Option to Purchase?

empty street in residential district in city

Commercial Real Estate (CRE) Investor Question #77: What is an option to purchase? Why would a investor use it?

An option to purchase real estate is a legally-binding contract that allows a prospective buyer to enter into an agreement with a seller, in which the buyer is given the exclusive option to purchase the property for a period of time and for a certain (sometimes variable) price.

During the option period, the seller cannot transact with any other parties interested in purchasing the property.

Sometimes, options are used in sale-leaseback or build-to-suit arrangements when the seller is unable to obtain the financing necessary to improve the property. Options are also used by investors in situations where the development potential of the site is unknown.

Source: Reonomy