Property development options are an increasingly popular way to buy real estate in Australia. That’s because they can help you get your foot in the door of a great development opportunity when you might not necessarily have all the funds in place.

But what exactly are property development options? And what four things do you need to know about them?

What’s a property development option?

A property development option is a legally binding agreement between a property developer and a landowner typically made up of two parts: the ‘call’ option and the ‘put’ option.

  • Under the call option, you get the exclusive right (but not the obligation) to buy a property at an agreed price in the future.
  • Under the put option, the landowner exercises has the right to offer the property to you at a specified price in the future.

The agreement is sealed by a non-refundable option fee which is typically 5% – 10% of the purchase price.

If all goes well, the property developer pays the full purchase price when they are ready. If they can’t raise the funds or the deal falls through for another reason, they walk away and forfeit the option fee.

Four things you need to know about options

  1. They can be a very useful strategy as a property developer

Option agreements can be a great way of reaping a significant return on your investment. They give you the time to secure planning permits and add value to the property through renovations and upgrades. At the same time, the purchase price doesn’t change as this was agreed by both parties when the option agreement was signed.

  1. There are risks involved

Option agreements can pose a risk to developers, especially if you are unable to secure finance or the necessary development approval. In this case, the deal may fall through and you lose your original option fee – unless you are able to find another developer willing to take the option on.

  1. They need to be properly drafted

Your property development option needs to be drafted well, as this makes a big difference to how effective it will be at protecting your interests. So while it can be tempting to use a template agreement, this may cost you more in the long run.

  1. It pays to do your homework

As with any property investment purchase, it’s important to do your research before you enter into an option agreement. Getting rezoning and development approval for a subdivision can be a tricky and expensive process. So in addition to researching the local market, you need to understand all the local council planning regulations and be across any planned infrastructure or other developments that may support your application.

Freya Southwell is the lead solicitor in the Sutton Laurence King Lawyers property law and development team.

Protect your interests when you’re buying and selling property by having Sutton Laurence King on your team. As Melbourne-based property law experts, our legal and conveyancing services will make your transactions hassle-free. Contact us or call 03 9070 9810 today.