The Legal Status of Real Estate Options Varies from State to State

Unfortunately, there's no Uniform Commercial Code equivalent for real estate options. The legal status of real estate options varies from state to state. In most states, the legal status of real estate options has evolved over the years from a combination of common and case law. The case law that regulates estate options in most states is the result of various lawsuits involving legal disputes between optionees and optionors over the use of real estate options. To know the legal status of real estate options in your state, you should consult with a board-certified real estate attorney who is familiar with how real estate options work in your state. I suggest that you ask your real estate attorney the following four questions:

1. What constitutes a valid and fully enforceable real estate option agreement?

2. Does a real estate option, prior to its being exercised, create an estate in land?

3. Can a real estate option be recorded in the public records so it constitutes constructive notice?

4. Does a real estate option violate any rule against perpetuities that your state may have?

In some states, most notably California, courts have ruled that real estate options are personal property rather than real property. For example, in a federal bankruptcy case, In re Merten, 164 B.R. 641 (Bankr. S.D. Cal. 1994), the court ruled that under applicable California law, an unexercised option to purchase real estate is personalty—personal property—and not realty—real property. I suggest that you check with a real estate attorney to find out if real estate options are considered to be personalty or realty in your state. Your state's real property statutes should be available online via the Internet or at your county's public law library. If there is not a public law library in your area, check with your local public library to see if they have a current copy of your state's civil statutes. A listing of state statutes, by subject, is available at the following web site: www.law.cornell.edu/topics/state_statutes.html.

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