Option Listing Agreement

Definition of "Option listing agreement"

Written by

Dawn Dougherty

Coldwell Banker Realty

An Option Listing agreement is one of the many specificities of a Listing Agreement. Here’s what happens when the house seller signs an Option Listing: he gives someone (a home buyer, a real estate agent or a broker) the option to purchase the property within a certain period of time at a pre-determined price. To acquire the right to buy the house (remember: it is not an obligation!) the home buyer, or real estate agent or broker pays an amount of money set by the home seller. Note: this right has an expiration date (usually 6 months). If the option is not exercised within the specified time period of the contract, the right to buy the house expires.

Here’s why it makes sense to have an Option Listing Agreement:

For the home seller
Home sellers can first and foremost benefit from the upfront money received for the option. Selling a house is not the fastest way of earning money. It may take months or even years to find the right offer. And all the shortcuts you might follow to make the house more attractive - thus speeding up the process - have costs: changing floors, painting the house, buying new appliances… So it is nice to get some compensation, even if, in the end, the option buyer does not exercise its option. Going from Option Listing Agreement to Option Listing Agreement can be a way to smooth things up until the house is finally sold.

For the home buyer
Aside from stopping competition from making offers to the property for a while, Option Listings are good for home buyers who have cash flow problems. It warrants them extra-time to get the necessary funds for that big downpayment. But Option Listings become especially interesting for home buyers when searching for properties in a booming real estate market. It allows them to “lock” the house price at, say, 50k for some time: if at the end of that time period the area in question has doubled its worth, then the home buyer will eventually be paying 50k for a 100k house.

For the Real Estate Agent or Broker
Real estate agents and brokers should approach Option Listings from an investor standpoint. When they sign an Option Listing with the home seller and pay for the option to buy the property, they usually do so because they saw great sales potential for that property. Here’s an example: imagine real estate agent Toby has a hunch that location X is going to be worth a lot of money in 2 years. Real estate developers are starting to take notice and come to the neighborhood, but it’s not something massive yet, so the prices have not followed. So, he gets the option to buy a house from a client at location X. In the 6 months of the Option– during which the home seller is not allowed to sell it to anyone else – Toby can market the property to find a buyer for the highest price he feels the house deserves. But a lot can happen in 6 months, right? If, after all, Agent Toby’s hunch turned out to be a bad bet and Location X shows no sign of becoming prosperous; that’s okay. He can cut his losses and not exercise the option. But if he does find a buyer… Jackpot!

Real estate tip:

Need to know more regarding Listing Agreements? Check out our Listing 101:  What you need to know when you hire a real estate agent or a broker article!

And feel free to use our Real Estate Agent Directory to find the perfect Broker or Agent for your needs!