Option payments that never get credited, or a purchase contract with a rezoning contingency

Question

Take two tracts that both need the same rezoning, from ag to single family at around 3 units an acre, with sellers wanting completely different structures. One structure is an option: 24 months, quarterly payments that don't credit to purchase price, extensions available at a higher rate. The buyer controls the dirt while spending money on the engineer and the hearings, and if council says no, the buyer walks with the option payments gone and nothing else lost. The other is a straight purchase contract with a contingency, closing 30 days after final plat approval, deposit going hard in stages as milestones clear. Carry is cheaper in the early months, but the price is fixed at today's number, and the contingency language is where the whole thing lives or dies, since a contingency that lets the seller keep marketing the property is worth far less than one that doesn't. The case for the option is that the buyer is renting time, and time is the actual product in entitlement work. The case for the contingent purchase is that option payments are pure burn, and a seller who wanted an option in the first place is usually a seller who thinks the rezoning will happen and wants to be paid twice for it. The structure tends to matter less than whether the seller stays cooperative eighteen months in, when the county asks for a traffic study nobody planned for. Either document needs a real attorney in that state. Which structure holds up better when the zoning isn't there yet is worth debating case by case.

bmoreno23 · Answer

The part I don't follow is why anyone signs the option if the payments never credit. If I pay four quarters of option money and then buy at the same price the contingent buyer would have paid, I've just donated the option money to the seller for the privilege of doing the work. Is the answer that the seller wouldn't sign the contingent version at all unless the price went up, so the option money is really just a price increase with a different name on it? If that's it I'd rather see it in the price where I can underwrite it.

jessreyes12 · Answer

@bmoreno23 that's basically it, and the thing that changes the math is what happens when you fail. Under the option you walk away having lost the option payments and your soft costs. Under the purchase contract with a staged hard deposit you can end up having lost the deposit too, and I've read enough of these to know the staging schedule is usually written so the deposit goes hard before the vote that actually decides anything.

@devon_pierce the question I'd ask before either one is whether the seller has to sign anything during entitlement. Rezoning applications in a lot of jurisdictions have to be filed by the owner or with owner consent, so if the seller gets tired of you at month 14 they can slow you down without breaching anything. I'd want that consent obligation spelled out in whichever document I signed, and a lawyer in that state reading it.

Option payments that never get credited, or a purchase contract with a rezoning contingency

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