Definition of an Option

An option is a right a seller grants a buyer to purchase real estate within a certain period of time. For example, if you are interested in buying an office building but want more time to investigate the cash flow and compare this building to others in the area, you might offer to pay the owner an option fee to tie up the property. In return, the owner might be willing to grant you the right to buy this building within a certain period, such as six months, at a stated price. In the meantime, the owner would not be able to sell to anyone else. You could also agree that all or part of the option fee would apply toward the purchase, if you later decided to actually buy this property. If you did not exercise your option, you would forfeit your option fee.