Option To Purchase & Right Of First Refusal

What Is An Option To Purchase?

An option to purchase agreement gives a home buyer the exclusive right to purchase a property within a specified time period and for a fixed or sometimes variable price. This, in turn, prevents sellers from providing other parties with offers or selling to them within this time period. During the specified option period, the seller is forbidden from working with any other potential homebuyers.

In commercial real estate, an option to purchase can take many forms, but it’s most often structured similarly to a purchase and sales agreement or a lease agreement. Regardless of the format, the price is usually fixed — an agreed-upon price by both buyer and seller. However, there are certain situations where the price might fluctuate. Our attorneys can work with you to go over these situations and ensure you get the price you are entitled to.

Types Of Options

There are three main types of options to purchase, from simple straight options to more complicated rolling options. Each has its own requirements and different responsibilities for buyers and sellers. Unsure of which type is right for you? Let us help you decide when drafting your contract. The three types of options include the following.

• Straight option. This gives a buyer an opportunity to purchase the property for a certain period of time for a certain price. When buying the property, this money can be deducted from the purchase price upon close. If you do not buy the property, you forfeit the option deposit.

• Letter of credit option. This less common option involves a letter of credit from a bank, issued for the amount of the option price. If the option is exercised, the letter of credit is voided. If the option is not exercised, the seller collects the value of the letter of credit from your bank, eliminating the need for an investor, but it requires more paperwork.

• Interest option. For this option, a buyer agrees to pay the seller the amount of interest they would have earned due to the appraised value of the property. If a buyer doesn’t go through with the deal, the seller at least gets some form of compensation.

Option To Purchase Vs. Right Of First Refusal

Contrary to an option to purchase, a right of first refusal means a tenant has the option to purchase the property after the seller makes an offer to an outside party. Once the seller begins negotiations with another party, the buyer can choose to purchase on those same terms or decline. Similar to an option, a right of refusal clause is an added provision to a lease agreement or other document.

However, a right of first refusal is much more advantageous to the buyer, not the seller. Tenants already living in the home have first dibs on a property. To determine which type of contract is right for your situation, talk with our real estate attorneys, and we can get you the help you need, whether you’re a home buyer or a property owner seeking to sell.