PUT AND CALL OPTIONS
Put and Call Options are a special type of contract commonly used by land developers. In the most typical scenario, the developer is also a home builder who will use a Put and Call Option to secure the exclusive right to buy a property from its existing owner at a set/fixed price, but with no obligation to actually complete the purchase and pay over the money for an extended period of time of say 120 days. The developer then enthusiastically sets about marketing the property for on-sale to a third party as a finished “house and land” package. If all goes to plan, the developer will have found a buyer willing to sign up to a purchase contract for the land and a simultaneous building contract for the home within the first 90 days and with the new buyer secured, the developer can then go on and safely deliver the “call” to the original land owner to commit to the sale of the land before the 120 day time limit has expired. With the timing set up in this way the developer will be using the new buyer’s money (as opposed to its own) to complete the land purchase and once the land purchase is complete, the developer can then go on and happily build the new home for a profit assuming of course the developer has done its sums right. By using a Put and Call Option device, the whole project becomes much more affordable because the developer doesn’t have to borrow and pay commercial interest rates on the land purchase whilst trying to find a buyer and, if the documentation is done right, the land transfer will occur from the original owner directly to the third party house and land buyer, thus cutting out the developer as the middleman and saving the payment of double stamp duty in the process. Put and Call Options can and often are also used for other situations, such as a developer buying a larger parent block with the intent to subdivide and sell off smaller blocks for profit, but in those scenarios, usually paying the double stamp duty is going to be unavoidable.
Michael Zande is the Principal of Zande Law Solicitors, with 30 years’ experience in practice. Michael and his team have had extensive experience in conveyancing matters. Please feel free to review our firm and staff profiles at www.zandelaw.com.au
The information in this article is merely a guide and is not a full explanation of the law. This firm cannot take responsibility for any action readers take based on this information. When making decisions that could affect your legal rights, please contact us for professional advice.