Closing an option deal.

Options are a very technical area, a lot of these questions are really something that should be asked of an experienced solicitor as they have some underlying legal aspects that if incorrect, could be costly as they still appear to vary from state to state. I know one of our people who deals with the larger residential groups has had to seek Barristers advice on a number of structures now where CGT etc are involved, which if nothing else might indicate how complex it can be at the larger end of town.

Sellers may accept an option because of a number of factors, including an option fee, which again depending on the size of the deal, may be significant and possibly, although these days unlikely, non refundable. It may also be because it fits in with their own goals, or that they simply don't, or won't, understand the process. Options can be great if its an ethical negotiation, but there are also so many other contract types (development agreements and such) that can also work well.

Find a good property solicitor, thats my advice.

Yes it is very complex they don't teach about this in law schools.

Everything is up to negotiation. Whether someone exercises an option or not will depend on their estimate of the value. And with property it is not just value that is taken into account but other factors too – emotions.

maybe its better to think with shares
eg ANZ is trading at $20.00 You sell an option for $2 with a strike price of $22 and an expiry in 12 months. You would do this because you think the price may not reach $22 in 12 months. You would also be protecting yourself from a small drop too. Since you received $2 income the price of the shares would need to drop below $18 for you to make a loss.

With shares you will know when the price goes over $22. it may happen in 6 months, but the option owner may hang on as the higher it goes the higher you could sell the option for. Say it went to $24, the option owner bought the option for $2, but could sell it for $4 (or buy the shares for $22) that is a 100% gain. If option owner sells now it may go up to $25 or it may drop, its his call.

If you want specific answers you should be talking to your specialist solicitor and paying for it.

My guess:
1. $5k – do you mean this is the fee you will pay the vendor for selling you the option?
2. Do you mean $30k or $730? $705,000 profit is pretty good!
3. I think the name will be the one entering the agreement to purchase. This can be decided later when the option is oging ot be exercised. If you put your name you will be up for stamp duty on the value of the property as will the end purchaser.
4. You would pay stamp duty on the $5k option and the developer on the contract price (sale of land) or the value.
5. a) when taking out the option. b) at settlement or within 3 months of exchange.
6. It could be, but you may not get the 50% discount so it probably won't matter if it classed as income (unless you have capital losses.
7. don't think gst would apply
8.
9. see 3.

Hi all,

Very interesting reading and good learning, thanks

Does anyone have any experience in dealing with options in Qld? In particular wether stamp duty is payable?

Dale

Good luck on your endeavours Jess and I applaud you for that.

A couple of years ago, I too have started to formulate a strategy using options because of my background trading share options. I talked to a few people about it including lawyers, spending money on an option contract where the owner changed his mind before signing the option agreement, then I realised that using this strategy alone can be limiting in a number of ways. One lawyer even asked me why use options when you can use terms contract as effective or probably even more effective.

One thing I'm finding is that there's a lot of hard work involved in property development and there's so many things to read and understand, however I find the process really enjoyable. It took me a while to put a team together and finding a lot deals that doesn't really work. I don't mind because I learn a lot more from the deals that doesn't work because it gets me closer to the deal that will work for me.

I'm finding that building relationships and finding a deal that works then strategising is more important than strategising using a single strategy. It's only my humble opinion of course.

Its up to you, but you have to be realistic.

If you offer a $1 option fee with a term of 6 months – there is no incentive for them.

If you affer $3,000 with a term of 6 months and a strike price of $350,000 they will be thinking they can keep the $3k if you don't purchase, but will be down more than this in interest paid on the loan.

If you offer $10,000 then it is more of an incentive to them, but a bigger risk to you as if you don't purchase you have lost a fair bit.

etc

Why not! I don't think there is any standard. Its all up to your imagination and negotiating skills.

Hi J-lou,

It’s so nice that you are educating yourself. It is important that we have knowledge to be successful in what we do.
I agree with Stella lewis this post is very helpful especially for the beginners.

All the best

Elea
educatingpropertyinvestors.com