Option agreements in property development
Bruce Burkitt, founder and managing director at Property Experts
Formerly a property industry secret, the number of option agreements has risen dramatically in recent years, and with numerous local authorities having relaxed their planning policies in order to encourage the creation of new homes, an increasing number of property entrepreneurs are seeing this opportunity as a way of making money. I would like to delve further into this relatively unknown development method and discuss the effect it is having on the property marketplace.
An option agreement is a legally binding contract between a potential purchaser and a seller, granting the purchaser the opportunity of acquiring the property from the seller at an agreed price within a certain timeframe.
During the option period the purchaser will undertake to apply for planning permission for their desired development scheme. In essence, it’s a low-cost, low risk method of exploring a site‘s development potential without committing to the purchase.
Option purchasers have historically been new build development companies whom once having identified a property with potential for development would approach the seller directly with a view to optioning the site for an agreed period of time.
Option contracts typically last 12-18 months and in most instances, where planning permission is granted, will allow the seller to achieve a sale price in excess of the property’s market value and the purchaser to purchase the approved scheme at below market value.
With property responsible for creating so many millionaires in the UK, it’s no wonder that the market has recently seen a wave of “option opportunists” enter the arena. These less experienced individuals have become more involved in forging option agreements with sellers with the sole intention of assigning the agreement to a third party for a considerable premium, once planning permission is granted.
Sadly in many cases these opportunists are no wiser than inexperienced gamblers in a casino and we are witnessing numerous situations where they either fail to obtain their planning permission or the price that they agreed to pay the seller, once planning is granted, exceeds the value that a development company would pay them.
Both these scenarios can result in the purchaser walking away and leave the seller contractually locked into the sale until the option agreement expires, a volatile situation for the seller if house prices are decreasing.
Wise to the potential gains achievable once planning is granted the market is also seeing an increasing number of sellers instructing their own planning advisers with a view to then selling their permitted scheme directly to a bona fide development company.
With so many options being agreed I am concerned that if there is not an equal number of development companies with the appetite and financial ability to build these schemes out, then the value of these optioned sites will ultimately decrease.
In order to execute a successful option agreement, I would advise any would-be-property developer to proceed with caution and engage the services of an accomplished, local architect and planning adviser. Looking for examples of similar schemes nearby that have recently been approved will allow you to establish the relevant council’s appetite towards development.
Once your planning advisor has approved the principle of a new build scheme, essential reports will be required, including a topographical survey, parking survey and an arboricultural report. After these reports are obtained, the results will allow an architect to prepare drawings for the scheme. Upon receipt of the planning drawings, costings for the build and anticipated gross development value can then be calculated.
For land or homeowners who are approached directly by those hoping to create an option agreement, I would advise seeking legal advice from a lawyer with specific experience in option agreements and undertaking extensive research into the purchaser to establish the existence of a proven track record before proceeding.
Structured correctly and accompanied with a well-considered planning application, option agreements can create a win-win situation for both buyer and seller.