Option Contract in FilePlace?

14 Replies

Hi, I'm just wondering if there's a good Option agreement that someone might be willing to post on the FilePlace.  I hope to have it in my toolbox when the time comes for a Lease Option scenario.

Thanks very much for any assistance!

-Brian

@Brian Gibbons   I see other documents like Letter of Intent and Assignment of Option to Purchase but not an Option Agreement.  Maybe I'm missing it and it's right under my nose...

@Brian Gibbons When I try to access the forms on your website, it says the Dropbox file has been moved.

Thank you, @Brian Gibbons Here is the link for your special report for sellers

https://www.dropbox.com/s/q5u7fk7b8hv4x6e/SpecialReport-HomeSeller-LP.doc

A Dropbox error comes up for all the forms.

@Brian Huber 

Let me ask you a question, you too Lonnie, I didn't down load the LOI stuff or the Option,

but lets say I buy off that option contract, I give a half of ton of cash, then 6 months later I give you notice that I intend to exercise my option and purchase in 30 days. 

We need to close at WACO Title on Jefferson Street, I want you to prove you have good title, that means you get the title search from WACO and I'll buy my title policy.

I also now want to ensure you have the property insured since we are in contract, I'm spending money for inspections, appraisal and mortgage fees, if the place burns down, I'm out money, so show me the insurance.....og, BTW, I also want the option to go ahead with the deal if it does burn down between now and then and be entitled to any insurance proceeds. You need to do an assignment of your insurance proceeds.

I want you to pay all the taxes to the end of the year, not just to the day of settlement.

I want a general warranty deed.

BTW, in your disclosure about the property, you failed to mention an asbestos wrapped pipe on the furnace in the basement, so you need to have that removed prior to settlement, it will be a lending requirement.

Now what do you do?

Are these matters covered in your option contract, I'm betting not.

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

@Bill Gulley  The first thing we do after entering into an agreement with the seller is do a title search.  If there's anything clouding the title, we give the owner a specified amount of time to get it resolved.  If he can't show us proof that it's been taken care of, we walk.

As far as insurance, it stays in the owners name until the day of closing since the deed is still in his name.  We do require the tenant/buyer to carry a fire & liability policy.

The taxes are prorated at time of closing, but just like anything else, that's negotiable.

We do have a full disclosure regarding asbestos and lead based paint.

@Lonnie Pickard  

so, if a lien is placed on the property while under your option, then what? What is your recourse if the seller can't clear a lien? Ever have a nursing home slap a lien on a property or a funeral home? Then you've been lucky if not.

Your insurance arrangement doesn't cover you in an insured loss, try getting your option price back, your option to buy the property, the dirt and the dirt is still there, if you didn't insure your interests in the improvements that could be your problem. Tenant is probably covered, the owner is, the mortgage holder is, but not you in that arrangement. 

My point to taxes, no, my demand is not customary, but it then becomes a negotiation, point is, why do you want to allow anything to arise that needs to be negotiated, if no agreement is reached the deal gets delayed, lawyers can be paid, suits filed.

What is the remedy agreed if a disclosure is made and found later to be incorrect? You going to walk away after paying an option price, don't you then have a liability/responsibility to the tenant?

I wasn't posing questions because I don't know, I was posing them to get people to think.

My point is that digging option contracts off the internet, dreamed up by some non-attorney or some investor or guru in Bum-Teak-Boonieville to be used in your state and in your community isn't a good idea. I've not seen an option contract used by investors in the deals talked about here that covers your azz, they are all junk!

Not saying investors can't be lucky not to have issues and have a one page option work for them, I'm saying your stuff is flapping in the wind and your exposure to liability and unnecessary issues is higher when it shouldn't be or when it doesn't need to be.

A good option contract contains all sale contract provisions which take you all the way to settlement, the option is made, it is exercised and the terms are followed to settlement without any need for any negotiation and, in the event there are title or insurance issues, how those matters are addressed are already stated as part of that agreement.

For those investors that say "my attorney said it was fine" is correct when things go as planned, they may have their fingers crossed that they have an opportunity to get in your pockets representing you later on simply because you used a crappy contract that was just "okay to use".  There are attorneys out there that check once and charge twice.

I'd say the reason investors don't CYA is that they don't know, it's just another aspect of not knowing what can go wrong and not knowing how to address measures to prevent future problems. A good RE attorney will know.

Another point, you pay an attorney $300 for some contract. You have a 5 or 10, maybe more of a deal in the balance, screwing up a lease-option can cause you to lose more than you have to gain. Not only that, but that contract doesn't dissolve after that deal, you may use that contract 100 times, that means your business inventory to conduct your business cost you 30 bucks! Talk about penny wise and pound foolish. :)   

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

@Bill G.  I definitely see your point.  My OP was for the purpose getting a document that can serve as a starting point so that an attorney can look at it and provide feedback.

How can I protect myself from an attorney who looks at it and says, "It's fine" when in fact it's not fine? It's win-win to him, because if something goes south, he can charge me extra hours to un-tangle it. But isn't he violating some kind of ethics rule or something?

It's kind of the same with an auto mechanic for example.  I know the basics of car maintenance but I have to rely on a mechanic to see the weird things that might happen to a car. Things you might need a computer to troubleshoot, etc.

If I'm an investor, unless I go to law school to be a real estate attorney, I'm not going to know every minutiae about all real estate laws every potential pitfall. I have to rely on a profession like a lawyer.

So if I don't have CYA by doing the transaction through a title company, running a title search, getting an inspection and appraisal, having a lawyer look at the legal documents, then is it best to just not do these types of transactions?

LOL, you're speaking to legal malpractice, not likely if it's an opinion and it's an opinion.

A good option contract is a sale contract that takes effect once notice of the option is to be exercised, everything in you local standard sale contract will be there, the contract has default provisions for the seller. An option contract has no obligation on the part of the optionee, but may on the optionor. If the option is formally exercised to move into a sale, if that was agreed, then the option rights may expire moving the parties into a sale contract and at that point both may have obligations to perform.

I'd suggest you get your local sale contract, take out the default provisions for the buyer, change "seller" to "optionor" and "buyer" to "optionee", put the title of Option To Purchase on it and you'd have what you need, then take that to your attorney. Can't say that all the terms would be applicable, appropriate, carry the same meaning, but basically you have the issues generally addressed in a sale contract and you would allow those agreements to govern to settlement....that's why you'd have your attorney review it, if anything needs tweeked, they can do that.

Our BOR sale contract here was about 12 pages with addendums, takes about 15 minutes to run through it with a buyer or seller, most actually read part of it, few read the whole thing, even when it clearly states to do so.

When I explain any contract, mortgage, note or deed or lease I don't sit there and read it word for word, I explain it by paraphrasing the meaning of each paragraph, and at critical points, mention word for word what may be written. If you are going to be in RE, you need to understand these instruments and develop an easily understood explanation for each paragraph. You need to practice speaking to each point and, what you say should be pretty canned, you should be saying the same thing each time.

That's important in communicating with clients or customers, to say the same thing every time to everyone. Some day, the phone will ring and someone will say, "hey, you told me this..." then you can repeat exactly what you did say, usually in most cases, they will then recognize what you are saying, not only is it the same thing they heard, you can use the tone of your voice as might be appropriate, but you can continue, showing them what they got was the same thing all others hear from you.

This is very handy with an attorney, they will recognize that what you say is uniform, consistent and difficult to combat in court! There is no question as to what I told someone concerning some instrument! 

You must know your contracts, know what is meant and be able to explain them, that is your business!      

Investors (I pick up on this here) usually avoid the legal stuff, that's why they can't select a good contract or know what is needed and they are more like the dreaded end, the hard part getting someone to sign. This shouldn't be the case at all, the meeting of the minds should have already be reached through negotiations and agreements, the contract is simply those aspects then reduced to writing with the standard provisions as necessary. While it is a time to be serious and professional, it doesn't have to be 15 minutes of stammering and confusion and questions, just go over it.

And, if you have your set phraseology running through some legal instrument, you demonstrate confidence, knowledge and expertise, this will set your customers at ease. If they sense you're nervous, that you stutter trying to go over something, you're going to put doubt in their mind, they will have more concerns.

Don't let your presentation sound cocky or discount the importance of something as "ah, this is just the standard insurance stuff, if the place burns down I can still buy the place and get the insurance money" that is not professional and isn't really clear......if something were not important, it wouldn't be in there!

Hope that answered your question and taking you a bit further than just a document, your contracts are what your business is based on, it's just as important if not more than anything else you do. :)  

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

You brought up a lot of good points @Bill Gulley  .  As far as the option contract, the one I use was drawn up by my attorney.  I was merely looking for an informational hand out explaining what lease options were & how they work that I could provide for potential tenant/buyers & sellers to save me a lot of time trying to explain it to everyone.

Not sure giving a handout is a good idea as you probably can't cover the issues, especially with some tenant buyer, not only what you say can be held againts you, what you don't say can too. Often, when you start giving information that sets a new base line as to what is expected, in other words, telling someone to take this cough suryp then leads to giving disclosure of side effects. If something is not common to do, it's best not to do it.

It's not common to hand out phamplets explaing lease-option areas covered by law or finance matters related to them or the duties or responsibilities of the parties. That needs to be done as I mentioned in explaing the contract.   

In law, there are aspects of specific and implied warranties, representations, guarantees, agency and consent, passing out written materials can cross lines if you are not familiar with these legal matters, it's somplace investors shouldn't go.

The only written materials that should be used are the required disclosures by law and the contract, dump all the other guru junk, eye wash and what some non-lawyer thinks is some CYA form, most just makes for more issues and is something that makes something as a marketable product to sell newbies. Have an attorney tell you if somthing is necessary, if it's not, don't use it.

Yes, there are many investors who had their attorney draft their option. I have no idea of how many crap installment contracts and lease-option arrangements I had to fix that had been "done by my attorney".  :)

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