How do property option agreements work?

Guest blog by Ellen Orton, Openagent.com.au

If you’re a property investor, you may have heard of a range of property contracts, including property option agreements. A property option is a way that you can secure an investment opportunity without having to pay a large sum of money upfront. How exactly do property option agreements work in Australia and what are the pros and cons?

As an investor, you would go to a landowner and agree to have the option to buy their property at a agreed price in the future. In a call option, you would have the right to buy the property from the landowner. In a put option, the landowner would have the right to sell their property to you.

Most of the time, a call option and a put option will come together. A put option usually won’t exist unless there is also a call option. In a put and call option agreement, you as an investor can ‘call’ to enter a contract, or, the landowner can ‘put’ the contract to you. In both cases, there is a right, but not the obligation, to follow through with buying and selling the property.

Benefits of property option agreements for investors

Property option agreements in Australia have a range of benefits for both the property investor and the landowner. For example, as an investor, you might see development potential at a certain property but it doesn’t have a development approval and it’s not being marketed for sale.

By entering into a property option agreement, you would gain the exclusive right to buy the landowner’s property at an agreed price. This gives you time to get a development approval from the local government. You also get peace of mind in knowing the landowner won’t sell to anyone else during the option period.

There is usually minimal upfront commitment for investors and you can secure the option for a relatively small option fee (for example $1000 is quite common.) By entering into a property option agreement the investor can also defer stamp duty liability until you exercise the option and the contract is formed.

Benefits of property option agreements for landowners

Following on from the benefits for investors, there are also many benefits for landowners. First and foremost, landowners are paid an option fee by the investor that is usually non-refundable.

On top of this, both parties will agree on a price for the property that is typically above market value because the investor will intend to increase the value of the property by obtaining a development approval. You might also agree on a period of time, such as 24 months, that gives the landowner plenty of time to find alternate accommodation and move out.

Disadvantages of property option agreements

Of course, there are still difficulties with property options. They are not commonly understood by most landowners and an investor will need to be skilled at explaining how they work to put the deal together. Property option agreements are not a standard form of contract and can cost more to prepare but they generally include common types of clauses. However, talking to a legal professional experienced in property option agreements can help make the process easier!