Option consideration is a non-refundable sum given to the optionor in consideration for the right, but not the obligation, to acquire a property within a set period of time, at a set price.
An earnest money deposit is money deposited by the buyer under the terms of a contract to purchase, to be forfeited if the buyer defaults, but to be returned if certain conditions of the contract are not met by the seller, the property, or the buyer. It?s kind of like a performance money that can be refunded under certain circumstances. It is applied to the purchase price if the sale is consummated.
I know an option consideration must be agreed upon to make
the contract binding, but what if the option consideration
is fairly high? Are there creative ways around paying
such high option considerations? Also is the rent, and
security deposit due when the contract is signed?
Posted by John(NH) on January 12, 1999 at 09:19:32:
It must be agreed to, but the option consideration can be $0. You can handle option consideration a couple of different ways. You can pay it as pre-paid rent for X months. You can pay some now, some later.
When the contract is signed, the option consideration and rent should be due. There should not be a ‘security deposit’.
I wouldn’t call pre-paid rent option consideration. I would call these distinct and separate items. If I used pre-paid rent to satify the seller in terms of “upfront money” I would also give him a nominal amount as “option consideration”…like $10. Pre-paid rent is just that…pre-paid rent.
You could also use a security deposit as your “upfront money”. Personally, I would rather use a security deposit than “option consideration”. Why?? Security deposits are refundable under certain conditions…option consideration is not. Again, if I were using a security deposit I would probably use a nominal sum for option consideration.
Re: Option Consideration vs. Earnest Money Deposit - Posted by MarkHOUTX
Posted by MarkHOUTX on January 12, 1999 at 10:55:54:
John, I understand the difference between “earnest money deposit” and “security deposit”. Is “option consideration” and “earnest money deposit” the same thing when doing L/O’s? If not, please clarify this for me. Thanks, A newbie.
Posted by John(NH) on January 12, 1999 at 12:07:06:
I was looking at his situation as a way to ‘break up’ the up front money needed. If the seller needs a very high amount to satisfy his immediate needs, one way to do it is offer 6 months of pre-paid rent and have it all considered the option consideration. That way all of it can be credited to the purchase price while ‘just rent’ may not. Will the seller go for it? Maybe.
Security deposits are good for the buyer if they can be treated like option consideration and applied to the purchase price (I’m assuming the buyer intends to buy and not just a straight rental).
From a sellers standpoint, option consideration is the way to go, as it is non-refundable.