option consideration - Posted by RYAN

Posted by Eli on September 05, 2005 at 16:20:42:

Ray in your opinion what are the BEST books/courses for options? I am having a hard time finding great info, except occasional posts here on creonline.com

option consideration - Posted by RYAN

Posted by RYAN on June 19, 2005 at 14:04:21:

I’m looking at 5.5 acres for $1.5M and want to offer an option. What kind of price range is the “norm” for my option payment? I realize this can vary greatly just looking for a ballpark. How long of a term can you usually get? Looking for any input as i have never optioned anything in this price range.

Re: option consideration - Posted by ray@lcorn

Posted by ray@lcorn on June 20, 2005 at 15:21:48:


Options are among the most negotiable instruments available to control property. I wrote a post last week about how to arrive at the amout of option consideration, and here’s part of that discussion.

My general rule of thumb is the maximum option fee should not exceed 1% of the strike price per year, so if the option is for less than a year, I pro rate the fee for the appropriate period. Example: Say the asking price for the property is $1mm. One percent is $10,000, for one year. If the time period agreed to is six months, then under my formula the option fee would be $5,000. But that’s just me, and I have no rationale for it other than it sounds good.

And that’s not necesarily what I would offer to start the conversation. As a buyer I always start as low as I think I can get away with. Last summer I bought an option on a $1mm office building for $100… that’s not a typo, one hundred bucks. Pulled the bill out of my pocket and handed it to the seller with a handshake. Yes, it still happens, and yes, I closed the deal.

As a seller I take the opposite approach. In 2003 I was the seller of land for a development deal. I collected $10,000 per ninety days on a $1.75mm strike price, just because that’s where the buyer said “okay” (They offered $10,000 for a year; I countered at $10,000 per month!). I also got a 90-day reciprocal option for the finished project (and later another one too) for $10 (yes, ten dollars) cash, just because I asked for it. All three of those deals closed too. Can you tell I like options?

The real point to those stories is that there is no “rule” or “norm” governing an option fee… it’s whatever the parties agree to.

I’ve found that different sellers have different hot buttons, and I may be able to offset a high fee with other favorable terms, say by making a renewal very cheap, or writing in language that gives me the right of first refusal for another offer for some time period after the option expires.