Rolling Option

The city of Shmoopsville is growing like a weed, which makes us here at Big Mood Building very happy. After all, the more people who move to Shmoopsville, the more houses we’re gonna have to build so all those new residents have somewhere to live, which means more money in our pockets. We just got a call from our land developer buddy that they’ve got a huge piece of property ripe for home-building, if we want to check it out and maybe buy it from them. Unfortunately, the lot is huge—100 acres of huge—and as hot as the market is right now, we’re not sure it’s going to stay hot long enough to sell 100 acres’ worth of new homes. If each home requires roughly half an acre, that’s 200 houses. That’s...a lot of houses.

But we’re definitely interested in buying at least 20 acres right off the bat, so we sign a contract with a rolling option. A “rolling option” gives us the right—but not the obligation—to extend the terms of our contract for another period of time. So let’s say we def want 20 acres right now. Depending on how the houses we build on it sell, we might want another 20 acres later…but we’re not sure. With a rolling option, we can pay the land developer a fee and extend our right to buy extra land for another twelve months. This way, we’re not under contract to actually buy the land, which will be good if the Shmoopsville real estate bubble bursts. But if it doesn’t, we can still get our mitts on some extra real estate if we want it.