Is an option contract binding on the seller?

Getting all your ducks in a row for a major purchase can be tricky. A vendor wants to strike a deal, but you don't have a store to sell from yet. A property owner wants to sell you land ASAP, but you don't have financing. In these situations, a contract giving you the option to buy may be safer than a firm offer that commits you to the purchase.

Tip

A firm offer is a contract that Party A will buy from Party B within a given time frame. An option contract says that in return for a deposit, Party A may buy from Party B: If Party A walks away from the deal instead, the deposit is forfeited.

Define Firm Offer

UpCounsel defines a firm offer between two merchants as a written commitment to buy. The vendor gets the guarantee of a sale, while the buyer gets a guarantee of price. The firm offer definition in law doesn't require an immediate purchase. Either the contract sets a time limit, or the offer remains open for a maximum of three months.

A typical firm offer example occurs when manufacturer A finds supplier B is offering raw materials at a great price. The two parties sign a contract to lock in the purchase quantities and prices. This can work out well, but not always: Party A could hit a cash crunch, or B could run out of inventory and be unable to honor the deal.

If the purchase is real estate, "firm offer" is defined similarly, according to Buzaker Law Firm. A firm offer is a commitment to buy property with no conditions attached. In a competitive market, this gives the buyer the right to purchase without worrying they'll lose out to someone else. However, if the buyer discovers problems with the property, they're stuck.

Although the definition of firm offer is consistent in different areas, the details are governed by different laws. The Universal Commercial Code applies when two merchants transact business, but a firm offer between nonmerchants operates under different rules.

The Option Contract

Even if a deal looks good, there are lots of reasons a buyer might not want to make a firm offer. They're not sure they can line up the cash. They don't want to buy ​$10,000​ of inventory until they have a warehouse to hold it. They don't want to buy the real estate until it's inspected and any problems have been fixed. This is when the option contract comes into play.

As the name suggests, an option contract gives the buyer the option to make the purchase but doesn't bind them to it. A firm offer to buy the ​$10,000​ inventory within two months commits you. An options contract for the next two months allows you to back out if, say, your financing falls through. Unlike a firm offer, which can work with no money down, an options contract requires a deposit. If you walk away, you say goodbye to that cash.

In real estate, Reonomy says, an option to buy has the same effect of locking in the deal. This is slightly different from a right of first refusal, which gives someone the first shot at buying but only if and when the owner decides to sell. It's also different from a conditional offer, which commits the buyer provided certain terms for example, the inspection doesn't turn up major problems are met.

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