I get questions all the time about what an option to purchase is. This video blog gives an explanation of what the option is, how it works, and when to use it.
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Transcription of the Video Blog:
Hi everyone, this is Rowan Smith from The Mortgage Centre. I’ve been taking several calls recently on Options to Purchase and Vendor Takebacks. This is something that keeps coming up, time and again, so I wanted to address what an Option to Purchase is today.
An Option to Purchase is a registered right for someone to buy a property, that is registered on title. So, for example, let’s just say for simplicity’s sake, that I own my own home clear title. I’ve got no mortgage, and my neighbour wants to try and buy my unit, but doesn’t have the money right now. He is, perhaps, in between jobs, or faces some other complicated factor such that he doesn’t want to transfer it right now into his name. He may not have the money for closing costs, or the bank won’t finance him due to bankruptcy issues right now, and he needs a couple years to re-establish his credit.
I can grant him an option to purchase my property. So what that would mean is, I would take, say, $25,000 in exchange for the right to buy the property at $500,000. So that would be the price. He would be guaranteed that price would be $500,000. That’s what his option is. It would be set to have an expiry date on it. Say, 5 years time.
So, any time within the next 5 years he can buy that property for 500 grand. And in exchange for that right, he has given up that $25,000.
Now the way we see these things come up is that someone comes to us, and they want to sell their property, but there is an option to purchase registered. So these options get put on title. I couldn’t sell my property once the option is on there. The only way to do that would be to have him with the option sign off on it and allow me purchase the property, which of course he wouldn’t do unless I gave him back his $25,000 or whatever he wanted.
One of the downsides to Options to Purchase is that the property is held up and tied for that period of time. So if you have got, say, 5 years on your option to purchase. I as the current owner who has that now registered in your favour to purchase the property, can’t sell it expires or until you execute that option to purchase.
So it’s just another way to tie up property. I’ve seen a lot of these recently with developers where they are trying to do a land assembly and maybe assemble several hundred acres in an area for an industrial complex. What they’ll do is offer options to purchase, for considerable sums, to land owners all around the area. The plan, of course, is that once they’ve got the options on all of this land, then they’ll step up, bring the financing, bring the cash, and they’ll buy them all at one point.
I have seen it in personal arrangements too where one person has a debt to another and wants to give them the property, but maybe that person can’t afford to buy the property, or there is some mitigating factor.
So if you need any information on Options to Purchase, asking a lawyer or notary is the best way to go as they are the ones that actually register it. We brokers aren’t really involved in it except when the person finally decides to execute it, and perhaps need a mortgage at that time. But we do see them, and they can create some complications. So if you are thinking of executing on an option to purchase, or you are thinking of offering an option on your property, in the hopes of getting some money, speak to me first to find out the risks and I’ll put you in touch with an appropriate lawyer to get a legal opinion and express it as well.
For The Mortgage Centre, I’m Rowan Smith.