Buyers with multiple options?

KomehtMarch 15, 2013

Question came up recently in another discussion - seller has house under contract but still in the option period - learns during the option period that buyer has another option on a different house.

Now, I know legally the buyer can get out during the option period for the price of an option fee (usually negligible - 100 bucks) for any reason. But it's my understanding that the use of the option period is for a serious buyer to perform due diligence tasks on home (kick the tires so to speak) and negotiate repairs with seller (if warranted).

I've also heard that in tight markets an unscrupulous buyer may put out multiple low-ball offers hoping one might hit.

But to date I haven't seen a buyer treat the option period as essentially a "free look" while they shop the market and look for other homes.

One person suggested this wasn't an abuse - but I maintain that it is abusive of the intention of the option period and that if I, as a seller, knew the buyer's intention to shop around during the option period I would not consider that offer to be a serious one. It seems to me that if more buyers did this - the risk of transactions falling through would rise dramatically and the cost of options would have to rise accordingly.

Are there actually realtors who allow clients to go under contract on multiple properties during the option period?

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Tony2Toes

Depends on the RE terms, laws and activity level of the market in question.

If its a buyers market, and the buyer isn't being required to put down earnest money with purchase contracts, then I can see how it could be abused. But if the buyer is following the rules, and they tie up funds with EM deposits, inspection fees, etc then they share some of the risk.

How is this much different from a seller holding a Contigent WITH Kickout contract?

    Bookmark   March 15, 2013 at 2:51PM
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Komeht

The option fee is negligible - not equivalent to earnest money. The costs of option fee and inspection are noise in a typical transaction - a rounding error.

I've not heard of contingent with kick out used in this market - certainly not standard contract language (the forms don't have a clause - so these would be pretty ad hoc and maybe involve lawyers). But wouldn't those be limited to three days - option periods could be 10 days to 2 weeks even. In any case - they are atypical whereas option periods are in every transaction.

This post was edited by Komeht on Fri, Mar 15, 13 at 15:13

    Bookmark   March 15, 2013 at 3:11PM
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Tony2Toes

Like I said, depends on market.

Here in Missouri, contracts almost always require an earnest money deposit held in escrow, and escrow $ can be 1% or higher. Inspections can run $700 and higher. There is no Option fee, although your earnest money is at risk unless you cancel the contract during the Option period. And the Option period is default of 10 days. It would be harder to abuse the model here, unless a seller were willing to accept an offer sans earnest money down.

You never mentioned where you are at but here, I currently see over 25 Contigent with Kickouts listed in St. Louis county alone. It's a standard rider to the standard contract. YMMV....depending on market.

This post was edited by Tony2Toes on Fri, Mar 15, 13 at 23:02

    Bookmark   March 15, 2013 at 10:59PM
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kats_meow

And the Option period is default of 10 days. It would be harder to abuse the model here, unless a seller were willing to accept an offer sans earnest money down.

I think you are missing the OP's point. The OP is talking about people cancelling during the option period. Specifically about putting down multiple options at one time and then cancelling whichever ones they decide not to buy.

Basically during that 10 day period the seller is effectively locked up (yes they can keep showing, taking back ups during the option but usually that doesn't amount to anything) but the buyer has little risk in cancelling the option.

As a practical matter I don't think it is typical to have multiple options since the big expenses buyers usually incur during the option period are for inspections and other things that have to be quickly done during the option period. That is the time you do all your inspections, so most buyers don't casually enter into options since they would have incur inspection costs in that period.

    Bookmark   March 16, 2013 at 2:36PM
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ncrealestateguy

Komhet... If you think a buyer is shopping you around during the SDue Diligence Period, then just negotiate a bigger sum for the Due Diligence Fee. $100 is not sufficient. Most buyers do not do it anyhow, just for the reasons mentioned above... it is too costly. But, for those buyers where it may make sense, it is a great way to to perform rule #1 of real estate... get it under your control.
On hot properties, I tell buyers to not fart around with any upfront due diligence. Just get in the offer, with as little due diligence fee as possible. THEN, start the due diligence! If you have buyer's remorse afterwards, then just terminate. Well worht the $100 or whatever it cost you.
But, you are correct, OP, in that states where the due diligence period is used, it gives the buyer a very big bias IMO, unless you compensate that vwith a large enough of an due diligence fee.

    Bookmark   March 17, 2013 at 2:20PM
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lazy_gardens

Question came up recently in another discussion - seller has house under contract but still in the option period - learns during the option period that buyer has another option on a different house.

Maybe the buyer plans to buy several houses.

    Bookmark   March 17, 2013 at 10:28PM
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brickeyee

What state is this in?

Option to purchase contracts are not normally that low.

    Bookmark   March 18, 2013 at 12:11PM
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kats_meow

Where I live it is very common for the option to be $100. I've seen more negotiation on the length of the option than on the amount of the option fee. 10 days is fairly typical from what I've seen but it can vary.

    Bookmark   March 19, 2013 at 2:37AM
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ncrealestateguy

Brickeyee,
I do not think he is speaking of an Option To Purchase contract. I think he is speaking of the contracts that use a Due Diligence Period, also called an option period. It is typically 20 - 40 days long here, and the Option Fee is negotiable and is the amount that a seller is willing to take the home off the market, knowing that the buyer can terminate the contract for any or no reason during this period. The fee is negotiable.

    Bookmark   March 19, 2013 at 6:00AM
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brickeyee

What state?

Many places have no such thing as a "due diligence period."

Once the contract is signed, you have purchased (subject to contract contnge3ncies, like inspections, appraisal, financing, etc.).

You are expected to have done your "due diligence" before making an offer to purchase (or put in some type of contingency in the contract if their is information the seller needs to supply).

    Bookmark   March 19, 2013 at 2:38PM
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RooseveltL

As a buyer - I previously had two offers at the same time with the same agent. 1 was to a ShortSale and the other to a realtor. Realtor wouldn't give an answer until Tuesday and shortsale required all bids the prior Thursday. I cancelled out of first offer when I found out I was accepted on 2nd more expensive but better looking home.

It has no bearing on buyers or sellers market. Especially, in a seller's market a buyer has to cover all bases especially in a bidding process.
Agents create this market by extending their decisions until all bids come in or highest bid. So, a buyer can't sit and wait to be picked or not.

    Bookmark   March 19, 2013 at 4:02PM
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