How Does Option Money Work? - Posted by Lynn Johnson

Posted by BillW. on March 31, 2001 at 15:18:25:

I think you’re getting a little mixed up here.
When you put an option on a property, this is a separate agreement. It basically says you have the right, but not the obligation, to purchase the property under the terms agreed to in the option agreement, within a certain time period. The seller is obligated to sell to you (or your assignee, if you wrote it correctly). When you do an option, the seller receives a “payment” from you called “consideration”. (You try to make this payment as small as possible. Seller trys to make it as large as possible). Anyway, whatever you agree on is the option consideration. It is given to the seller when he/she signs the option agreement. You do not get this money back. If you’re not sure of the exact wording to put in the agreement, check some of the ones on legalwiz or there are many in the courses offered on CRE. If you don’t have or can’t get these, I’d recommend you spend a few dollars and have a good real estate attorney draft up the agreement, so it meets all your local rquirements. When it’s done, meet the seler at the attorney’s office, everyone signs and you give the option money check to the seller. Then hustle down to the courthouse and record a memorandum of option immediately. Don’t record the option itself.
As to closing, there is no closing unless you (or your assignee)exercise the option and “close” on the property.
Down payment money is only tendered when you (or your assignee)exercise the option and then only in the amount stated in the agreement. This downpayment money should be held by (preferably) your attorney. If not your attorney, then an escrow company or title company, depending on where you live. Don’t just give it to the seller. If you do and anything goes wrong, it’s very hard to get it back sometimes. When the final closing occurs,the downpayment money and all other funds are collected by the closing agent and disbursed according to the terms and agreements of the contract.

How Does Option Money Work? - Posted by Lynn Johnson

Posted by Lynn Johnson on March 31, 2001 at 14:14:11:

Do you give the seller option money before or during closing;and the same with down payment money.Does the money(OPTION OR DOWN PAYMENT)change hands during the signing of the order of purchase contract or at closing?

Re: How Does Option Money Work? - Posted by TheMadDog

Posted by TheMadDog on March 31, 2001 at 16:33:17:


If you are the T/B (that’s RE lingo for tenant/buyer) you would give the Seller your option money upfront, in exchange for the privilege of his writing an option for you to buy his place at an agreed price and terms by an agreed date.

That’s not to say you’d really want to structure your deal like this if it is a truly creative deal, but the essence of it is that your Seller gets his option money upfront.

Now, to get creative, you’d want to have that money credited toward either the deposit or the down payment upon closing, especially if it is a significant amount of cash.

And we’re not even talking about leasing the same property from the Seller before you close and exercise your option. So you see, this is the very beginning of trying to understand all the facets of the Option deal, and all its nuances, such as Lease Option, Lease Purchase, Option to Purchase, etc.