Option to Purchase Real Estate

Option to Purchase Real Estate

Unilateral option contract granting the Optionee an exclusive right to purchase real property under predetermined terms within a defined period.

Prerequisites

Collect before drafting:

1. Parties — legal names, entity types, addresses, jurisdiction, authority docs (POA, corporate resolution)
2. Property — current deed with legal description, survey, encumbrances/easements/CCRs, title commitment
3. Deal terms — purchase price (fixed or formula), option consideration, option period, credit treatment, financing
4. Jurisdiction — state where property sits (controls recording, disclosures, statutory language)

Quick Start

1. Gather all prerequisites and confirm governing jurisdiction
2. Draft sections in order below, defining all capitalized terms on first use
3. Attach exhibits: legal description, survey, exercise notice form, deed form
4. Run pitfall checklist before delivery

Core Sections

1. Parties

• Optionor: legal name (as on deed), entity type, address, state of organization
• Optionee: legal name, entity type, address, jurisdiction
• Representatives: if via POA/agent, state authority and reference instrument
• Assignability: assignable or personal to named Optionee
• Capacity representations, especially for entity parties

2. Property Description & Title

• Full legal description (lot, block, subdivision, county, state) + street address
• Known encumbrances, easements, CCRs, mortgages/liens, HOA obligations
• Title standard: marketable and insurable, free of unaccepted encumbrances
• Title commitment delivery obligation and cost allocation
• Included fixtures/appurtenances; excluded items

3. Option Period

• Commencement: specific date
• Expiration: specific date, time, and time zone
• Time of the essence: global or provision-specific
• Extensions: conditions, additional consideration, force-majeure/title-defect triggers
• Maintenance payments (if lengthy): periodic amounts, non-payment consequences

4. Option Consideration

• Dollar amount; non-refundable except for Optionor breach or title failure
• Payment timing: lump sum at execution or installment schedule
• Credit toward purchase price upon exercise — yes/no
• Receipt acknowledgment in document

5. Purchase Price & Payment

• Fixed price or formula (e.g., FMV by defined appraisal method)
• Earnest money: amount, post-exercise timeline, form (wire/certified funds)
• Option consideration credit: yes/no, amount
• Price allocation: real vs. personal property (tax purposes)
• Seller financing (if any): rate, amortization, balloon, security instruments
• Contingencies — each with deadline and failure consequence:
  • Financing (specific loan terms)
  • Inspection (timeframe and objection period)
  • Appraisal
  • Environmental assessment

6. Exercise Mechanics

• Notice method: personal delivery, certified mail (RRCR), overnight courier, email, or combination
• Delivery addresses and authorized recipients
• Effective date: upon sending vs. upon receipt (critical near expiration)
• Whether earnest money must accompany exercise notice
• Partial exercise: permitted or not (multi-parcel)
• Failure to exercise: automatic termination of all rights

Attach as exhibit: Form of Exercise Notice.

7. Closing Procedure

• Closing deadline: 30–90 days post-exercise; extension terms
• Location/method: in-person or escrow
• Optionor delivers: warranty deed, bill of sale, title affidavit, FIRPTA cert, lead-paint disclosure, estoppel certs (if leased)
• Optionee delivers: certified funds, loan documents, assumption agreements
• Prorations: taxes, HOA, utilities, rents — as of closing date
• Cost allocation: title insurance, recording fees, transfer taxes, survey, attorney fees
• Walk-through: immediately pre-closing; procedure for material condition changes

8. Optionor Covenants During Option Period

• Maintain property condition and insurance coverage
• Pay taxes and assessments when due
• No additional encumbrances or leases beyond specified terms without Optionee consent
• Covenant breach remedy: termination with return of consideration, or injunctive relief

9. Default & Remedies

Optionor breach (refuses to convey after valid exercise):

• Specific performance
• Monetary damages (return of consideration + consequential damages)
• State whether remedies are elective or concurrent

Optionee breach (exercises but fails to close):

• Retention of consideration + earnest money as liquidated damages
• Actual damages if exceeding liquidated amounts
• Specific performance if breach is remediable
• Termination + freedom to sell to third parties

Non-exercise expiration: automatic termination; Optionor free to sell/encumber.

10. General Provisions & Execution

• Governing law: state where property is located
• Integration clause; written amendments only
• Dispute resolution: litigation/mediation/arbitration; venue
• Prevailing party attorney fees (where state law permits)
• Severability, waiver, binding on heirs/successors/permitted assigns
• Counterpart execution
• Signature blocks with notary acknowledgment (if required/advisable)
• If recording: comply with local formatting, font, and statutory requirements

Pitfalls & Checks

• Use consistent defined terms throughout — never swap "Option Period" / "Exercise Period"
• Define all capitalized terms on first use or in a definitions section
• Verify internal consistency of dates, dollar amounts, and party names
• Confirm state-specific mandatory disclosures and recording requirements
• Mark uncertain jurisdiction-specific citations with [VERIFY]
• Plain English; avoid archaic legalese while maintaining legal precision
• Number all sections/subsections for cross-reference accuracy