A5. Option Agreement to Purchase Real Estate Negotiation Points

In exchange for a fee, the prospective Buyer is paying the Seller to take the property off of the for-sale market and give the prospective buyer exclusive rights to purchase the property at the terms specified in the Option Agreement. This exclusive right to purchase constitutes "Equitable Title" which will satisfy a lender and/or funders requirement for irrefutable site control. Option Agreements are useful when the developer needs time to secure funding, building and community approvals. A small amount of predevelopment money is put at risk in order to conduct due diligence and secure commitments, rather commit the organization to liability to buy the property outright.

The following is a list of key points to include in an Option Agreement:

1. Price of the Property Specify the exact price to be paid for the property. Specify the timing during which all of the purchase price will be paid. This includes whether or not the Option Fee will serve as an earnest money deposit with the balance due at closing. Usually need to offer deposit of 5% to 20%. All deposit money should be placed in Escrow either with a Licensed Real Estate Broker, Title Insurance Company or Settlement Attorney.

2. Cost for Option to Purchase Property Specify how much will be paid to the Seller in exchange for the Option rights. If the Seller demands an Option Fee that exceeds 25% of the purchase price, consider full purchase of property or walk away. Option fee can be paid up front and/or negotiated to be paid over a series of payments such as once a month with a "not to exceed" amount. Negotiate the Option Fee amount to be credited to the final purchase price of the property should the purchase go forward.

3. Terms and Extensions Specify the date when the Option Agreement begins and ends. Negotiate to extend the Option Agreement based on specific terms such as: due diligence; processing delays out of the control of the Buyer or Seller; Buyer offers more money for Option extension Should the Buyer choose to go forward with the purchase, specify that the Buyer and Seller will execute the Purchase Contract based on the terms of the Option Agreement.

4. Contingencies Contingencies allow the Buyer to be released from obligation to pay the Option Fee if the Option is to be paid monthly or over a series of payments. If the Buyer finds that the proposed housing project is unfeasible and chooses not to purchase the property prior to the end of the Option Agreement, the Buyer should negotiate a release from Obligation to Pay any further Option Fee payments based on the following Contingencies: Financing Clear Title Environmental Issues Planning and Zoning Issues Building Permits

5. Buyer's And Seller's Obligations If Cannot Close If the Seller cannot deliver free and clear title and/or if the Seller failed to disclose material issues that concern any of the items on the contingency list, the Buyer may want to void the Option Agreement and request release of the Option Fee or re-negotiate the Option Agreement Terms. If the Buyer fails to perform according to the Option Agreement terms, the Buyer must forfeit the Option Fee and any Deposit Money. Some Sellers may negotiate more severe penalties if the Buyer fails to perform

6. Before signing make sure: A real estate lawyer reviews the Option Agreement Your Board of Directors has reviewed the Option Agreement and has passed a Board Resolution providing staff authorization to execute a Option Agreement to Purchase Real Estate. Make sure you know what you are agreeing to!

Next: A6. Sample Option Agreement

OHIO CAPITAL CORPORATION FOR HOUSING