations. This gives the seller the peace of mind that they need, and it gives you the equitable interest that you need to be able to go out and make a killer deal.
So having said that, let's jump in and I'm just going to blast through this agreement. It's very short and concise. It's not going to take long to go through.
So here we are with our Option to Purchase Agreement. Now I should say this is a standard option. It's a simple plain English option. This Option Agreement is made between the following parties, and of course, you're going to fill in the giver of the option. You're going to fill in their full name and after that, they’ll be ‘referred to as the optionor of the property. And under that is the optionee, that's the receiver of the option.
Next it reads: The following items are applicable to this agreement:
- The optionor agrees to grant an option to purchase to the optionee, the land and improvements known as XXX, which is where you put the full street address with city, state and ZIP.
- Optionor agrees that he/she will not attempt to enter into any other negotiations or returns for the sale of this property with any other party while this agreements in effect. If optionor receives any other independent offers on this property option, you will be notified immediately. (This is not quite the clause I was telling you about that gives the right of first refusal, but it’s close. It lets them know that you don't want them to going out marketing the property, but if somebody brings an offer, you’ve got to be notified immediately.)
And a lot of times, I can just verbally tell them that at that point I'll either match their offer or release them. And then sometimes, I'll actually put that part in writing if I feel like I need to.
- Upon agreement, the option would begin on the date of XXX and end on the date of XXX.
Meaning, you might sign this agreement today, but the option might not take effect until tomorrow for whatever reason. Basically, you need to have a definite starting and ending date for your option period… a couple of years, couple months, whatever seems to make sense on your transaction. So that's going to be your beginning date and the end date of your option.
- Purchase price will be XXX, and payable by certified funds at settlement.
Now let me say this—even though you're putting some of the details that you would put in a contract into this option, if you decide to come back and exercise your option to purchase, then you actually still have to put a Purchase Agreement in place.
So this is like a holding document in a sense. It's not a replacement for a Purchase and Sale Agreement later on. And it basically says, if you do go to contract, XXX is the amount of the property ($100,000 or whatever that you decide) to secure the option.
- Optionor grants optionee access to the above property for showing to prospective buyers,
contractors or appraisers.
Of course that's important! If you put an option on a piece of property, you’ve got to have access to the property.
- Optionor must maintain proper insurance on the before mentioned property.
Clearly it's important that they keep their insurance in place. I don't want them to think that I'm insuring it. They still own the property, so they should keep it insured.
- If the optionee purchases the property, the optionor will pay all closing costs.
Now this is obviously slanted in my favor, and usually what I'll do is I'll strike through that as an act of goodwill and say, “You know what? Let's just say that we'll split the closing costs or I'll pay the closing costs.”
It makes me look good to scratch through that one and say “optionee will pay all closing costs” or scratch through this word and write “optioned” and just let them know I'm willing to do that.
- Optionor grants this option for the consideration of $10 and other valuable consideration.
This is just basically a formality. This is the consideration that you're going to be putting down now depending on the deal and what you're negotiating and how savvy your seller is. You may have to put a thousand dollars option consideration down. This is what you risk.
Whatever you put down is what you have at risk. It's not an earnest money deposit, meaning, if you don't exercise your option, you don't get this back. This is a fee that you are paying for the privilege of holding an option on this property for xX amount of time.
Now $10 typically works with mom-and-pop sellers when you say, “I don't know if I have a deal here or not. I need to talk to people about whether or not they're going to be able to partner with me on this. Give me an option so I have the ability to go do that.”
Then I say, “$10 is a formality,” and I hand them a $10 bill. If you're dealing with some guy who owns a crap-ton of land like a few acres at the bottom of a planned interstate exit, then you're gonna have to put some down for a more serious option consideration.
It's not a deal killer, you’ve just got to see if it makes sense for the deal.
Fun Fact: I learned that there's other things besides money that can be legal consideration for an agreement like this. In fact, in Tennessee, love and affection can be considered legal consideration. I'm not sure how you document that, but it is legal.
The last thing you're gonna want to do, of course, is have the optionor or the owner, and you, sign and date the contract. And typically, rather than just having their names in cursive, I'll write out in manuscript underneath the cell phone numbers for each person.
And really that's it. What I love about this agreement is it's simple, it's plain English, it's all in one page. It's very unintimidating and not filled with legalease. So I like it for that reason too.
Now there's other option agreements out there. There's one you can get from your Board of Realtors that's probably 10 pages long and full of all kinds of bloat. So you could just use that standard Option Agreement and just scratch out what you don't like and add in what you do like and make it what you want it to be.
But ours is a simple one that you can use. And I hope this has been helpful to you.
If you have any questions at all, anything, please leave a comment. I love answering these questions, so leave us a comment with any questions or comments or remarks.
If you've had experience using an option and you have any comments that you want to throw in on your experiences, please do that as well. Thanks guys, JP out.
How to download my Option Agreement
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Ok, so how do you get your little paws on my Option Agreement? Easy peasy. Just leave a comment below sharing ONE THING you'd like us to give you in a future “Swipe & Deploy” post, and then Chuck Norris will hand it to you.
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We all love to score a good tool or resource like this, right? Be it a form, contract, marketing piece, script or “what-have-you”… Something that’s already been time-tested and proven to work.
So here’s how this goes:
Step 1. Engage with us by sharing (in the comments below) at least ONE THING you’d personally really love to see us give away in the future as a “Swipe and Deploy” like this. We’ll take every single suggestion into consideration.
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