Put & Call Options

Hi all...

been trawling through the search facility and not able to find what I am looking for.

Is there anyone here in SS land that FULLY understands the ins and out of put and call options as a purchaser (and obviously seller, but to a much lesser extent) for en globo sites etc.???

I am specifically looking for QLD info!!!!!!! no interest in other states at the moment.

and/or, where does one go to find the right information???

As a former REA I have done the rounds of the usual places, but there are few people who I believe really understand this...


thanks in advance!!!!!

UC, why don't you go to the following shares forum and pose the same question there: http://www.aussiestockforums.com/forums/

Put/call in combination are usually only used to delay the actual contract date. i.e. You can enter into this on 29/6/09 but only effect a contract when you 'call' upon the vendor to sell as per the option agreement just like the vendor can 'put' upon you to purchase. This effectively means you have a contract that can be effected but you can move the date forward in time.

If you are buying en globo, normally you'd only do a call option to purchase to allow you time to do your DD and get DA approvals etc. You pay an option premium to the vendor (non-refundable) but effectively you have total control over the purchase up until option expiry date. You can decide not to proceed (i.e. could not get DA that you wanted) and you forfeit the option premium. You can exercise your right to buy at the agreed price (and the vendor cannot refuse) or you can onsell your right to purchase to another purchaser.

If you need option contracts drawn up see Rob Balanda on the Gold Coast
http://www.mba-lawyers.com.au/

thanks for the replies folks!!

I probably should clarify slightly - my fluey haze isn't allowing my head to work too well...

As an REA, I understand how and why they are used - but have never actually done one as a purchaser - I am now in the position that will soon require me to become much more of an expert in the finer details of the purchasers side of the equation and am looking for info on how to more expertly negotiate the value of the options and the traps for young players etc.

I.e. as opposed to being the carrier pidgeon (agent) i now need to fully understand the roles, rights and responsibilities of the players!!

I will give Rob a call - have spoken to him in the past about some other things, thanks for reminding me about him!

UC Rob Balanda has a CD on the subject. You may want to start with that before you talk with him.

Hi UC,

I hope the following explanation makes the process a little clearer for you.

An option is the right but not the obligation to purchase a property at a specific time for a specific price. It’s like a “lay by” to purchase a property at your discretion.
The call option gives you all the right, but none of the obligation to settle or buy. A put option gives the seller the right to exercise you to buy and settle upon the terms of the option contract.

A call would be used as a short term measure (to tie up the deal) for someone to undertake DD and arrange preliminary matters pertaining to a DA for example, so they can be sure they want to proceed to settlement. It is not likely to get past a sellers solicitor for a lengthy period of time though. It would be seen as insulting to offer a only a call (without a put to hedge the seller) for say two years whilst you go about getting a DA or indeed even doing nothing and having the leisure to walk away at your discretion.

A put is rarely used on its own. It is used in combination as a “put and call” option. This would be more common in longer term contracts, say 18- 24 months or longer. More common in the en globo scenario where you wish to proceed to carve up the blocks, cut roads, etc or at least on-sell your option position (assign the option) to a developer.

Your call component may be subject to an effective DA. If you satisfy all of the requirements but change your mind, the put component protects the seller as they can exercise their right to enforce settlement upon you as the purchaser assuming as I mentioned that an effective DA has been granted. Usually there will be milestones nominated in the option agreement, amongst other criteria.

Ideally you negotiate an option with an option. If you run out of time or wish to modify and make changes to the DA or have more time to find a party to on-sell to, a further option term will protect you as the purchaser.

You need to be very careful with feasibilities in this caper, especially in this market. If you are not proceeding to full scale subdivision, and want to on-sell with DA, you would need a future purchaser (or more than one) to have as an exit strategy. You need to leave enough “meat on the bone” (at least 25-30 %) for them and still allow for your profit after DA costs. This will then ascertain the purchase price you can offer the seller. THerefore you need to work out gross realisation (in today's market) and work backwards by allowing for each parties cut/return and your costs and then arrive at a purchase price.

I have been keen to dabble in this area myself more so with industrial, however with credit squeezes being applied, I doubt there are too many buyers waiting at the other end.

Aside from ensuring the numbers stack up for all parties concerned, you need a buyer(s) to onsell and assign the option to. If you are doing the full development yourself, check the depth of your pockets, and likelihood of securing finance. You will also need presales of land parcels or house and land packages.

At the end of the day with such creative strategies the rules are that there are no rules. Negotiation is key. All matters of access for your consultants and professional personnel is documented and allowed for in the option agreement.

Hope this makes sense. I am no expert, however that is what I understand of the process and would be keen to hear more of what realm/sector you are looking at residential, industrial or business zoning, and how far donw the numbers path you are.

thanks for the awesome reply - much appreciated...

certainly you have some insights there that I would like to pick on further - just need to figure out the right questions!!

most of my concern is strategy and negotiation of options - knowing the right numbers etc.

the basics i get - paying the right amount is not a problem and the financial side doesn't come into it at the moment - it is knowing what sort of option fee for how long and ensuring the right "outs" are there.

will ponder it some more and get back to you...

thanks again for the awesome reply!!

cheers
UC

It took me over a year to fully understand options and apply them to the real estate market. Not sure I can depart the experience in one easy forum post but I would recommend paying the money to do a course.

you pay a non-refundable fee - pre-determined between the option holder and the option seller, which gives the option holder the right, but not the obligation, to exercise that option and purchase the land for a pre-determined price, on or before a pre-determined date, as set out in the contract.

you can call it a long settlement with a large, non-refundable deposit. you are BUYING time, hence the non-refundable bit.

you can use these options to truly test the waters when it comes to development. you pay someone $10k for a very large parcel of land, they give you the option to purchase in 2 years for "x" amount. if the market goes up or down, if you wish to purchase at the end of the option time period. you still pay "x", not "x" plus or minus market value. this can be to the detriment of the buyer, or seller.

they work well when the deposit is equal to, or less than (preferably) the holding costs fo rthe land over that time. what it does is protect you, should you not be able to develop the land to it's fullest extent allowable in your financial models, then you aren't left "holding the bag".

yes, "technically" you can take an option out for a dollar, but you will find you need to have worked out a profit share deal for the end product with the seller + premium for the wait.

example of a typical conversation.

i can give you $1mil now for the property OR you allow me to take an option over the property for $1, you agree to sign all relevant documents to allow developments as the owner of the land and when we sell the properties you will receive a 30% premium on that price, or $1.3mil, after 3 years as stipulated in the contract - which allows for marketing time. you maintain the capital growth over those 3 years at 10% which is twice the average, take no risk with the costs associated with preparing plans etc and you have a sale at the end of it. deal?

that's a "long option" because it is "long" in time - which stupidly (IMO) confuses "long in the stock market (buy/call) " with "long in time (just...well, time!)".

daft.

UC

I have done about 7 P & C deals in Brisbane ranging from a small corner allotment with 4 Townhouses to the old Nundah Bowls Club which eventually we got approved for 55 Units / Townhouses.

Feel free to give us a call if you want any information.

thanks everyone for your awesome replies - you guys rock!!

Xenia - yeah would love to do a course or something, but brisbane isn't a bastian of common sense when it comes to real estate training...if things get moving as seriously as they look i may travel interstate to find some training.

BC - I got most of that - it's the finer points i am struggling with but the way you worded that got me thinking about some things not previously considered - so cheers mate

Richard - BEAUTY!! I will definitely give you a yell at some point in the not to distant future to talk further - buy you lunch even??

thanks again all!

UC

Hi Qld007
I wouldn't mind having a chat as well.. if thats ok?
Let me know..

Cheers
Matt

Yeah Richard. Wouldn't mind hearing some stories as well. Maybe you should do a BIG presentation?

Hi everyone just joined to see what info I can find on options. Does anyone now any good sites where you can pick up some good free info like feasability spead sheets and option contracts, really good to read everyones replies some good info in there.
Thanks
Doug

i have a feaso sheet.

email me.

cheers,
a.

Not a good idea to pull free option contracts off the net, they're usually very generic, and wouldn't suit a specific deal by a long shot. They're a powerful legal document, and you need to get them right for each deal. Using a one size fits all template 'could' land you in a lot of trouble.
Fin a lawyer who understands and uses them. That would be a much safer way to go if you're going to use one.

i never said anything about a contract.

i said a feaso sheet.

You are all missing the essential ingredient- a chain smoking middle aged real estate agent who badgers the elderly owners of large parcel/multi lot prime inner residential properties to sign off on an agreement they don't really understand with a token deposit/option fee and long (18 month plus) exercise date which can be extended at the buyers option anyway.

A sure way to quick profits- exploiting commercial inexperience of the other party.

Good for using in QLD to allow you to "flip" without extra stamp duty- otherwise I like to keep it simple- standard REIQ with lots of special condits... pre incorp clauses. Due Dilligence, subj to DA approval. Maybe a non refundable deposit.

From a vendor point of view I have yet to see an attractive Put Call deed.

cu@thetop said:

From a vendor point of view I have yet to see an attractive Put Call deed.

Click to expand...

did you miss this?

this is being used all over perth at present - with a lot of takers. just a fancy word for "vendor finance".

We are thinking to purchase 2 blocks of land through the attached draft Put and Call 1 and Put and Call 2 provided by the developer/vendors solicitor (see next post for P&C part 2 - as file was too large for 1 attachment).
My normal solicitor was inexperienced and reluctant to advise me after reading the document. He has only ever settled option contracts that have been onsold/flipped by settling both the contracts simultaneously. ie: the contract between us (as purchasers) and Developer and the contract between us (as vendors) to the nominee would be settled at the same time and both would incurr stamp duty.
We were led to believe by the developer that we could flip the option to the Nominee without incurring SD.

I will now have to seek out a lawyer who is familiar with this type of Option. In the meantime feel free to read the draft Option and comment on our situation.



Considering options on 2 blocks.
One block would be shared between my sister and I. She works as the Sales Coordinator for the developers and Owners and has been offerred these blocks at discounted prices before they go on the open market. The other Option would be shared by wife and I.

The Option on the block that I purchase with my sister intends to be flipped on to a buyer in 12-18mths or so - before settlement - approx 6 mths to registration + 12 mths to settlement.

The Option for our (wife and I) block is on a designated duplex lot and we would potentially build the duplex. Therefore we would require the contract to allow us to lodge a DA prior to settlement. This has been verbally approved by the Owners.

Here are my questions.

Clause 1.1 Definitions. Call Option Period.
Can one settle (Grantee or Nominee) before the 12 months is up if desired?
What does b) mean - 43 days? Isn't it obvious that a) will be the later of the two?

Does this mean - we can exercise our Call Option as early as 43 days after this Agreement is signed (depending on whether the title is registered) and/or as late as 12 months after registration of title?

Clause 8.2 Consequences of Appointment.
Can the Nominee appoint a 2nd nominee? ie: can it be flipped twice?

Clause 12 Binding Contract (also mentioned in Schedule 1 - Notice of Exercise of Call Option)
c)ii) This deposit has already been paid as the option fee, I would assume, so therefore would not have to be paid again?

Further questions.

How do we onsell the option to the Nominee? ie: what is the process - do they merely pay us the original deposit + difference in value from our original agreed sale price to the new nominees' sale price? Then we sign Schedule 3 and hand over the Option Agreement?

eg: Our Land price $175,000
Deposit (10%) $17,500

Nominee price $200,000 (in 12 - 18 mths)

They pay us for the Option $17,500 + $25,000 = $42,500