Has anyone been offered option to purchase by a developer?

davidmcn

GDB2222 said:

davidmcn said:

This might be semantics, but for this sort of situation you'd be better with a conditional contract, where the developer is obliged to try to get planning and to complete the purchase if/when they get planning. I would generally regard an option agreement as being for longer term arrangements e.g. "I want to be able to buy your field if it ever stops being green belt", or where it's subject to other deals being agreed e.g. to buy other adjoining land.
As above, you can try asking for the developer to cover your legal costs (yes, this can be your own choice of solicitor, not whichever tame one they suggest).

It’s not very practical trying to enforce a contract like that, especially against a limited company. You could get into an extremely expensive legal wrangle about best endeavours, etc. 

Well, at the very least you'd want to ensure there was a relatively swift exit route after determination of the planning application if the developer failed to complete, rather than being stuck in the option agreement and unable to sell to somebody else. 

GDB2222

The OP mentioned a six months option. My experience is that that’s quite short. It depends whether the planning gets waved through by the council's officers. If so, six months should be long enough. If it goes to the committee and gets turned down, six months would not be long enough to get an appeal finished. I’d have expected the developer to want a year's option.

claire_mc_2

Thanks so much for all the info and advice, this has all been incredibly helpful. We don't have exact details or numbers yet, but we're definitely feeling wary, and thinking that perhaps we'd rather just use this to try and get anyone else who's interested to go a bit higher. I think we'd rather get out relatively quickly and in an uncomplicated way, even if it means not getting quite as much money... will see what the agent has to say this week...

carefullycautious

You could have applied for PP and then sold at a higher price.

princeofpounds

Option agreements are quite a standard solution for land transactions of this nature. However, you do need to understand properly what you are getting into, and to retain independent legal advice from a solicitor who is familiar with them.

An option contract contains the following key elements:
- A strike price - a price for the property that is agreed in advance. 
- A premium -a non-returnable sum of money that the buyer of the option gives to the seller.
- A timescale - kind of obvious, but some options are only exercisable at the end, some at any point in time
- A method of execution - covers a whole range of things, but probably the most important thing is who has the right to exercise the option. The developer will want a 'call' (i.e. the right to buy if permission is granted). It's possible for you to have a 'put' too (i.e. the right to sell if permission is granted - useful perhaps if property prices collapse between now and then).

And obviously there is counterparty risk - there's always a risk the other side can't fulfil their contract.

The land you have at the moment contains planning risk. Apply for and get planning, and the land is presumably worth more than its current asking price - that is why the developer is interested in the option (along with the certainty that they have a site they can actually develop). Apply for and lose planning in a way that makes it clear it will never be granted; the land is worth less now, as the potential has been erased.

With an option agreement, the developer takes on that planning risk, but also takes on the possibility of gaining the planning reward. Their loss is limited to the costs of applying for permission (peanuts) and the premium on the option contract. 

So the premium paid needs to compensate you for:
a) the six+ months you spent waiting unable to sell your property to anyone else
b) an element of the potential planning reward, bearing in mind the probability of gaining it and the potential value uplift.

It is possible to build some of this reward into a higher strike price instead of an upfront premium, but then obviously you are sharing the development risk as much as the developer is, and the reward should be bigger (as all the developer really did for you was manage the application).

It sounds like the developer has given a fairly honest account of the structure of the contract so far, and it's nothing to be sceptical of as long as you understand it. But the key is making sure the key inputs are fairly valued. The developer will want to minimise the premium and the strike price, and you'll want it the other way around. If the following situation describes you, then it's worth considering seriously:

- You don't mind waiting 6 months+ to move
- You don't want the risk or hassle of applying for planning yourself 
- You would like to capture some of the potential planning value uplift, whether planning proves possible or not, but don't mind giving away some potential value and some control for the sake of convenience.

My guess is that the may to maximise total potential reward would be to retain a planning consultant and apply yourself, then sell it as a development plot. But then all the risk and expense is on you.

And yes, as noted earlier, do not rely on your estate agent if they represent you in these negotiations - they may well have a stronger relationship with the developer than you do. 

GDB2222

It’s not always obvious what will maximise the development potential of a site. So, applying for planning permission yourself may not help all that much. You are unlikely to detract from the value, but you may not add to it.

Also, submitting detailed plans, with all the ground levels surveyed and maybe a detailed report on the light for neighbouring properties, can be quite expensive. 

Building a single house on a confined site is quite expensive, compared to a typical estate. For example, building a 1000 sq ft house would probably cost a typical end user such as myself £150-200k. It depends on local property prices whether that’s worthwhile. 

claire_mc_2

@princeofpounds that is incredibly helpful, thank you.
@GDB2222 yes that's exactly what I was thinking, you've put it perfectly. And I guess is why we haven't wanted to apply for pp ourselves, despite realising the potential. 
We're meeting the developer this week and also we have  lot of viewings booked in this weekend, so it's looking really positive - looking like we might sell by this time next week, which we weren't expecting at all so we're very happy so far.

GDB2222

Have you found somewhere to move to? 

getmore4less

Watch out for deferred payments on completion of project.
Developer goes but you won't see that money.

claire_mc_2

GDB2222 said:

Have you found somewhere to move to? 

No, not yet. We've seen a house that would have been perfect but as we didn't have a proceedable offer, they understandably wouldn't let us view it. That house is now under offer, but I'm sure that there will be more coming on after Christmas.