The Perfect Option Contract for Real Estate [Template Included]

Let’s say you just found the perfect real estate investment using your real estate lead strategy. It's in an up and coming neighborhood with cash on cash return potential and a profitable gross rent multiplier number.

But you need more time before signing on the dotted line, whether it's waiting for funding or you think interest rates will drop in the foreseeable future, saving you money on the deal.

In either of these scenarios, what can you do? 

That’s where an option contract in real estate comes in. 

An option contract is a powerful tool for all new and experienced real estate investors alike. 

Keep reading to learn everything you need to know about an option contract in real estate, including an option contract template. 

What is an Option Contract in Real Estate?

An option contract is a legal agreement that allows a potential buyer, known as the optionee, the exclusive right to purchase a given property from a seller, known as an optioner, without an obligation to do so. 

To get this exclusive right, the buyer pays an upfront fee that can vary. 

This contract gives the optionee a specific timeframe to decide whether to exercise the option and proceed with the purchase.

Let’s take a look at an example.

Say Mark (the investor-buyer/optionee) enters into an option contract with Joe (the seller/optionor) for her property in Riverside, California.

Mark pays Joe an option fee of $5,000 for the exclusive right to purchase the property for $250,000 anytime within the next 2 years.

If Mark decides to buy within this specific period, he’ll do so according to the terms outlined in the option contract.

If he chooses not to, Joe keeps the $5,000, and they both move on.

Advantages of an Option Contract for the Buyer

If you're a buyer, an option contracts allows you time to:

• assess the property's value
• obtain financing
• conduct due diligence before finalizing the deal 

Option contracts also give buyers a competitive edge in a competitive market by preventing other potential buyers from swooping in and making an offer on the property.

Advantages of an Option Contract for the Seller

Sellers benefit from option contracts by generating additional income through option fees paid by the buyer. 

Sellers also have the advantage of locking in a potential buyer at a predetermined price, providing them with a sense of security.

Components of an Option Contract in Real Estate

Let's take a look at some of the components of an option contract. It includes:

• Parties Involved: The contract will list the two parties in the agreement, including the  buyer (optionee) and the seller (optionor). 
• Description of the Property: This section provides a detailed and legal description of the property. 
• Option Fee: A non-refundable fee that the buyer pays to the seller for the exclusive right to purchase the property within the specific time frame provided. 
• Option Period: This specifies the length of time the buyer has to decide whether or not to purchase the property, ranging from several months to a few years.
• Purchase Price: This is the agreed-upon price that the buyer can purchase the property for during option period.
• Terms of Exercise: The conditions that the buyer can exercise their option to purchase the property.
• Default Terms: Outlines what happens in the event either party fails to uphold their end of the option contract.

Option Contract in Real Estate Template

If you're looking for an option contract to use for your next real estate deal, look no further:

("Agreement") made and entered into this ____ day of _________, 200_, by and between _________________, whose principal address is _____________________, hereinafter referred to as "Seller" and ___________________, whose principal address is _________________, hereinafter referred to as "Purchaser": W I T N E S S E T H: WHEREAS, Seller is the fee simple owner of certain real property being, lying and situated in the County of _________, State of _____________, such real property having the street address of __________________________ ("Premises") and such property being more particularly described as follows: (legal description) Also known as ______________________________________________________________ WHEREAS, Purchaser desires to procure an option to purchase the Premises upon the terms and provisions as hereinafter set forth; NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged by the parties hereto and for the mutual covenants contained herein, Seller and Purchaser hereby agree as follows: 

1. DEFINITIONS. For the purposes of this Agreement, the following terms shall have the following meanings: 

(a) "Execution Date" shall mean the day upon which the last party to this Agreement shall duly execute this Agreement; 

(b) "Option Fee" shall mean the total sum of a down payment of _____ percent (___%) of the total purchase price of the Premises plus all closing costs, payable as set forth below; 

(c) "Option Term" shall mean that period of time commencing on the Execution Date and ending on or before ____________, 20____; 

(d) "Option Exercise Date" shall mean that date, within the Option Term, upon which the Purchaser shall send its written notice to Seller exercising its Option to Purchase; 

(e) "Closing Date" shall mean the last day of the closing term or such other date during the closing term selected by Purchaser. 

2. GRANT OF OPTION. For and in consideration of the Option Fee payable to Seller as set forth herein, Seller does hereby grant to Purchaser the exclusive right and Option ("Option") to purchase the premises upon the terms and conditions as set forth herein. 

3. PAYMENT OF OPTION FEE. Purchaser agrees to pay the Seller a down payment of ____ percent (____%) of the total purchase price of the Premises plus all closing costs upon the Execution Date. 

4. EXERCISE OF OPTION. Purchaser may exercise its exclusive right to purchase the Premises pursuant to the Option, at any time during the Option Term, by giving written notice thereof to Seller. As provided for QUICKSTART KIT Wholesaler Contract Pack above, the date of sending of said notice shall be the Option Exercise Date. In the event the Purchaser does not exercise its exclusive right to purchase the Premises granted by the Option during the Option Term, Seller shall be entitled to retain the Option Fee, and this agreement shall become absolutely null and void and neither party hereto shall have any other liability, obligation or duty herein under or pursuant to this Agreement. 5. CONTRACT FOR PURCHASE & SALE OF REAL PROPERTY. In the event that the Purchaser exercises its exclusive Option as provided for in the preceding paragraph, Seller agrees to sell and Purchaser agrees to buy the Premises and both parties agree to execute a contract for such purchase and sale of the Premises in accordance with the following terms and conditions: (a) Purchase Price. 

The purchase price for the Premises shall be the sum of _____________ ($__________); however, Purchaser shall receive a credit toward such purchase price in the amount of the Option Fee thus, Purchaser shall pay to Seller at closing the sum of ____________ ($___________); (b) Closing Date. 

The closing date shall be on _______________, 20____ or at any other date during the Option Term as may be selected by Purchaser;

(c) Closing Costs. 

Purchaser's and Seller's costs of closing the Contract shall be borne by Purchase and shall be prepaid as a portion of the Option Fee;

(d) Default by Purchaser; Remedies of Seller. 

In the event Purchaser, after exercise of the Option, fails to proceed with the closing of the purchase of the Premises pursuant to the terms and provisions as contained herein and/or under the Contract, Seller shall be entitled to retain the Option Fee as liquidated damages and shall have no further recourse against Purchaser;

(e) Default by Seller; Remedies of Purchaser. 

In the event Seller fails to close the sale of the Premises pursuant to the terms and provisions of this Agreement and/or under the Contract, Purchaser shall be entitled to either sue for specific performance of the real estate purchase and sale contract or terminate such Contract and sue for money damages.

6. MISCELLANEOUS. (a) Execution by Both Parties. 
This Agreement shall not become effective and binding until fully executed by both Purchaser and Seller. 

(b) Notice. 

All notices, demands and/or consents provided for in this Agreement shall be in writing and shall be delivered to the parties hereto by hand or by United States Mail with postage pre-paid. 

Such notices shall be deemed to have been served on the date mailed, postage pre-paid. 

All such notices and communications shall be addressed to the Seller at ______________________ and to Purchaser at ___________________ or at such other address as either may specify to the other in writing. 

(c) Fee Governing Law. 

This Agreement shall be governed by and construed in accordance with the laws of the State of _____________. 

(d) Successors and Assigns. 

This Agreement shall apply to, inure to the benefit of and be binding upon and enforceable against the parties hereto and their respective heirs, successors, and or assigns, to the extent as if specified at length throughout this Agreement. 

(e) Time. 

Time is of the essence of this Agreement. 

(f) Headings. 

The headings inserted at the beginning of each paragraph and/or subparagraph are for convenience of reference only and shall not limit or otherwise affect or be used in the construction of any terms or provisions hereof. 

(g) Cost of this Agreement. 

Any cost and/or fees incurred by the Purchaser or Seller in executing this Agreement shall be borne by the respective party incurring such cost and/or fee. 

(h) Entire Agreement. 

This Agreement contains all of the terms, promises, covenants, conditions and representations made or entered into by or between Seller and Purchaser and supersedes all prior discussions and agreements whether written or oral between Seller and Purchaser with respect to the Option and all other matters contained herein and constitutes the sole and entire agreement between Seller and Purchaser with respect thereto. 

This Agreement may not be modified or amended unless such amendment is set forth in writing and executed by both Seller and Purchaser with the formalities hereof. 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under proper authority: As to Purchaser this _____ day of _____________, 20_____.

Witnesses: "Purchaser" ___________________________ __________________________ ___________________________ As to Seller this ____ day of ______________, 20____.

Witnesses: "Seller" __________________________ __________________________ __________________________ 

How Does An Option Contract in Real Estate Differ from a Lease Option Contract?

You may be wondering how an option contract differs from a lease option contract. While the two real estate contracts have similarities, they are used for different purposes.

In the case of an lease option contract, the optionee enters into a lease agreement with the option to purchase the property at a later date. 

This type of contract gives the optionee the opportunity to rent — not purchase — the property while having the right to buy it within the agreed-upon lease term.

Lease option contracts can be beneficial for individuals who may not be ready to commit to a property purchase immediately but want to secure a potential future buying opportunity. 

This arrangement allows the optionee to test out the property, neighborhood, or market conditions before making a final decision to purchase. 

It also provides the optionee with the ability to lock in a purchase price, protecting them from potential future price increases.

What to Avoid in an Option Contract for Real Estate

So, what should you avoid when utilizing an option contract?

1. Avoid vague or ambiguous language in the contract that could lead to misunderstandings. For example, the property description should include not only the physical attributes of the property but also any restrictions, easements, or encumbrances that may affect its value.
2. Avoid excessive option fees that may discourage potential buyers.
3. Ensure both parties have a clear understanding of their rights and obligations under the contract.
4. Seek legal advice to ensure the contract complies with local laws and regulations.

The Bottom Line: Option Contract in Real Estate

There you have it: an option contract in real estate.

An option contract in real estate is a powerful tool for a real estate investor, giving you time to process the purchase or wait for a more advantageous market.

Use our option contract template in your next real estate deal to ensure you have all boxes checked. 

But don't stop there.

Use this template again and again to ensure that your next real estate deal is potentially your most profitable one yet.

Free Property Search

Find Your Next Wholesale Deal, House Flip, or Rental Property Investment.

Search Now