Often, people confuse a real estate option with a right of first refusal. The main difference between a straight or naked real estate option and a right of first refusal is that a right of first refusal is the right to match a bona fide purchase offer from a third party, whereas a real estate option is an irrevocable right to purchase property, usually at a predetermined price, within a specified time period. For example, most commercial leases include a right of first refusal that gives the lessee the right to match any written offers that the owner may receive to purchase the property under lease.
The Definition of a Real Estate Option
In general legal terms, a real estate option grants the party owning the option,
the optionee, the exclusive, unrestricted, and irrevocable right to purchase property
from the party selling the option, the optionor, during the specified period
of time that the real estate option is in effect.
A Real Estate Option Grants Only an
Irrevocable Right to Purchase Property
I want to state right from the get go that the only thing that a straight or naked
real estate option grants is an irrevocable right to purchase the property under
option within the option period. Nothing more! An optionee has absolutely no
beneficial or equitable interest whatsoever in a property under option. Furthermore,
in my professional opinion, the creation and sale of a straight or naked real
estate option does not violate the due on sale clause contained in governmentbacked
and conventional mortgage or deed of trust loans secured by a lien on
residential property containing five or fewer units.
Again, in my professional
opinion, there is absolutely no way that any lender can legally exercise its option
pursuant to a due on sale clause on discovering the creation and sale of a
straight or naked real estate option. Why do I hold this opinion? Because Title
12 of the Code of Federal Regulations refers specifically to lease option contracts,
but makes no mention whatsoever of straight or naked real estate option
to purchase contracts.
Real estate options are not covered under Section 591.2
(b) of the Code of Federal Regulations that defines the due on sale clause as
follows:
Due on sale clause means a contract provision which authorizes the
lender, at its option, to declare immediately due and payable sums secured
by the lender's security instrument upon a sale or transfer of
all or any part of the real property securing the loan without the
lender's prior written consent. For purposes of this definition, a sale
or transfer means the conveyance of real property or any right, title
or interest therein, whether legal or equitable, whether voluntary or,
by outright sale, deed, installment sale contract, land contract, contract
for deed, leasehold interest with a term greater than three
years, lease option contract or any other method of conveyance of
real property interests.
Furthermore, the creation and sale of a straight or naked real estate option
does not transfer any legal or beneficial interest in the property under option
until after the option is exercised. The transfer of the property or a beneficial interest
in borrower is the standard loan due on sale covenant, which is included
in all Fannie Mae and Freddie Mac conventional residential mortgage and deed
of trust loan documents.