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What are Put and Call Options in commercial real estate?

Categories: Commercial

Put Options and Call Options are mutually beneficial agreements for a party to either sell (a put option) or buy (a call option) a property at a future point in time at a particular price.

Put Options and Call Options are mutually beneficial agreements for a party to either sell (a put option) or buy (a call option) a property at a future point in time at a particular price.

Put and Call Options are terms usually found in the world of share trading. But it extends to commercial real estate investment, and for very good reason.

Here we’ll cover some of the basics of both a Put Option and a Call Option in the real estate sector.

What is a Call Option?

A Call Option allows the buyer the enforceable right to purchase a commercial asset at a future point in time at a particular price. It is granted by the seller in favour of the buyer.

The buyer will effectively pay for what’s known as a call option period at the cost of a non-refundable ‘Call Option Fee’.

This scenario benefits the buyer, because they’re enabled exclusive right to the property – almost as if it’s an off market purchase – during the call option period.

Conversely, the seller may see some slight disadvantage because their property has been withdrawn from the market for that period of time without guarantee of a sale. Should the buyer not exercise the Call Option and purchase the property, the seller has wasted valuable time with the prospect buyer and must once again put the asset back on the market.

What is a Put Option?

put option vs call option real estate

A Put Option allows the seller the enforceable right to sell a commercial asset at a future point in time at a particular price. It is granted by the buyer in favour of the seller. It is the opposite of a Call Option.

A Put Option allows the seller the enforceable right to sell a commercial asset at a future point in time at a particular price. It is granted by the buyer in favour of the seller.

That’s right, a Put Option works in a complete mirror image of a Call Option.

A Put Option will either be exercisable at a particular point in time, or it may be structured so it can only be exercised if certain conditions have been met.

The price (known as the consideration) for the option can be nominal, say $1 or $10, meaning the only stamp duty payable when the Put Option is exercised is negligible.

Why do Put and Call Options appear in the same contract?

Put Options and Call Options can be combined into one transaction. We call them a Put and Call Option, and this allows the seller to compel the buyer to proceed under the put option, if the buyer doesn’t exercise its call option.

What are the benefits of Put Options and Call Options?

put option call option real estate

Call Options and Put Options are very handy instruments of the commercial real estate game. Yet some new investors can come unstuck when hearing these terms, and especially find confusion when knowing how to take full advantage of either Option.

Put Options and Call Options carry certain tax benefits. The most notable is that payment of transfer duty on the property is delayed.

A Call Option can allow the potential buyer extra time to undertake their due diligence investigation, as well as gaining finance approval and any development or council approvals they may require (particularly if developing).

The benefit to either party, depending on whether the market is favouring buyers or sellers, is that a price is locked in for a particular amount of time. This means that the purchase price remains the same if the property’s market value increases (favouring the buyer), and likewise the sale price remains the same if the property’s market value decreases (favouring the seller).

Call Options and Put Options are very handy instruments of the commercial real estate game. Yet some new investors can come unstuck when hearing these terms, and especially find confusion when knowing how to take full advantage of either Option.

That’s another reason why many investors turn to commercial property syndicates when investing in commercial real estate. Also known as unlisted property trusts, a property syndicate is managed by proactive real estate experts, who will invest, manage, and divest your investment without you lifting a finger. While the syndicate managers get their hands dirty to squeeze the best value from your commercial property investment, it’s a set and forget investment for you.

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