Buying an Option on a Real Estate Contract

1. What is a soft deposit?

A soft deposit, also called good faith deposit or earnest money, is a deposit made to a seller showing that a buyer is serious about purchasing a property. During the negotiated due diligence period, this deposit can be fully refundable should the buyer elect to terminate the contract. This earnest money allows the buyer additional time when seeking debt or equity financing and is typically held by the seller’s attorney’s escrow account or a national escrow agent.

For the most part, all sellers will require a deposit as a sign that the buyer is serious. During up markets or if a property generates a lot of interest, sellers may demand a higher deposit and in some cases a hard deposit which would not be refundable.

Buyers will many times face temporary illiquidity which prevents them from tying up asecuring a property with a contract. Some of the reasons include:
  • Buyer waiting for cash proceeds from the sale of another property or;
  • Private equity firm or investors’ committed capital for real estate acquisitions may not be available until the Sponsor locks up the deal first with its own capital, which it may not have at that moment or;
  • Opportunistic investors looking benefiting from a lucrative market considering accepting higher offers for their contract than what their contract providesto tie up a deal to flit it for a profit or;
  • Real Estate Sponsors that have deployed much of their liquid capital for other deals and maybe temporarily illiquid.

Our soft deposit program gives buyers the control they need to compete in today’s fiercely competitive Real Estate market without the risk of losing a deal due to a temporary lack of liquidity. It is structured as a real estate option similar to a stock option, giving the buyer the right, but not the obligation, to buy (call) the property at an agreed-upon price within the due diligence period.

The first step is for our underwriting team to review the contract to ensure the escrow language and escrow agent both meet our requirements to write an option contract. Winchester will then form a new Limited Liability Company and become the signing counterparty of the Purchase & Sale Agreement with the Seller. Simultaneously, Winchester will structure and sell a real estate option agreement for the property for a specific fee, giving the Buyer the right to purchase our membership interests for the LLC at any time during the due diligence soft period. Winchester will then wire 100% of the soft deposit funds to the escrow agent at which point the due diligence period begins. The Buyer now has control of the contract and is able to begin working on debt and equity financing negotiating from a position of strength.

No. While those are requirements in the lending industry, we are not making loans. We are the buyers of record until you exercise your option agreement and take control of the LLC membership interests.

The fees are broken down as follows:
  • A $2,500 non-refundable underwriting fee for us to review your contract.
  • The upfront cost of the option, or option premium, is 2.5% of the deposit amount for 30 days. There is a 1% fee for every additional 30 days of due diligence.
  • Should If you do not not exercise the option, there are no additional costs to you.
  • A strike price for the option is applicable if/when the option is exercised. To learn more about the strike price or get a quote please click here.

Winchester has a lot of experience with real estate transactions and is sensitive to the challenges of getting a deal done. Let’s say you are looking to go to contract on a $10,000,000 property and need a 10% deposit of $1,000,000. An upfront fee of 2.5% or $25,500 is a nominal fee that will give you the time and control you need to work on your debt & equity. Should If you decide not to move forward with the contract, there are no further costs to you. If you do however decide to go hard on the contract, this means you have secured your equity and or debt and expect to close on the property. In this case you will exercise the option by paying the strike price. Your total cost for the option will never exceed 1% of the property's purchase price, making this an attractive options for real estate investors of all sizes nationwide.

No. We don’t underwrite or engage in due diligence of the subject properties therefore would terminate the contract.

This structure has no impact on the seller since the signing entity is an LLC and it does not change throughout the entire process process. Remember, we are not assigning the purchase contract but the membership interests of the LLC.

From the time you sign the application with a deposit and submit a copy of the Purchase & Sale Agreement, the review and approval process can take as little as 5-7 days and once approved the option can be structured within 24-48 hours.

Yes, Winchester has no interest in interfering in your acquisition and will not discuss the merits of your purchase with anyone outside our company.

No, so long as the extension does not exceed our maximum total of 90 days of due diligence.

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Ask us about our revolutionary Soft Deposit program and talk to us about your debt or equity needs. Our experience combined with our out-of-the-box mentality has served us to secure off market opportunities and create value where others fail to see it.

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Phone: (212) 494-9025
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