An option contract is a unilateral contract — only the seller (optionor) is obligated to perform if the buyer (optionee) exercises the option. The buyer pays option money, which is independent consideration to keep the offer open and irrevocable for the option period. If the buyer exercises the option, the option money is typically applied to the purchase price. If the buyer does not exercise the option, the seller keeps the option money.
A developer pays a landowner $10,000 for a 6-month option to purchase a 10-acre parcel at $500,000. During the 6 months, the developer investigates zoning and conducts feasibility studies. The developer exercises the option, and the $10,000 is credited toward the $500,000 purchase price.
Remember that an option contract is a unilateral contract — only the seller must perform if the buyer exercises the option. The key distinction from a regular offer is that an option cannot be revoked during the option period because the buyer paid consideration. If the optionee does not exercise the option, the optionor keeps the option money.
Related Terms
Related Concepts
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Consideration is something of value exchanged between parties to a contract, making the agreement legally binding. It can be money, a promise to act, a promise to refrain from acting, or anything else of value.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Frequently Asked Questions
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