Option payments you never get back, or a purchase contract with a rezoning contingency

Question

I've got two tracts on my list that need the same thing, a rezoning from ag to single family at around 3 units an acre. The sellers want completely different structures and I can't decide which one I'd actually rather sign.

Seller A wants an option. 24 months, quarterly payments that don't credit to purchase price, extensions available at a higher rate. I control the dirt while I spend money on the engineer and the hearings, and if council says no I walk with my option payments gone and nothing else lost.

Seller B will do a straight purchase contract with a contingency, closing 30 days after final plat approval, deposit going hard in stages as I clear each milestone. Cheaper carry 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, because a contingency that lets the seller keep marketing the property is worth a lot less than one that doesn't.

The case for the option is that I'm 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.

What I keep landing on is that the structure matters less than whether the seller will still be cooperative at month 18 when the county asks for a traffic study nobody planned for. Both documents need a real attorney in that state, which I know.

Which structure do you actually prefer when the zoning isn't there yet?

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

@ember 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.

@bramble 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 you never get back, or a purchase contract with a rezoning contingency

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