Both the Offer to Purchase and Option to Purchase is sometimes referred to as the OTP (although these days, “Offer” and “Option” are used to avoid confusion). They also happen quite close together in a property transaction process, hence it’s not surprising that buyers sometimes may confuse one for the other.
The wording in the Offer to Purchase can later on affect the Option to Purchase.
Here’s what you need to know:
What is an Offer to Purchase?
The Offer to Purchase is a formal letter from the buyer to the seller, expressing a serious interest in the property. Unlike the Option to Purchase, the Offer is not considered legally binding.
The details on the Offer to Purchase include:
The property address
The offered price for the property
The duration of the Option to Purchase (usually 14 days, but you can try to ask for a longer duration)
Date for completion of transaction (usually 6 weeks after exercising the option, but you can try to ask for more time)
Validity period of the Offer to Purchase (usually 3 days)
Additional terms to be included in the Option to Purchase (e.g. a 5% deposit)
The clause “subject to contract” at the header (This clause will be elaborated later in this article)
Drafted by the buyer’s agent, the Offer to Purchase is usually accompanied by a cheque, most often 1% of the purchase price as a deposit and to be used for the Option to Purchase.
Upon accepting the terms, the seller signs the Offer to Purchase and may proceed to issue the Option to Purchase (OTP) to the buyer.
If the seller decides to reject the Offer to Purchase, or when the Offer’s validity period lapses without an OTP being issued, the seller must return the cheque to the buyer.
So, the seller should not bank in the buyer’s cheque before signing the offer, as doing so could turn the Offer into a legally binding contract like the OTP.
Although Offer to Purchase can also be abbreviated as OTP, it can lead to confusion. Therefore, it’s more common now to refer to it as just the “Offer” while referring to the actual Option to Purchase as the “OTP”.
What is an Option to Purchase?
An Option to Purchase is the actual, legally binding document for purchasing a property. As mentioned, the buyer will issue a cheque for, usually, 1% of the purchase price in order to exchange for the OTP from the seller.
During the validity period of the OTP (which is indicated in the Offer to Purchase), the seller cannot accept any other offer from interested buyers.
Buyers must exercise the OTP within the validity period, otherwise, it will lapse, leading to the forfeiture of the 1% deposit.
It is important to note that the wordings in The Offer to Purchase matters as it can affect the OTP.
A famous example of this is the Montebleu condo incident which happens in 2013. In this legal case, the wording on the Offer to Purchase said the “option period” (the OTP) would be “3 days” instead of the usual 14 days.
Together with the Offer to Purchase, the buyer gave the seller a cheque for the 1% option fee. When the seller issued the OTP, the three-days option period fell right in the middle of the Chinese New Year holiday.
This left the buyer in a bind; the buyer’s agent was unable to deliver the buyer-signed document on time to the seller’s solicitor by the expiry date of the option, as offices were closed.
The OTP was submitted a day late, hence, the sellers rejected it on grounds that it was already past the expiry date, and sought to keep the 1% option fee.
Ultimately though, the Court ruled that, regardless of the situation regarding the OTP, the both buyer and seller had entered into a legally binding contract because of the following two reasons:
1. The seller had banked in the buyer’s cheque for the 1% deposit
2. The clause “subject to contract” was not found on the Offer to Purchase, allowing it to become legally binding after the sellers have signed and banked in the buyer’s cheque.
Following the incident, property agents are now careful to include the exact phrase “subject to contract” in the Offer to Purchase.
This is a clause that can prevent the Offer to Purchase from being construed as legally binding, and serve as a ‘safety net’ for both buyers and sellers prior to the signing of an actual OTP.
In any case, you can see how the Offer letter can affect the OTP, even though the Offer isn’t a binding legal document.
Check the offer letter carefully, as it might lead to problems with the OTP later
Why do we still need an Offer to Purchase?
While it’s possible for buyers and sellers to proceed straight to the OTP without first sending an Offer to Purchase, sending an Offer letter is a standard practice that’s used by all property agents—and with good reason.
Issued by the buyer's agent on instruction by the buyer, the Offer to Purchase allows buyers to specify the terms of the subsequent OTP. For example, say you’re upgrading from an HDB flat to a condo and depend on the cash proceeds from selling your flat, specifying a longer OTP period can give you more time to consider and accept the best offer for your flat.
Likewise, the offer letter can specify the date of completion; this is of practical importance to buyers, as you need to be clear on when the transaction will be settled and you can move in.
So, if you’re buying a resale property, it’s always a good idea to engage an agent to draft a formal Offer to Purchase if you've decided to offer for a home you really like.
What details and terms will you include in the Offer to Purchase? Let me know in the comments section!
About The Author
My passion for Real Estate sparked at a very young age. At 14, I would tail along with my parents as they went for home viewings, and get involved with the necessary matters whenever they shifted homes.
Later on, I was appointed as their power attorney who solely oversaw the sale and purchase of my family’s properties.
From my personal experience in engaging agents, I deeply understand how important integrity is in this business.
As properties are big-ticket items, their dealings should not be taken lightly. To offer the best advice, I always strive to put myself in the shoes of my clients such that I can help them make informed decisions which support their goals.
My mission is to add value and make a positive impact on the lives of my clients through sound investments and intelligent strategising. Let's connect at 97642556 to discuss on your goals.