Pricing Options over Land / Property

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From: Phil Ips


Morning All,

I am trying to find a way of pricing an option over a potential land purchase. For example, the vendor wants $1,000,000 for their land and are willing to lock it up with an option over a period of, say 2 years.

Is there a generally accepted method or formula for working out what the option should be worth. It could be as simple as working out the interest payable on the purchase price over the period the land is locked up but this seems to defeat the main reason the buyer wanted to lock up the land in the first place (ie) to avoid paying interest on the purchase price of a non producing asset while the planning proposal goes through the hoops with the local council.

Can anyone help??

Regards,

Trader
 
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Reply: 1
From: Derrick Barden


I believe there is a formula for pricing options called the Black-Scholes Formula. Though it requires a lot of assumptions.
 
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Reply: 1.1
From: Joanna K


We have recently purchased a block of land on a 12 month + 3 month option and the option fee we paid was 1% of the purchase price, which will be deducted off the purchase price upon settlement.

If we decide not to excersise our option, the vendor keeps the 1% for his trouble.

Hope this helps!


Kind regards

JOANNA
 
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Reply: 1.1.1
From: Phil Ips


Derrick and Joanna,

Thank you both for your reply's.

I think Joanna's suggestion may be worth looking at. Was this 1% figure just picked randomly Joanna or did you arrive at it through some other method??

I think if I could get the vendor to agree to a 1% option fee and have it deducted from the purchase price 15 months later, it would be a great deal for me. I don't think anyone could beat that for a financing deal. How did you convince the vendor to go along with it?

After reading a few other posts on the forum I thought I would also approach the Freestyler group to see if they had any ideas.

Thanks again Derrick and Joanna for your feedback.

Regards,

Trader
 
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Reply: 1.1.1.1
From: Joanna K


Honestly Trade,

no magic mathematical formula used. I could be wrong, but my husband said that 1% is fairly standard. The owner liked the idea simple because we didn't try and screw him on price. I guess we were lucky as the vendor was fairly open to any suggestion.

In my opinion though, most wouldn't go for a 15 month option, so i would structure it as a shorter option with extention clauses in it. The can't refuse to extend - especially if you wave a few more dollars under their nose.


Kind regards

JOANNA
 
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Reply: 1.1.1.1.1
From: Phil Ips


Thanks again Joanna.

Cheers,

Trader
 
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Reply: 1.2
From: Gavin Cook


In my experience a 1% option fee is paid and forms part of the full purchase price on completion.
The option fee is non refundable on obtaining council approvals.However, if council approvals are delayed your contract must have provisions for the extension of the option period as well as if the council does not approve the development application.
Also be aware that the vendors solicitor will probably advise against the option unless they are familar with them.
It may be worth asking the vendor if their solicitor knows of their intention to give an option on the property.
 
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