Definition
Option To Purchase (OTP)
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An option to purchase is a basic agreement between a property seller and buyer whereby the buyer has been granted the exclusive right to buy the property within a certain period of time.
The validity period for such options are usually two weeks from the date of issue of the OTP.
What usually happens for an option to purchase to be generated is that a buyer agrees a purchase price with the seller. He then pays a booking fee (or option fee) in order to obtain the exclusive right to buy the property. This is earnest money.
Should the buyer fail to exercise this right before the expiry of this right, he forfeits the deposit and the home owner would be able to sell the property to another buyer.
Should the buyer takes action to exercise the OTP but the seller has a change of heart, then the buyer may claim damages against the seller.
This can sometimes go all the way to court.
Option to purchase vs sales and purchase agreement
It must be said that an option-to-purchase is not the same as a sales and purchase agreement (S&P).
A sales and purchase agreement is a bilateral agreement between buyer and seller whereby the buyer has agreed to buy, and the seller has agreed to sell at an agreed transaction price.
An OTP is basically just a right to buy given to the potential buyer. The buyer can still walk out of the deal and just have the booking fee forfeited.
When it comes to claims for damages, the sales and purchase agreement would have a higher amount.
Theoretically, the sales and purchase agreement would come after the OTP has been exercised.
But sometimes, both parties can skip the OTP and move on directly to the S&P.
This can be commonly observes in sales launches where developer sales staff generate S&Ps for buyers to sign.
Developers could in practice issue an OTP before S&P.. But that would delay the sales process and can even cause developers to incur opportunity costs as apartment units with issued OTPs cannot be sold to other buyers.
When you receive an option-to-purchase, do check the expiry date as you would need to obtain financing before exercising the options with confidence.
Getting housing loan approvals can sometimes take a lot of time. So you’d want to keep your dates in mind and remind a banker about your deadline when necessary.
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