Question for Real Estate agents/property developers....

[abitfishy]

Hi all,

Yes, proper legal advice is the way to go, but its going to be hard to get my inlaws to get proper legal advice, so I ask some initial advice here....

They have been approached by a real estate agent on behalf of a developer showing interest in their property and wanting an Deed of Option on the property. It is a 'standard' Sydney Southern suburbs residential property, with the developer wanting to build retirement units on it and the surrounding properties.

Could someone in the know give us a guide on what time period we should expect them to ask for, and option fee paid (ie, is it usually a percentage of purchase price). As a guide they have offered around the $1 million mark - yes, you can tell its Sydney.

Any other random advice in these situations appreciated.

Thanks

[Wood Borer]

Pardon my ignorance, but what is a Deed of option?

[abitfishy]

Basically, it gives the option to the developer purchase the property at an agreed price in a set time limit, for a fee paid to the owner (comes out of purchase price if goes through, owner keeps if sale does not proceed). During that time limit the owner cannot sell to anyone else and is 'frozen' from doing anything.

[Honorary Bloke]

Pardon my ignorance, but what is a Deed of option?

A Deed of Option is basically an offer to "possibly" buy a piece of property for a certain price within a certain time period. A fee is paid, usually up front, to compensate the seller for the inconvenience of keeping the property off the market or for the privilege of locking in the price for a period of time.

For example, I approach you and say "I may like to buy your property for $350,000 within the next 6 months if I can get these adjoining properties. So if you will sell it to me for this price I will give you $3,500 up front and I may close the deal at any time up to 6 months from today. If I don't make the purchase, you get to keep the $3,500. If I do, the $3,500 applies toward the purchase price. There are many variations on this theme, but that's it in a nutshell.

[Disclaimer: I am an American estate agent, Australian mileage may vary. Take competent advice before signing any contract.]

[Honorary Bloke]

They have been approached by a real estate agent on behalf of a developer showing interest in their property and wanting an Deed of Option on the property. It is a 'standard' Sydney Southern suburbs residential property, with the developer wanting to build retirement units on it and the surrounding properties.

Could someone in the know give us a guide on what time period we should expect them to ask for, and option fee paid (ie, is it usually a percentage of purchase price). As a guide they have offered around the $1 million mark - yes, you can tell its Sydney.

Any other random advice in these situations appreciated.

Thanks

To deal specifically with your questions:

• The period of time will vary, based on the perceived difficulty in securing the needed property aggregate, the deadline for making a decision to develop the project, and how determined the developer is to make the project succeed. As a rule 6 months to 1 year is normal. The longer the time period, the higher the up front charge.
• The fee paid may vary from 1% to 3% (or perhaps there are different Ozzie customs) depending, as stated above, on the time period and other considerations. The fee may be lower if the property is being actively marketed and the option holder merely seeks the "right of first refusal." The fee may be higher if the prospective purchaser wants the property frozen off the market for that period of time.

The thing to remember about contracts is that they can vary widely. Do not let someone hurry you into signing the "Standard Contract." That's an old trick. There is no such thing as a standard contract, except one that favours the person offering it.

Same disclaimer as above. If you have additional questions, please post.

[Wood Borer]

Thanks for the explanation.

[abitfishy]

Thanks Honarary Bloke.

I couldn't imagine they will only want 6 mths given it would take longer than that to get council approval for the development - even 12mths sounds fairly short to me, but 12mths was mentioned as possible. They are only offering less than 1% at this stage, which we thought was a bit low. This we will need to negotiate - the inlaws were wanting to downsize soon for retirement which they may have no choice soon (lack of income $$), so having to sit on it for a period of time may get difficult for them - so the option fee is going to have to be sufficient to give them that little bit extra during that period as a bit of a buffer if they need it.

Thanks again

[johnc]

I was recently involved with one of these with a similiar value, we charged $20,000 for a six month option, but the figure was pulled out of the air and they took it, the option ran for a period and then was deducted off the sale price. It was all subject to the appropriate approvals.

[Honorary Bloke]

Thanks Honarary Bloke.

They are only offering less than 1% at this stage, which we thought was a bit low. This we will need to negotiate - the inlaws were wanting to downsize soon for retirement which they may have no choice soon (lack of income $$), so having to sit on it for a period of time may get difficult for them - so the option fee is going to have to be sufficient to give them that little bit extra during that period as a bit of a buffer if they need it.

Thanks again

I charge for classes in this type of negotiation, but as you are in OZ, unlikely to employ my services(), and a member of this esteemed forum (), here are some tips for free:

• Whoever has the shortest known deadline loses. Do NOT tell them your timetable. Let them guess. Try to discover what their's is.
• To try and have them raise the option amount, you may want to tell them you are thinking of putting the property on the market anyway. They will not want you to do that I suspect.
• Settle all the small issues first (if any). This will get them invested in working with you and they will be reluctant to have "wasted time" and have to start over elsewhere.
• Strip ALL the emotion out of the transaction. This is a common error. It is not personal. Do not make it personal. If they want to get emotional, that's fine (but they won't).
• The really important stuff tends to happen right at the end of the negotiation, so be patient. See my first comment above.
• Information is power. Try to discover what luck they are having securing the other properties. Ideally, you would hope they have gotten them all except yours and yours is in the middle of the proposed development

Finally, give them my name and tell them if they want me to stop giving you tips they must send me some money.

[abitfishy]

Thanks for that mate. Most of its common sense.

You can try and send me a bill.

[Honorary Bloke]

Thanks for that mate. Most of its common sense.

You can try and send me a bill.

Yes, but nobody pays for common sense. And you might be surprised at how few have it.

[abitfishy]

And you might be surprised at how few have it.

The amount of time I spend on the net and forums in particular, I am well aware of how few have it!!! Its quite scary in fact.

[bitingmidge]

fishy,

All Bob said is good stuff, please check the laws specifically in your State.

I'll fill in a bit of motivation from a developer's perspective, then from the owners.

As a developer, I don't want to throw money away. An approval is going to cost heaps, for an Aged Care Unit it could be more than $250,000, (a lot more).

I want to tie the land up for as long as I can, at a fixed price, with the smallest outlay. If the option fee is too high (and 10% is too high), I may as well buy the land and pay interest, offsetting that with some rental income.

That's not what I want to do, and I won't have any money until I've got the approval anyway, so there's probably no deal for you.

As an owner:

I want some certainty. I want to be free to sell whenever I want and being tied up for twelve months won't allow that. If the market is rising rapidly, I might be contracting to sell at today's price, and by the time settlement occurs the market might have shifted way out of my price range.

If I sign an option, I can't get out of it, the option is for the other person to buy, not for me to sell.

What we do in reality:

Usually when offering option fees such as the one you describe, we offer a nominal amount, enough to cover the vendors legal costs, and maybe a bit more. We are more scrupulous than many, so we'll ask our agent to work with the people to try to tie up a property on similar terms. This can't always happen. Sometimes, we'll make an offer to purchase based on the value at a certain date, with an interest component so that if we are delayed getting approvals or whatever, the purchase price increases.

From our perspective, this is still better than purchasing at the beginning, before we have added value to the place with the approval as we would have no means of servicing the debt during that period.

From the owner's perspective, it's better to get a good price for the house, than a few thousand dollars early (which are deducted from the house price). There is a big temptation to take a large option fee, but you're better off getting a large price for the house!

Don't forget the intention of the developer is to proceed, no one spends that sort of money for fun, but make sure your costs are covered if it falls over, and try to make sure you get a price that's sustainable when the place settles.

I hope that's a bit clear?

DON'T DO ANYTHING WITHOUT LEGAL ADVICE. (but you knew that! )

Cheers,


P

[abitfishy]

Thanks bitingmidge. Once again pretty much all as I expected. I see where you are coming from with the option fee. In this case though they need to consider aiming for an option fee a bit higher than the 'minimum' (the talk at the moment is $10,000/12mths/1.1million, they would like more).

To cut a long story short, they have other financial commitments, but now they are getting older and from a non english speaking background, they cannot do the hard physical work they used to - so their income is currently limited. Asset Rich, money poor.

Now they have worked on the assumption that if they need to for whatever reason they can sell their house and downsize (whcih they have been considering). They need to consider that if they are stuck in the deed of option, with such little income, they could quite easily find themselves in quite a large amount of deep poo poo. Therefore they really do need to consider a larger option payment to ensure they can manage if the times get tough in that locked in period. It may not happen, but they need to cover themselves. They are aware it comes off the purchase price, but its upfront that they can use when they need it.

I'm pleased to help them as surprisingly given the different background, they are the nicest inlaws one could ask for! Can you imagine that, nice inlaws?

Thanks.

[prozac]

The option gives the purchaser the right but not the obligation to purchase the property within the designated timeframe.

Depending on the hurdles ahead of them a developer may (probably will) ask for a 12 month option rather than a six month. If rezoning is involved they will ask for 18 months. Make sure that settlement is written to conclude by the end of the option period, or at the very least exchange before the end of the option and settlement within say 21 days thereafter.

I would not want to accept anything more than 12 months.

The shorter the option period the better it is for the seller - that is if they really want to move. If the option period is soon to expire and the developer comes back with a token amount to extend the period another 1-3 months to tie up loose ends then this amount is exclusive of the settlement, ie; in addition to the agreed price.

Option Fee is typically 1%.

To commit to an option you want to know if what you are being offered is significantly greater than the market value of the property. That is if you were to have a straightforward sale today what is the residential value of the property.

What if the market goes up whilst you are in the option period? This is why you want only 6-12 months and need to know the value without a rezoning.

Things to do;
1. Go to council and see the duty town planner. Find out what the zoning is, and if council has any plans to change the zoning. What is happening to nearby zonings?
2. Seek out 2-3 local agents in the area who have a reasonable reputation and possibly sell newly built buildings. They should know what the pulse of the suburb is doing, and could tell you what the developers may be thinking. Only speak to the principal (owner) or manager.
You need to confirm current market value of the property on its own. Ask them what a developer would pay if he could get a few properties in-line. On its own the property is probably not worth as much as when it is combined with one or more others.
3. Talk with the neighbours and see what the mood is.
4. Don't be in a hurry to return the agent's phone calls.

Hope this helps. Let us know how you progress?

prozac