Curious about purchase option agreements

[John Divine]

Hey BP, I'd like to learn more about a purchase structure I don't hear about often: just a straightup option to purchase or purchase option agreement (NOT a lease option). 

In my mind, the agreement would look loosely like this: The option buyer pays an upfront fee to the option seller, giving the buyer a right to buy the property at any time between now and a certain date in the future, for a set price. I'm interested ideally in very long-dated contracts to take advantage of appreciation. So for example, you give the seller $5k upfront in exchange for the right to purchase a property (let's say worth $200k today) for $250k in ten years. The seller keeps that $5k no matter what, and it's not credited back at the time of sale. If you're familiar with stock options, this is exactly how call options work, although they only go out a max of maybe 27 months or so.

My questions are a bit numerous, but I've ordered them roughly in order of importance for me: 

-Is this legal? If so, has anyone out there done this and how did it go?

-Are there legal restrictions on this in NC, such as the length of the option?

-What sort of protections can be put in place for the buyer? I'm thinking of liens, backtaxes, making sure the seller doesn't sell to someone else, etc.

-Do folks have ideas about the best ways to source (i.e. find an option seller) for such deals?

-If these sorts of deals are doable (preferably in NC, but I'm open to other states as well), are there real estate lawyers specializing in this sort of thing?

Thanks,

John

[Don Konipol]

I’ve seen some long term options - as long as 25 years in one case, but it was concurrent with a triple net lease of the same length of time with the property being commercial.

If the option is with a homeowner then you deal with consumer protection laws, Dodd Frank act, and CFPB.  Investors contracting with investors are only subject to fraud statutes. 

Much more common is a short term - 30 day - 12 month option.  Few property owners would be willing to (1) “tie up” a property for 10 years where they couldn’t sell it and (2) give up 10 years of price appreciation for $5,000.  Unless the owner is mentally incompetent, or more than desperate, it most likely won’t happen.  However, like winning the lottery, it could occur in an extremely small percentage of time.  

The options I purchased were all for 12 months or less, and I recorded them to put on notice anyone , especially a title company, thinking of purchasing the property during my option period.  Obviously, no title company is going to insure title while there’s a valid option to purchase outstanding.  However, an option holder won’t be able to stop a private sale from occurring (unless they find out about it before hand and obtain an injunction); the option holder would most likely need to initiate legal action after the fact. 

The option contract itself should address liens, encumbrances, etc., but again enforcement may be after the fact.  

Bottom line is this; most real estate transactions only occur when both parties PERCEIVE the transaction as being advantageous to themselves.  Their are few, if any instances I can think of where a property owner would perceive that giving up the major portion of 10 years of appreciation on a $200,000 property for $5,000 cash while “tying up” said property for same time is advantageous.  

All lawyers with a specialty in real estate are, or should be familiar with options. 

[John Divine]

Very helpful Don, thank you!