CALL OPTIONS – A DEVELOPER’S BEST FRIEND

Harnessing the Power of Call Options 

Ask any investor and they will sing the praises of call options. They allow investors to secure potentail development sites whilst conducting due diligence, and all without costing a fortune. 

Investopedia defines a call option as:

An agreement that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset.

Call options come into play when you just need some more time up your sleeve. If looking at a particular investment site, there are many ticks and cross checks that need to be performed. And those checks take time - especially when looking into DA Approvals and due diligence. 

Enter the Call Option 

Call Options allow a potential buyet (the grantee) the right to compel the owner (the grantor) to sell the property to them at a set price within a set timeframe. The seller is not able to sell the property to any other buyer within the set timeframe. This allows the buyer the ability to condct all relevant checks and know that the property will not be whisked out from underneath them. 

The Call Option must be put in writing as a written contractual agreement. It is accompanied by a non-refundable Option Fee, which is generally in the vicinity of 1-5% of the agreed sale price. This is where investors love the Call Option. It allows an investor to complete all relevant checks without incurring too harsh of a financial penalty of anything awry turns up within the process. 

When an Option Agreement is exercised, a legal binding contract for the sale of the property has been entered into. If the contract falls apart for any reason, the investor will lose their deposit (between 1-5%) generally, and can walk away from the sale. The owner is then able to resell the property to other buyers after the agreed option time or if the contract falls anytime inbetween. 

If you are interested in considering a Call Option for your next development purchase, give Angela a call to discuss your Options.