The option is an extremely versatile investment tool that comes in a variety of forms and can be used for a variety of purposes. The best part of an option is that it gives the optionee (the party holding the option) control over property (in the sense of the right to acquire it) for a very small cash outlay. In effect, it achieves a very high degree of leverage and conserves cash, two goals sought by both real estate investors and real estate speculators.
An option gives to its holder the privilege to buy a specific parcel of real estate, at a specified price, on specified terms within a fixed period. An option to buy also is known as a “call.” (An option to sell, known as a “put,” also may be used in real estate, although it is more common in securities transactions.) The person who grants the option (the optionor) agrees to refrain from selling the property to any other party during the option period in exchange for consideration, which the optionor will keep whether or not the option is exercised by the optionee.
Combine An Assemblage
An assemblage is when someone, usually a developer, combines an assemblage of separate parcels of land into a single parcel. The developer putting together the assemblage normally is interested in acquiring all or none of the parcels. Consequently, in order to avoid committing large amounts of capital to a project that may not succeed, the developer will proceed with options rather than purchase contracts. Of course, each contract could be conditioned upon acquisition of the remaining parcels, but this would reveal the assemblage plan and cause an immediate rise in prices of the parcels not yet acquired.
Most Favored Purchaser Clause
A landowner that suspects that an assemblage is in process may insist on a most favored purchaser clause before giving the option. This requires a developer to increase the exercise price of the option so that it is equal (on some comparable basis) to the highest price paid for any other parcel. Because the developer may be confronted by one or more holdouts and be forced to sharply increase the exercise price for them, this type of clause can substantially increase the gain to earlier optionors.