What the heck is option money?

Question

It’s our first time buying a multi family property. It’s a small 6-unit apartment building. Our agent is asking for option money, but is unable to clearly explain what the heck it is. We’ve purchased single family homes twice and have never run into this. We know and understand Ernest money, but what’s option money?

Thank you!

Steve Vaughan · Answer

Funny your (commercial?) agent is unsure what this is.

Option fees are more common with commercial income property sales.  Tire kickers with no skin in yet bothering residents by viewing apts or stores/offices is annoying and detrimental to our business.  An option fee (usually non-refundable but credited at closing) helps weed out the tire kickers.

A slant on this is earnest money "going hard" halfway through or so of DD while under contract. How much of an option fee is the seller asking for? Most aren't a ton on a 6 unit.

Greg Dickerson · Answer

Simple terms it’s a fee you are paying for the option to buy the property at some point. It’s mostly used with land or other development projects. With traditional sales it’s earnest money that goes hard at a specific point in time.

Chris Mason · Answer

Other posters already answered, but sometimes context helps make things more clear. Using unrealistic nice round numbers just for clarity.

I  have a stock that is a share of Microsoft. I think it'll hold flat, I don't foresee any action in the near future. Trading at $20 right now.

You have a hunch. You think it's about to go crazy and double to $40.

We both place our bets. What that looks like is I sell you an "option" for $2. I will sell you that share of MSFT for $25 at any point during the next 30 days, you paid $2 for the option to do so and I was willing/able to sell you that right/option. That price is locked in no matter what MSFT does, you have the "option" to buy at our agreed upon price. I get to keep your $2 no matter what.

If you're right and it doubles, you buy the share of MSFT from me for $25 and can immediately resell it for $40. You win.

If I'm right, then you wouldn't by that share, but I still get to keep your $2. I win.

(A senior employee of Microsoft that knows a big product announcement is coming out would have an unfair advantage, that's why insider trading is illegal with stocks. Insider trading is not illegal when it comes to real estate... if you are on the El Cerrito City Counsel and know a big development announcement is coming, you are allowed to buy a home in El Cerrito in spite of that.)

Nathan Gesner · Answer

@May Baten you can READ THIS to get a better understanding. Option money is not widely used.

May Baten · Answer

All incredibly helpful.  I get the picture.  Thank y’all so much!  Love this great BP community 😁

What the heck is option money?

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