Option contract
An option contract is an agreement under which a prospective buyer pays for the right, without the obligation, to purchase property at a specific price within a specified time, and the owner agrees to sell on those terms if the holder exercises that right in time.
When the window closes, the holder buys or walks
The holder's decision comes on or before the option's last day. The holder either exercises it and moves to buy the property at the price already fixed, or lets it lapse and does not buy.
The money that buys that choice has a statutory name in one Virginia context. In the Residential Executory Real Estate Contracts Act, Va. Code 55.1-3000 defines an option payment as the amount the purchaser pays "in exchange for the right to purchase the property" at a specific price within a specified time. The same idea runs through an option on acreage: a price, a deadline, and a payment for the right to decide.
That is the difference from a deposit. Earnest money accompanies a signed contract in which the buyer has agreed to buy; an option payment is paid before any such agreement exists, for the right to make it later. Outside the residential setting that Act covers, whether the payment is credited toward the price on exercise, and what happens to it on a lapse, are terms of the option itself.
How that decision plays out on development ground, with feasibility work running during the option period, is taken up in what an option contract on land is. An option to buy a house the holder is living in, packaged with a lease, is a different instrument that can fall under Chapter 30 of Title 55.1, covered in what a land contract is.
An option is also not the only way to control ground without buying it outright. Renting the land itself for a long term is a separate arrangement, taken up in what a ground lease is.
Until recorded, void as to later purchasers for value and lien creditors
For the owner and the holder alike, the next question is the clerk's office, and Virginia has a statute written for options specifically. Under Va. Code 55.1-315 A, an option that has not been recorded is void as to later purchasers for value without notice who are not parties to it, and as to lien creditors, and the rule reaches renewals and extensions as well. What that means for a holder is argued in the option answer linked above.
The federal paperwork treats the option differently from a sale. The IRS instructions for Form 1099-S say an ownership interest does not include any option to acquire real estate.
A real estate licensee may prepare one only inside a transaction and for no separate fee
The last question is who writes the document. Virginia allows a real estate licensee to prepare an option contract, within limits set in Va. Code 54.1-2101.1.
any person licensed under this chapter may prepare written contracts for the sale, purchase, option, exchange, or rental of real estate, provided that the preparation of such contracts is incidental to a real estate transaction in which the licensee (i) is involved and (ii) does not charge a separate fee for preparing the contracts.
Va. Code 54.1-2101.1
The preparation has to be incidental to a transaction the licensee is involved in, and the licensee may not charge a separate fee for it. What the option's terms mean, and whether it is enforceable, are questions for an attorney.
Asked to grant an option on a tract you own?
An option holds your land for someone else until it is exercised or lapses. Share the county, the acreage and the proposed term, and Lowell can talk through what that period ties up. No cost, no obligation.
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Questions about this term
Does the owner keep the option fee if the holder never buys?
That depends on the option's own terms, except in one setting the Code addresses. In a residential executory real estate contract, Va. Code 55.1-3002 bars the vendor from forfeiting the option payment and says how it may be applied instead. An option outside that Act is governed by what it says, which is a question for an attorney.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- Va. Code 55.1-315: recordation of options to purchase real estate Code of Virginia
- Va. Code 54.1-2101.1: licensees may prepare certain contracts Code of Virginia
- Va. Code 55.1-3000: definitions, Residential Executory Real Estate Contracts Act Code of Virginia
- Va. Code 55.1-3002: purchaser protections under the Act Code of Virginia
- Instructions for Form 1099-S Internal Revenue Service