The definition of option explains the term as something that can be chosen in spite of having multiple other alternatives. It could be an option for food, which shows a preference for one meal over another. You can have the option to do something, and to chose whether to do it or not. Generally, many options are presented before us during our lifetime and we are faced with situations where we have to choose.
When it comes to real estate, option is the right of an individual or entity to sell or buy property for a specific price within a given time period. You will often find them as “option agreements” and while there are different option agreements out there, all of them follow the same principle of reserving the possibility of purchasing or selling to a person or a company.
For example, a buyer can reserve the right to purchase a property he might be interested in through an option agreement. In this situation, the option contract is called “real estate purchase option” and it gives exclusive rights to the buyer to purchase the property.
Once the option to buy a property is in place, the seller of that property cannot sell it to anyone else. The option has a predetermined purchase price that is valid for a certain period of time, which is usually 6 months up to a year. If the buyer is unable to purchase while the contract is still valid the seller receives the money used to buy the option.
Although traditionally, in real estate, when sellers list their homes for sale they can sell to whoever they want, but when an option contract is introduced things change. Now the right to sell is conditioned by the contract terms.
Another option in real estate is the lease option. This agreement is made between the landlord and tenant if the perspective of buying the property is considered by the tenant and the landlord agrees on it. This agreement allows the tenant to buy the property after a predetermined rental period. This agreement may be detrimental to the tenant if he is unable to buy after the rental period since the rent option costs, as well as premium rent costs, will go in the way of the landlord.