Option contracts and installment sales contracts

Buying a choice versus committing to buy

An option to purchase gives the optionee, the prospective buyer, the right to buy specified property on agreed terms during a stated period. The optionor, usually the owner, promises to keep that opportunity available. Consideration supports that promise. Before exercise, the optionee has a choice, not an obligation to purchase; the optionor is bound by the option. This is why an option is commonly described as unilateral.

The option should identify the property, price or price-setting method, duration, consideration, and required method of exercise. Exercise must comply with its terms. Timely, proper exercise creates an enforceable purchase obligation under the agreed terms; it does not itself deliver the deed. Letting the option expire normally ends the purchase right, and consideration paid for the option is generally retained unless the agreement provides otherwise. Whether the fee is credited toward the price depends on the agreement.

Related arrangements

A lease option combines a lease with a purchase choice. Rent pays for occupancy; rent credits toward purchase exist only if agreed. A lease purchase instead includes a purchase commitment. A right of first refusal ordinarily lets its holder respond when the owner decides to sell on triggering terms; it does not give the same present power to compel a sale as a purchase option.

A purchase option also differs from a termination option in an already signed sales contract. For example, Texas's TREC resale contract paragraph 5 provides a paid right to terminate within the agreed option period, rather than a standalone right to purchase.

Installment sales

An installment land contract, also called a contract for deed, is seller financing in which the buyer commits to purchase and pays over time while the seller retains legal title until the agreed performance is completed. The buyer generally receives equitable title and possession under the contract. Equitable title is the buyer's beneficial ownership interest and right to obtain legal title upon performance.

Contrast this with seller financing using a deed and a purchase-money mortgage or deed of trust: the buyer receives legal title at closing, while the seller holds a secured debt. Monthly payments alone do not identify a contract for deed; ask who holds legal title.

Installment buyers should examine title, existing liens, payment allocation, taxes, insurance, maintenance, and the seller's ability to deliver the promised title. Default remedies and buyer protections depend on applicable law and the contract; do not assume one missed payment permits immediate eviction and forfeiture of all payments. Remember the distinction: an option reserves a decision, while a contract for deed finances an agreed purchase and delays legal title.