What is an option agreement?

Definition of Option Agreement

An option agreement is an arrangement between the property owner and a potential buyer. This signed document states that the potential buyer will pay a deposit and be given a specific time period to be the first buyer given the right to buy the property at a set price. 

Why is this term important?

Option agreements can be extremely valuable to those wanting to keep their options open as developers or investors. The ability to hold a property while waiting for approval to build is a definite advantage. However, if the option agreement holder does not buy within the agreed time, they will lose the deposit, the agreement will end and they will no longer have the first right of refusal on buying the property.  

The advantages for the property owner is that an option agreement ensures a sale of a property in an unstable market or it allows the property owner access to a non-refundable deposit if the outcome does not end with a sale.

Examples of term

If you were looking to sell your property during a risky time in the market and a developer came over asking if you were looking to sign an option agreement, this would ensure a potential sale and also relieve some stress for the prospective buyer.

If you want to sell your property for $500,000, the option agreement allows you to put this sale price in the signed document to ensure you achieve your goal of selling the property for the amount agreed upon. By signing the option agreement for this sum, you are agreeing to sell your home for this price to the potential buyer with an agreed upon timeframe, regardless of what the market does. The potential buyer could walk away from the deal, but the seller does not have the option of selling the home within that timeframe without first offering the deal to the option agreement buyer.