Glossary
Option agreement
The right, but not the obligation, to buy land at an agreed price or discount within a set period.
What it means
An option agreement gives you the right to buy land within a fixed period, often three to fifteen years, in return for an option fee paid to the landowner. You then pay for planning. If permission is granted, you exercise the option and buy at the agreed price or at a discount to market value with planning, often 10 to 25%, then sell to a developer. If planning fails, you let the option lapse and lose the fee and your planning costs, not the price of the land.
Worked example
ExampleA £10,000 option on a paddock, exercisable at 80% of market value with planning.
- Residual value with planning
- £744,000
- Exercise price at 80%
- £595,200
- Less fee, planning, buying and selling costs
- £64,380
- Profit if granted
- £84,420
If planning is refused, the loss is £47,000 of fee and planning costs, not the land.
Information, not advice. Example figures are fictional and for illustration only.