Development Site Offer - Call option?

firebucket on 30/04/2023 - 14:59

Hi All,

I have just had an expression of interest to purchase a unit I own on the beach in QLD. However, the offer is subject to the following Terms and Conditions:

• deposit 5% at contract exchange
• settlement 45 days from contract date
• Call Option period 12 months
• Call Option Fee $1,000
• Due Diligence 90 days

Please note that this offer is made:

  1. Strictly in commercial confidence and must not be disclosed or discussed with anyone
    other than those required to provide you with financial and/or legal advice.

  2. Subject to contemporaneous Call Option Deeds with all owners in the building.

Just wondering if anyone has had any experience with call options and what they think of these conditions.

Financial

Comments

  • Jimothy Wongingtons on 30/04/2023 - 15:06
    +8

    and must not be disclosed or discussed with anyone

    D:

    • AngoraFish on 30/04/2023 - 15:15
      +7

      As Jimothy implies, you don't have a contract with these people so they can't actually claim commercial in confidence. They've made an open offer and you can discuss it with whoever you like, including the media.

      The rest of the terms are also universally in their favour. For example the call option means that they can sit on the offer for 12 months and if the value of the property increases they can take the profits and if not they can back out entirely.

      It'd have to be a pretty good base price offer under the circumstances, say 20%+ above current market value, before I would even consider.

      • MrMarket on 01/05/2023 - 13:09
        +1

        one way to counter that is you tell them to offer more for option premium
        $1000 is bugger all money, I would ask for 10K

        a bit different but in the stock market if I am going to sell my stock options, I want 2-3% premium on asset for 6 months
        I accept 1-2% for 3 months, my recent options I sold for 1.5% premium on the contract price for 3 months

  • firebucket on 30/04/2023 - 15:31

    Thanks for that. The offer is 40% above current market value. So fairly decent. So, contract exchange wouldn't take place until after the 12 months period?

    • AngoraFish on 30/04/2023 - 15:35
      +3

      It's a call option, so they can call it in any time in that 12 months. In practice, if they're legitimate developers the main purpose of the clause is to give them an opportunity to lock everyone in individually but not need to actually pay people until the entire owner's corporation has signed up.

      • firebucket on 30/04/2023 - 15:38

        Thankyou. That makes sense.

      • AustriaBargain on 30/04/2023 - 16:23
        +2

        Sounds like they know something OP doesn't about the future of the block.

        • AngoraFish on 30/04/2023 - 16:29
          +3

          It's pretty common.

          For example, you might have a lot with four single story, separately owned beachfront holiday houses. Each house individually is valued as a single holiday house only without much development potential. Owing all four units, however, could easily allow for construction of a 20 story high rise on the same title.

          The extra value comes from the increased development potential associated with owning all the units and being able to demolish them.

          • AustriaBargain on 30/04/2023 - 16:38
            +4

            @AngoraFish: Then shouldn't OP knock on the door of the other three holiday houses, organise a group discussion, hire an expert to represent them, then extract the full share of the 20 story high rise value that they can minus their expert's commission? If they are offering 40% above market how does OP know that that a 1/4 share of the land in a high rise development isn't worth 400% above market. And if the other three have already sold to the developer, then OPs share of the land as a stall for development could be worth 1600% above market.

            • AngoraFish on 30/04/2023 - 16:57
              +3

              @AustriaBargain: It's certainly worth considering, and OP indeed has opportunities to extract a bit more value above the initial offer. One might hope that OP isn't just going to run out and sign papers this afternoon without getting some actual informed professional legal and real estate advice.

              The practical reality, however, is that developers inevitably have their eyes on a dozen properties at any one time and will simply pull out if they get wind of too much bullshit. They might pull out anyway, since it's highly likely that the developers are currently going through the exact same process with at least a couple of other lots further up the street, and the developer won't have capacity to develop all of them. If the developer closes a reasonable deal on one of the other titles first then they may just withdraw OP's offer entirely.

              People can get greedy when they see the potential for $$, and getting random neighbours to cooperate on anything is a difficult ask at the best of times. Ultimately the land is worth bugger all, relatively, until after all the paperwork is done.

              • kiitos on 01/05/2023 - 07:19
                +2

                @AngoraFish: Yes, my in laws tried to get the neighbours in their small street to do a group sell to a developer (but needing to get rezoning first) as large developments were planned around them but couldn't get agreement from all. They eventually sold independently and their street is now in the shadow of 3 enormous high rises.

          • JIMB0 on 30/04/2023 - 16:54
            +1

            @AngoraFish: Sounds like monopoly.
            @AustriaBargain
            I think there is a rule where once a certain percentage of owner have agreed to sell the rest are forced to sell.

            • AustriaBargain on 30/04/2023 - 17:21
              +1

              @JIMB0: OP should speak to everyone else then if there is a rule that could mean he is forced to sell at a value less than it could have been if they banded together. I guess if someone else already signed they wouldn't be able to talk about the deal though..

            • loropy9 on 30/04/2023 - 17:52
              +1

              @JIMB0: I believe in NSW if 75% of the owners agree to sell the 25% don't have much choice.

    • MrMarket on 01/05/2023 - 13:13

      Do you understand how options work?

      too cheap option premium to locked you in for 12 months even if it 40% above market price
      because they don't have the obligation to buy they can walk away when the options expire in 12 months
      and they locked you in for $1000?

      options is a smart play by them they have the rights to acquire if the properties took off but they dont have the same obligation if the properties tank
      they just walk away and it cost them $1000, cheap cheap

      • firebucket on 01/05/2023 - 13:37

        Thanks mate. But I haven’t signed anything yet.

  • KaTst3R on 30/04/2023 - 16:45
    +5

    Call Option for $1000? Lol i would ask for $10k to $20k at least for a 12 month option. $1000 option is only for a very short term. Dont forget that you cant sell in the next 12 months even if your financial situation changes. A call option is a very valuable thing. It puts the buyer in an extremely advantageous position. This is worth a lot.

  • firebucket on 30/04/2023 - 17:47

    Thankyou everyone for your input. I assume that the call option fee is forfeit, should the deal not go through?

    Thinking I should counter with an increased purchase price and call out fee in the vicinity of $15k ?

    There are 11 other owners involved, so I'm not hopeful they will all agree on a reasonable price to sell.

    • AngoraFish on 30/04/2023 - 20:17
      +1

      The call option fee is yours either way, it'll be treated as kind of a signing bonus. You should get it more or less immediately.

      A local real estate professional will be able to tell you what is a typical and achievable call option fee in your area. I wouldn't be taking advice from OzBargain about that kind of thing.

      The call option fee sounds like a low-ball, but at the end of the day if you had no intention of selling either way in the next 18 months it might not be worth holding out for more if the offer price is otherwise fair. There's no guarantee that another developer will be coming knocking on the door of a 12 unit owners corporation again any time soon.

      With 11 others involved the developer will be looking to make as few individual concessions as possible, lest the entire owners corporation gets wind and they have to give the same thing to everyone. As AustriaBargain suggests, if you are in a position to negotiate as a group you will have a lot more leverage to squeeze a bit more out of them.

  • deme on 30/04/2023 - 17:59
    +3

    lol a 12 month call option for $1,000
    Ask for 50k at least

    It's likely they want to turn the whole place into some shitty apartments and flock them off for $$$

    The offer is 40% above current market value.

    You really think property developers are being nice?

    Double the purchase price

  • djkelly69 on 30/04/2023 - 19:26
    +3

    Yeah at least 5% of the price for the call option fee. Essentially they are paying you not to sell the property to someone else for the whole option period, which is why $1k is ridiculously low for 12m.

    • MrMarket on 01/05/2023 - 13:17
      +1

      5% is a bit excessive for strike price 40% over premium no one will pay that but 10-20K order is probably works if they are serious

      • firebucket on 01/05/2023 - 13:39

        Thankyou. So you think $15-$20k is reasonable?

        • MrMarket on 01/05/2023 - 14:57
          +1

          Yeah 1k is too low but again 40% over market value is excessive strike price as well

          so I am trying to think from the other side intention
          The only way I can think off is they want your block for rebuild, have 12 months to locked in and secure all the buyers
          And if they still make a profit then they go ahead
          Else he walks away and it cost him just $1000

          But from your perspective you can’t sell your properties for 12 months, well technically you can but if he was to exercise the call you got to have the properties to give it to him else you in a lot of legal problems so reality is people hold for 12 months

          It also depend if you intend to sell it or not, if you don’t want to sell and 40% over market price strike price is a high probability it never get exercise so you pocket some nice cash and if it does get exercise then you happy with 40% above market value to let it go?

          That how I played my asset, if something I don’t want to sell I write options at excessive over market value and get nice fees for them and even if it will get exercise due to temporary boom I am happy to let it go and I probably get to buy it back cheaper at a later date

          • firebucket on 01/05/2023 - 18:47

            @MrMarket: So what would you ask for as a call option fee?

            • MrMarket on 01/05/2023 - 20:54
              +1

              @firebucket: What do you want to do with your properties do you want to offload it?

              Without knowing the properties value it hard to know what premium to ask.

              It really your call how much you want for the hassle and want to set a strike price where it has a good chance of getting exercise and you happy with the premium for the hassle if it doesn’t eventuates

              40% above market price is a bit of out there and this guy is unlikely to exercise unless everything goes his way 100% and all the ducks line up precisely, it a very cheap high risk play for him.

              10-15k Is reasonable but against a 40% above market price I don’t think they bites they may come back with higher premium but much lower
              Strike price.

              Just to give it some perspective and it not an exact comparison I wrote an option last month on one of my parcel of shares worth 60k with strike price 8% above market price for $1000 premium for a period of 3 months

  • firebucket on 01/05/2023 - 03:46

    Good advice. Thankyou all.

  • kiitos on 01/05/2023 - 07:22

    Is there anything special/unique about your location? Eg proximity to public transport, beach, good schools, etc?

    • firebucket on 01/05/2023 - 07:40

      It’s on the beach

  • Grunntt on 01/05/2023 - 08:43
    +3

    Coincidentally, this article appeared in my email inbox a couple of days back.

    Worth a read by the OP.

    https://jenman.com.au/when-property-developers-come-knocking…

  • here2rock on 01/05/2023 - 10:50
    +1

    Sorry to ask, if the settlement is 45 days from the contract value how is the Call option relevant?

    • djkelly69 on 01/05/2023 - 11:46
      +1

      The actual contract isn't entered into until the option is exercised, and the option period is 12m.

      • here2rock on 05/05/2023 - 12:08

        Thank you for the clearing it out.

  • MITM on 01/05/2023 - 12:10
    +1

    Can the developer then onsell once a DA is in place?
    I’ve always thought if someone was going to build a multi-storey, I’d be happy to swap existing for a new (plus some cash to cover a rental till build completion/move in date) That way you stay in the same locale.

  • JIMB0 on 02/05/2023 - 09:10
    +1

    Maybe they have interests in other property in the area and for some reason want to take yours and possibly others off the market.

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