The "New" Option Agreement

Sellers of raw land are still out there; there just aren't as many buyers right now. Enter the more buyer-friendly option agreement.

The option agreement, a popular mechanism for buyers and developers in the past, normally contains a feasibility (or due diligence) period during which a buyer can consider whether the land could be developed, and at what cost. Normally, the deposit a buyer puts up for the purchase, becomes non-refundable at the end of the feasibility period unless the buyer disapproves of the feasibility of the land for the proposed project.

In this slower and slower housing market, many buyers are being offered rather generous terms in their option agreements. One area where they have more flexibility is the period of feasibility and the amount of the deposit. Given the relative risk that many developers are taking nowadays when paying option money for land, the new option agreement is one way to keep the land transactions from stopping altogether, and a great way to allow builders to move ahead with building attractive projects in the future.