Put and Call options are widely used by developers and investors when looking to acquire land for future development. A Call Option gives the buyer the right, but not the obligation to buy the asset at the exercise price, at or within a specified time. A Put Option gives the seller the right, but not the obligation to sell the asset at the exercise price, at or within a specified time.
Basically, put and call options give developers the opportunity to seek out long term plays in the market. It allows them to undertake their due diligence checks without the property being snatched from under their noses. The seller is unable to actively market or offer the property for purchase to any other buyer within a set timeframe. It allows the buyer to purchase the property at a set price, at a time that suits them.
If indeed a developer finds any issues with the property throughout their due diligence and DA approvals, they can pull out of the arrangement without a harsh financial penalty. This non-refundable option fee is charged at the time of the agreement. It is generally at 1-5% of the purchase price – a much more palatable loss. They are then free to walk away from the sale and the seller can again advertise for sale to another buyer.
The Put and Call option enables the seller to force the purchaser to buy the property at a set point in time. If the buyer doesn’t buy, the vendor will pocket the deposit. Otherwise the Put and Call option also allows the buyer to nominate a new buyer.
THE LONG-TERM PLAYS ENABLED BY PUT AND CALL OPTIONS
The benefits of these options to developers are huge. It gives them the security knowing that they have control over a development site whilst not yet owning the property. They can proceed with their checks and approvals all whilst it remains in the hands of others.
On one hand, vendors are happy with a secured sale. On the other, it gives greater power to developers over prime development sites with minimum upfront commitment. Both parties are happy and the outcomes can benefit everyone when managed correctly.