Gary explained: “Options have been around for centuries. In real estate the call option is the right granted by the seller for the buyer to purchase their property within a set time period for a set price.
“A put and call option is the right to force the purchaser to buy the property at a future point in time. Normally the developer will have a call option agreement which is a one sided document that says they have the right to buy the property at a set price in, say, two years’ time.
“It doesn’t need to be subject to anything and the vendor can agree to this for a fee, often about 1% of the purchase price. Then if the market drops in two years’ time the seller can pocket the money if the developer doesn’t exercise the option.”
He added that one positive feature of put and call options is that they give the buyer the ability to nominate someone else as the buyer.
Options on the rise
Barry said: “We’re seeing a lot of these options today because of all the changes happening around Sydney with the new infrastructure from rail, to the roads and re-zoning of property.
“This is because more people are wanting to consolidate sites and the State Government is putting pressure on local councils to encourage development with housing.
“We are seeing it out west and all over Sydney where you have rows of houses and other types of property whereby together they are worth more than individually.”
He added that the benefit of options in real estate is a buyer can gain control without being fully committed. They may need time to consolidate a row of houses or obtain council approvals to develop the land. This gives the buyer confidence and certainty that they control the sites for a set period of time while they get started with planning and building approvals.
The vendor is often happy because they may get a higher price by allowing the developer time to consolidate a site or obtain their approvals. If the sale does not proceed they often keep the option fee and can remarket the property.
Gary said: “The more properties developers own, the more the value goes up. If they talk to the council and get a rezoning approved, the value goes up.
“A decision can also be made if the buyer is going alone or if they exercise a nomination provision, which is normally a call option and a clause which says they can buy it or nominate any third party to buy it.” This may give ownership flexibility without the need to pay double stamp duty. Parties need to seek their own tax advice.
Advice to agents
Barry said: “If you get a group of vendors interested in options, as an agent you may need to encourage them to speak to a professional town planning consultant.
“This is because these consultants do this day in and day out, and as good as an agent may be, they may not know all of the issues that go into developing a property. Town planning specialists study these issues and can add substantial value in this process.
“Sometimes the best thing to do is go to a consultant and get them on board to meet the vendors. This way you know you’re heading down the right track with the plans for the best use of that site.”
Gary said: “I always recommend that everyone gets good financial planning advice to avoid any potential tax problems.
“It is also good practice to see what is out there in the market by speaking to other agents and looking at how long you should be entering an option for, which of course depends on the circumstances.”
He added: “It is best to have option extensions written up front, otherwise other developers might start to try and get involved and offer more money.
“The option fee usually comes off the purchase price, and some options fees are not returnable.
“The bank also owns any mortgaged property so you need to cover off any risks to avoid surprises and make sure if the owner cannot pay it off you have added caveats to protect yourself.
He added that the Conveyancing Act says when you’re selling residential property via an option, you need to have a warning notice in the contract that it is an option. If you don’t, the purchaser has a right to walk away up until completion of the option.
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