Real Estate Contract vs OptionOctober 25, 2017 | By Erik Lincoln
A contract to sell real estate is a bilateral agreement (usually subject to certain conditions) between a buyer and a seller that sets forth the intent of the parties with respect to buying/selling the property. An option, on the other hand, is an agreement where seller grants to buyer the right (upon certain conditions), but not the obligation, to purchase real estate. An option is generally more favorable to a buyer when compared to a contract because of the flexibility an option gives the buyer regarding the real estate. An option allows the buyer to “tie up” seller’s real estate during the option period without binding the buyer to actually purchase the real estate. With this in mind, a diligent seller’s attorney should, generally, recommend a contract to his client as opposed to an option. If buyer insists, however, on obtaining an option, seller and the seller’s attorney should insist on sufficient consideration being paid to seller for the option to justify the time the real property will be subject to the option. From seller’s standpoint, this consideration should be in addition to the purchase price paid for the real estate if the option is later exercised.
The current trend in real estate transactions is to blur the distinction between contracts and options into a hybrid document nominally designated as a contract but containing a so-called “free look” period. The “free look” gives the buyer the right to terminate the contract if the buyer determines, in its sole discretion, the property is not suitable for the buyer’s intended use. Usually, these “free look” contracts also provide the retention by the seller of the earnest money as liquidated damages is the sole remedy available to the seller. One should recognize that these contracts are generally nothing more than options and should be treated accordingly. The buyer should pay some independent, nonrefundable consideration for the so-called “free look” to make certain there is a mutuality of obligations between the parties.