Excercising option as trigger point for sales contract?

Question

Please forgive my newbie question regarding wholesaling,... but is it possible, or common, to put in your sales contract that it commences upon the excercising of the seperate Option contract? The Option to Purchase will of course have an expiration period, and thus if never excercised, should you not be able to find a buyer, the sales contract would be void.

I had assumed this is how it would work, but after seeing some comments on this forum,..I'm not so sure I've got it right. Any observations would be greatly appreciated.

I had assumed this is how it would work, but after seeing some comments on this forum,..I'm not so sure I've got it right.  Any observations would be greatly appreciated.

Stacy Steven Smith · Answer

Thanks, Bill, for the excellent info.  I've checked out a Californian specific contract (that's my region) and will do more research on contracts as you suggest.  I already see many differences from the simplistic national version sample I had.

I hope to be a knowledgeable veteran investor like you, one day and will definitely remember to give back by sharing wisdom as you and many other investors do on a daily basis on biggerpockets.com.  Thanks again for you input!

Bill Gulley · Answer

Your option can be accomplished in several ways. Most that are advocated by certain marketing types are really insufficient and poorly written, Another problem is that I would never suggest someone use a contract that is designed for a national market due to state requirements that can be unique.

Many attorneys are boiler plate types and have little understanding of what can follow in certain instances. They may not look to far in the future to make a contract work, rather provide a contract that meets legal requirements, which is what they do.....

You can use a standard sale contract and simply use an addendum for the terms of an option, this may be the easiest way to set the property under contract and simply void the penalties for default if the option is not taken.

You can also state in the option that you are to execute a sale contract which is customary in your area, but I don't like that as many have areas that can be contested. So best to do a contract with the option.

Too many variables, to foresee problems and be aware of issues you really need to study various contracts, talk to a lender and see where financing will come in and pass it by your attorney, with this due diligence you can devise a good option agreement that will work in your area....

Stacy Steven Smith · Answer

Thanks for the replies, guys,... I probably didn't explain my premise right, so I'll take another crack at it.

The Option to Purchase seems pretty straight forward to me in that I will pay some monetary consideration to the seller for the right to purchase the property for X amount of dollars within X number of days.  I can then exercise the option within that stated X number of days for the price indicated.  I would include an assignment clause so that I could sell that assignment to another party who would then close on the deal.

What I'm having trouble wrapping my head around is that the Option to Purchase Agreement example I've seen doesn't seem to specify enough of the basic details and terms of the purchase, so it would appear that a separate Sales contract also needs to be signed. Most purchase contracts would have time frames included within them such as inspection periods allowed, closing deadline, etc.  These would start from when the contract commences.  I was wondering if it was common to put in language that the commencement start date began once the separate Option to Purchase agreement was exercised.

Based on the responses, it looks like the Option Agreement must commonly contain the basics for the Sales contract details as well.  Otherwise,... I would think that exercising the option for the specified price within the allotted time of the option would not even allow for the assignee to get an appraisal of the property?

My thanks in advance for any info you can share as the courses I've taken thus far, while very good, have limited information on the precise contractual process of Wholesaling.

Bill Gulley · Answer

Hi, your question is hard to understand, are you saying you want your option to be operable when you find your buyer? I'd suggest you study options and very basic contract law before trying to change the scheme of things.

What you seem to asking is can your contract become effective when you have a buyer, this is something like what is called a "hip pocket listing" with sale contracts by Realtors and may well be or is illegal, having a listing agreement come alive when you have a buyer or customer.

And, to have a valid option contract you must have paid some consideration or be obligated to pay some amount for the right to purchase, even if you do not.

Good luck!

Jon Holdman · Answer

Not really sure what you're trying to accomplish.  If you're making a contract with an individual seller and want to have an unlimited "get out of jail free" card, just state you can cancel the contract at any time for any reason and the seller has no recourse.

Stacy Steven Smith · Answer

I'm not sure if I just posted this question at the worst possible time and it got burried, or I'm way off base, but if anyone has some input, I'd love to hear your impressions.  It looks like my post has 77 views already, so there appears to be some interest in the question.

Any help would be greatly appreciated.