Unit 1 Chapter 20

Question 1

Option contract

Answer 1

• Optionor gives optionee right to purchase property at a stated time, price, and terms
• Unilateral agreement
• Exercise of option creates bilateral sale contract
• Optionee under no obligation to purchase property, but optionor must perform under terms of contract if
buyer exercises option
• Optionee can prevent sale of property to another party during option period
• Optionor can sell property at higher price to buyer who doesn’t qualify for third party financing
• Optionor can collect option fees
• Optionee gains access to property while establishing better credit and testing out neighborhood before
purchase of home
• Options facilitate commercial property acquisition by allowing commercial buyer to research zoning,
space planning, building permits, environmental impacts prior to purchasing property
• Optionee enjoys equitable interest

Question 2

Contract requirements

Answer 2

• Name of optionor
• Actual, non-refundable consideration
• Price and terms of sale
• Expiration date
• In writing
• Legal description of property
• Meet general contract validity requirements

Question 3

Option contract common provisions

Answer 3

• When, where, and how to deliver notice of election
• Forfeiture terms
• Property and title condition warranties
• How option consideration will be applied toward purchase price

Question 4

Additional contract considerations

Answer 4

• Short option period to prevent agreement from looking like a land contract
• Recorded option creates equitable interest for optionee
• Unrecorded option simplifies remedies for optionee default on lease
• Option is assignable unless otherwise prohibited within contract
• If tenant defaults between exercising option and closing on purchase, landlord can evict or terminate
contract. Including related language in contract protects landlord.
• Option fee compensates landlord from keeping property off the market.
• If option fee too high, option can be viewed as land contract due to tenant’s substantial equity in the
property
• Fair option fee determined by current value and anticipated future value of property, value appreciate
rate, tenant’s credit, risks to landlord, and length of option term

Question 5

Lease, option, purchase agreement

Answer 5

• Keep contracts separate
• Lease – includes terms to be followed until option is exercised; may include security deposit; length of
rental period, rental rate, how rent is paid, what happens to security deposit at end of lease, late fees, etc.
• Lease should include provision for landlord to continue paying regular mortgage payments
• Option – includes all contract requirements plus option fee, option credits, how option fee paid, if option
fee is refundable
• Purchase agreement – includes terms and conditions related to actual purchase of property; completed
only when option is exercised; should be negotiated at time option contract signed; should not be signed
until option is exercised; should include purchase price, items to be included and excluded, home
inspection requirements, financing and title insurance details.
• Language of contracts can determine outcome

Question 6

Termination of option

Answer 6

• For best chance of successful option, optionee should have good credit worthiness and committed to
buying property; landlord should be committed to selling; tenant’s income should be high enough to cover
expenses
• If tenant defaults on lease, landlord can terminate option according to terms in contract
• Landlord must send tenant notice of intent to terminate or intent to waive termination for breach of
contract