Nineteen Clauses That Must Be Included in Your Option Agreement

One of the biggest mistakes that I made when I first started out as a real estate option investor was that I did not include clauses in my option agreements that fully protected my rights and interests as optionee. However, I started to wise up when a property I had an option on burned to the ground, and I was left with nothing but a pile of ashes to show for my $2,500 option fee. At this point, I quickly came to the realization that I had better include a clause in my option agreement that the option consideration fee would be refunded in the event the property under option was damaged or destroyed by fire. And over the years, I have refined and tweaked my real estate option agreement so that it now includes the following 19 optionee protection clauses:

1. Parties to the agreement: Designate all parties to the real estate option agreement as optionee and optionor to include their legal status as to whether single individual, husband and wife, or a business entity such as a corporation or limited liability company.

2. Legal description of property: Use the exact legal description that's written on the recorded deed of the property being put under option to describe it in the option agreement.

3. Option to purchase: Specify that the optionor grant the optionee the exclusive, unrestricted and irrevocable right and option to purchase the optionor's property.

4. Option fee: Include the full amount paid as the option fee and state that it is to be credited toward the purchase price when the option is exercised.

5. Option period: State the exact length of the real estate option period by calendar dates.

6. Purchase price: Specify the full purchase price of the property under option including how the purchase is to be financed.

7. Exercise of option: Outline exactly how the optionee is to exercise the real estate option including the method for notifying the optionor.

8. Extension of option period: State the optionee's right to extend the option period including the length and cost of each extension period.

9. Assignment of option agreement: Include a clause that gives the optionee the right to assign or sell the real estate option agreement to a third party.

10. Waste clause: Include a waste clause requiring the optionor to maintain the property during the option period.

11. Default by optionee: Specify that the consideration paid as the option fee is the sole and exclusive remedy in the event that the optionee exercises the option but fails to purchase the property.

12. Default by optionor: State that the optionee shall have the right of specific performance in the event that the optionor defaults by refusing to sell the property after the option has been exercised.

13. Eminent domain: Specify that the optionee will receive a full refund of the option fee plus any accrued interest if the property is condemned by eminent domain during the option period.

14. Right of entry: Include the optionee's right, upon notifying the optionor, to enter, clean, repair, market, and show the property during the option period.

15. Risk of loss: Specify that the optionee is entitled to a full refund of the option fee plus accrued interest if the property is damaged or destroyed by fire, storms, or earthquakes during the option period.

16. Further encumbrances: State that the optionor is prohibited from placing any additional encumbrances such as mortgage or deed of trust loans against the property during the option period.

17. Title transfer documents: State that a warranty or grant deed and purchase agreement with the notarized signature of the optionor are to be held in escrow by a reputable attorney or title or escrow company during the option period.

18. Recording of memorandum of option: If permitted by a state's recording statute, specify that the optionor execute and acknowledge a memorandum of real estate option agreement suitable for recording in the county's official public records where the title to the property under option is recorded.

19. Option agreement to ripen into purchase agreement: If you do not want to use a separate purchase agreement to buy the property after exercising the option, specify that in the event the option is exercised, the real estate option agreement shall automatically ripen into a purchase agreement without further notice.

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