land purchase option length

6 Replies

what's the longest you've seen a piece of land or a building tied up with an option?  If it was your deal, was it a straight option or did it include extensions as well?  how much did you put up to start and for each extension?

obviously answers can be all over the board depending on deal type, entitlements and approvals, lease negotiations, ect.... Just want to see what the cross section looks like.

Will we have anyone with 1-2+ years under option?

Derek Carroll, NorthMarq Capital | [email protected] | 315‑558‑8332 | http://www.realestatefinanceguy.com

You can deflect timelines like 6 months with critical events like say getting your permit.  A lot depends on your market but instead of putting it under contract for n days, put it under contract until the permit is approved or some event reduces your risk.  This can usually be coupled with some non refundable earnest money every 30 days to show you are serious.

We try to get close with permits, but often cannot.  The next stop is 90 days, then 60 if we think we can confidently rush it.  30 is just too few to get all of the due diligence done and raise the money.  If you had cash, 30 days might work but you would need to be super confident in the lot.

Options on lots are usually less than a year, in months to a builder. Escalating prices or creating additional holding periods, roll-over, additional option prices can disqualify an option and cause issues, so ensure an attorney familiar in options and financing is there.

Options on lots have going to 3 years is common too, required to break ground after it is exercised, be aware of Dodd Frank financing options to homeowners by builder/developers, you're in a different boat.

Depends on who the parties are, builder or homebuyer.

Raw land, I've had 10 years.

Commercial, 5 to 99 years in connection with leased properties.

Cost on lots to hold, 10%. On long terms, the difference between today's value to the expected market value over the term, and this should be less than 10% generally on raw land, more to speculation. Depends on perception of value increases and if known increases will be applicable. It's negotiable.

Remember, the optionee may not be under any obligation at all pertaining to the property. Zoning changes usually require title or under a purchase contract here, that may differ in other areas, the optionee may be allowed to do something, but they can't be required to perform. You may end up defaulting to a purchase contract messing up an option. A separate construction agreement may be done aside from an option, free of any connection.

The optionor may be required to perform. The optionor may be required to subordinate for financing for example.

A financed option can not be assigned without consent, the assignment is not the same as assigning an option that has underlying financing or a sale contract that is not financed or a Sub-to.   

More to them, but I'm getting past the question.

This isn't really applicable so much to home options. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Interesting thread; I'm grateful to sit on the sideline to read these comments.

kv

@John Blackman   thanks for chiming in.  I like the event driven timeline approach.  If you can get someone to agree with it then there shouldnt be need for extensions.

@Bill G.  Thanks for the comments.  Love the insight.  You've optioned raw land for 10 years?  What were the circumstances on something like that?  Something that you originally wanted to build on, but then never did for some reason?

You  mentioned a construction agreement in combination with an option and then also a financed option.  Can you give an example scenario of using each of these? Never heard of anyone financing an option.  Usually it's a set dollar amount paid upfront in cash for a certain period of time.  

Derek Carroll, NorthMarq Capital | [email protected] | 315‑558‑8332 | http://www.realestatefinanceguy.com

Originally posted by @Derek Carroll:


@Bill G.  Thanks for the comments.  Love the insight.  You've optioned raw land for 10 years?  What were the circumstances on something like that?  Something that you originally wanted to build on, but then never did for some reason?

You  mentioned a construction agreement in combination with an option and then also a financed option.  Can you give an example scenario of using each of these? Never heard of anyone financing an option.  Usually it's a set dollar amount paid upfront in cash for a certain period of time.  

 I'm in SW MO, rural areas minutes from town. Options can be handy for speculation, 5 and 10 year options on raw land with a farmer can be had pretty cheap, consideration can be in connection with a partnership arrangement to develop later on. Common arrangement. Most never surface, usually they get assigned one way or another, development was too much of a pain for me, more of a side note and I bail from long term arrangements for several reasons, I'd rather be in and out.

If you have an option in a commercial deal, you can execute a note, secured or not for the option price, this should not be done in residential deals without expert assistance. An option price is earned when granted, if the option is not taken, the note is still an obligation to be paid! I've done many this way, it's a no money in it arrangement.

You are better advised to stick to your straight option, pay the option price in cash and move ahead.

BTW, here, several developers are also the builders, they wear both hats, which goes to my comments above.

I'll mention too, an option doesn't tie up a property as much as most think, I can give you an option, then later sell the property, subject-to an existing option, if the option is exercised then my buyer must sell (taking a profit) if not, the option expires and they own it.

See your attorney for a restriction to sale if that is a concern.

You might investigate Rights of First Refusal, filed they can give you 15/30 days to enter into contract, that may give you another 60 days to settlement. Another add to this is a quick settlement with seller financing on a short term note, 1 year, that can give plenty of time to build and sell. :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

If I could jump in, how do homebuilders typically use land options to secure large developments? I know NVR uses the strategy pretty regularly. Do they put down 10% of the purchase price, do you attend year term, and then pay the landowner once the lot is sold? Do they offer above market price is for the land to further entice the owner of the land to actually consider the option?