Scott from Wisconsin asks,
Hi Bill - you have mentioned option contracts several times, I am curious if you wrote agreed upon prices into the options or agreed the purchase price would be at fair market value at the time you executed the option? Thanks, Scott
Topic: Using Option Contracts to Buy Hunting Land:
I only did it twice and in both cases we established the future selling price for the land based on a set rate of return. I believe at the time we used a 6% annual increase because that was the average price appreciation for hunting land (and most ag land) at that time.
My options were written giving me the right to exercise at any time up to a deadline. So, the 6% appreciation was actually broken down into a monthly appreciation. That came out to .5% simple interest per month. We used simple interest – not compounded.
I guess it could have been written either way. A rate of .5% per month, compounded monthly would have cost me a bit more in the end.
Assuming the way we did these, if it took me 15 months to buy the property, my purchase price was the original land price (negotiated at the time of setting up the option) multiplied by the appreciation factor. For this case (15 months), that appreciation factor was (1+.005X15) or 1.075.
Let’s assume the price at origination of the option was set at $500,000. I paid $10,000 to secure the option that, in my case, would be taken off the final payment in the event I actually exercised the option. If I failed to exercise the option in the allotted time, I would forfeit the $10,000. When I finally bought the property, the purchase price (for the example given) would be $500,000X1.075= $537,500 – $10,000 (reduced by the option cost) = $527,500.
I liked that way of setting up the option because there were no surprises later. Both parties knew exactly where they stood at all times. If you do it based on “appraised future value” it can get pretty sketchy not knowing what that final price would be. I personally would not want to set one up that way.
Also, as an act of good faith, my options weren’t transferable. In other words, I couldn’t sell the option to someone else to exercise. I was the only one who could exercise the option. That might be a factor for some landowners or financiers who don’t want to see you make money without taking any risk.
That’s just the way I did it, but I am sure there are many other ways to set up an option. We used an attorney to make sure it was all nice and legal. Good luck. (2/10/22)