Illinois exam glossary
Option contract: the right to buy and how to exercise it
Paying for time to decide is different from promising to buy. An option can keep a purchase opportunity open while its holder decides. To solve the exam question, find what keeps the offer open, what counts as exercise and what still has to happen before closing.
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The short answer
A real estate option is a contract giving its holder the right, ordinarily without the duty, to buy on the agreed terms within a specified period. The optionor grants that right; the optionee holds it. Consideration supports the promise to keep the offer open. Paying an option fee does not by itself exercise the option. Valid exercise can create binding purchase obligations under the agreed terms, but it does not deliver a deed or complete closing.
The PSI national outline lists option agreements at V.A.8, with related contract classification, delivery and electronic-signature topics at V.A.7, 9 and 10. The whole Contracts category has 19 of 100 scored national broker questions, not a separate option-question quota. This glossary explains exam concepts and Illinois source distinctions. It does not draft an option, decide a disputed notice or replace advice on a live transaction.
Follow the option from the promise to closing
- Identify the right and the people. The optionor grants the purchase choice; the optionee can exercise it. Read the actual terms and the signer's authority. A heading that says option or sale contract does not settle the document's legal effect.
- Find the consideration and the decision period. Separate the value supporting the keep-open promise from the purchase price. Check the deadline, any extension payment and the fee's refund or credit terms. There is no universal Illinois option-fee percentage in the authorities cited here.
- Read the written purchase terms. Identify the property, price or sufficiently definite pricing method, required signatures and other material terms. Do not assume a promise to agree on the price later supplies an enforceable purchase bargain. The Statute of Frauds matters for land transactions. Electronic form can qualify under current Illinois law, but it does not supply missing terms or authority.
- Check how exercise must happen. Read the election language, recipient, address, delivery method, dispatch or receipt requirement, exact time and any required tender or accompanying document. Communicate a present acceptance of the agreed transaction. Adding a new price or condition is different from accepting an existing contingency.
- Separate exercise from later performance. Effective exercise can bind the purchase under its terms; title work, contingencies, payment, possession and deed delivery still follow the applicable agreement. If delivery, waiver, assignment or legal effect is disputed, preserve the documents and obtain qualified legal review rather than declare the result from one sentence.
| Step | Effect to identify | Keep separate |
|---|---|---|
| Supported option granted | Keeps the purchase opportunity open on its terms for the agreed period | A present duty for the holder to buy or an immediate deed |
| Option fee paid | Provides the agreed payment for the option and any expressly stated additional role | Automatic exercise, universal nonrefundability or an assumed purchase credit |
| Option exercised effectively | Can make the agreed purchase obligations binding | Closing, satisfaction of surviving contingencies and title transfer |
| Existing purchase contingency remains | The resulting purchase duties retain that agreed qualification | A newly demanded price or condition not offered in the option |
| Notice sent or received | The contract and applicable law identify which event matters | A universal mailbox rule, a read receipt or actual awareness alone |
| Exercise deadline missed | The contractual election ordinarily cannot be made late by the holder alone | An assumed extension or a broker's decision that waiver or equitable relief must apply |
| Closing completed | The agreed conveyance and performance occur through the applicable closing steps | The earlier option fee or election alone |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| The option contract and its underlying offer | The supported keep-open agreement can already be binding even though the optionee has not accepted the purchase offer. | No purchase contract yet does not mean no contract at all. |
| Optionor and optionee | The optionor grants the right; the optionee holds the choice to exercise within the agreed terms. | Identify whose promise and whose election the question asks about. |
| Unilateral and bilateral | The usual exam distinction is a purchase choice without a present reciprocal promise to buy. After effective exercise, the purchase can impose obligations on both sides. | Explain the obligations, not just a memorized label. Whitelaw describes the option as unilateral and its purchase provisions as capable of becoming bilateral. |
| Option fee, earnest money and purchase price | A fee can pay for keeping the opportunity open; earnest money and purchase-price payments serve their agreed transaction roles. One payment can have more than one agreed function. | Refundability, forfeiture and purchase credit come from the actual terms and applicable law, not the payment's nickname. |
| Existing contingency and newly imposed condition | Exercise on agreed terms can lead to a purchase contract that still contains its original financing or inspection contingency. Demanding a new bargain is different. | Unconditional acceptance of the option's terms does not mean all existing purchase contingencies vanish. |
| Sending, receipt and opening a message | The document and applicable law determine the relevant event. Under UETA's default receipt rule, qualifying system receipt need not wait for a person to read the message. | Electronic recognition does not make every email a compliant exercise notice. |
| Purchase option and right of first refusal | A purchase option gives the stated election during its period. A first-refusal right depends on the trigger and procedure in its agreement. | In a question requiring a qualifying third-party offer, do not invent the trigger merely because the holder wants to buy. |
| Lease option and lease-purchase obligation | A genuine option leaves a purchase choice; another agreement may require a later purchase. The label rent-to-own does not decide which arrangement exists. | Read purchase duties and the continuing lease terms separately. Exercise alone does not answer every rent or possession question. |
Work through the facts
1. The holder decides not to buy
A valid option gives Maya until a stated date to purchase for $240,000. She paid $4,000 for that choice but has not exercised it. The terms impose no separate promise to buy.
- The supported option keeps the agreed opportunity open.
- The purchase choice is different from a present purchase obligation.
- The fee's treatment is a separate question requiring the agreed terms.
Answer: Maya is not required to buy merely because she bought the option. Do not assume the fee must be returned or credited.
2. A credit is expressly written
The option in an exercise states that its $4,000 fee will be credited toward the $240,000 price if the holder exercises and closes. Ignore every other payment, adjustment and closing cost.
- The express credit reduces the remaining purchase-price amount.
- $240,000 - $4,000 = $236,000.
- This is a price-credit calculation, not the buyer's final cash-to-close calculation.
Answer: The remaining price is $236,000 on these facts. Without a credit provision, the calculation would not establish an automatic credit.
3. A received-by deadline
A hypothetical option requires the named recipient to receive the notice by 5:00 p.m. Central Time on October 30, 2026. The agreed method is used at 4:58 p.m., but receipt occurs at 5:02 p.m. No extension, waiver or other modifying fact is stated.
- The clause requires receipt, not dispatch.
- The stated receipt is two minutes after the deadline.
Answer: The notice does not meet the stated contractual deadline. A live dispute would require review of all relevant facts and law.
4. An agreed financing contingency
A purchase option incorporates a sale contract with a financing contingency. The holder timely exercises exactly on those existing terms.
- Acceptance adds no new condition.
- The incorporated purchase terms already contain the financing qualification.
Answer: The resulting purchase can be binding subject to that agreed contingency. Exercise does not silently waive it.
5. A newly demanded price
An option offers purchase for $240,000. The holder responds, I exercise only if the price is reduced to $225,000. No agreement to alter the price is stated.
- The response makes the election depend on a new price.
- That is different from accepting the offered terms.
Answer: The response is a conditional proposal, not acceptance of the stated purchase option.
6. An email still needs a contract check
The parties agree to electronic transactions, and the facts establish that the electronic record is the holder's act. The holder nevertheless ignores the option's expressly required notice recipient and method. No waiver or other modifying facts are given.
- Electronic form alone is not the defect.
- Recognition under UETA does not erase the agreed exercise requirements.
Answer: Do not declare valid exercise merely because the record is electronic and attributable. The required recipient and method remain material.
7. What the published cases actually decided
Compare The Terraces of Sunset Park with Michigan Wacker. The first concerned a paid real estate purchase option; the second concerned a commercial tenant's lease-extension election.
- Terraces upheld the option characterization and the stated nonrefundable payments on that agreement's facts, even though the document used sale language.
- Michigan Wacker rejected an equivocal proposed extension in its full negotiating context, even assuming a waiver of the prescribed notice method.
Answer: Use Terraces for the purchase-choice distinction and Michigan Wacker for careful notice analysis. Do not turn the extension case into a residential purchase-option ruling or treat every would-like phrase as automatically fatal.
8. The first-refusal trigger has not occurred
The exercise states that a first-refusal right arises only after a qualifying third-party offer. There is no such offer, and the holder simply asks to purchase now.
- The question supplies a specific trigger.
- The holder's request is not the stipulated third-party offer.
Answer: The stated right has not been triggered. Do not substitute a freely exercisable fixed-price option.
9. A lease with an option and seller disclosure
A covered residential-property transaction is a lease with an option to purchase. No Section 15 seller exemption applies. The seller argues that all options fall outside the disclosure Act.
- Current 765 ILCS 77/10 expressly lists a lease with an option to purchase.
- Terraces addressed a different, unexercised purchase-option agreement and its historical facts.
Answer: The blanket option exemption is wrong. Analyze the current Act, property definition, exemption and transaction stage; do not use the case to avoid a covered lease-option disclosure.
10. A valid election is not a deed
The facts establish effective exercise and provide for a later closing. The holder says the exercise notice itself transferred legal title and settled all rent obligations.
- Purchase duties and the conveyance are different events.
- The option and lease terms must be read for rent, possession, credits and later performance.
Answer: Exercise alone establishes neither deed delivery nor an automatic answer to every continuing lease obligation.
Mistakes to avoid
- No purchase duty means no binding agreement. The supported keep-open promise can already be binding.
- The fee does every job. Check its separate consideration, credit, deposit and refund terms.
- Any email counts. Check electronic agreement, attribution, notice method, recipient and timing.
- All conditions must disappear at exercise. Distinguish an existing purchase contingency from a new condition added by the holder.
- Every late notice gets an extension. Do not invent one; waiver and equitable arguments need the actual facts and legal review.
- Recording or possession proves exercise. Identify the agreed acceptance act. Neither fact alone substitutes for it.
- A case with option in the caption decides every option issue. Check whether it concerns a purchase, lease extension or a different right, and read the actual holding.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. Before exercise, what does a valid purchase option ordinarily give its holder?
- A guaranteed refund of every option payment
- Immediate legal title
- A right to buy on agreed terms within the option period
- An unconditional duty to buy immediately
Show answer and explanation
Answer: C. A right to buy on agreed terms within the option period
The holder receives the purchase choice. A deed, a present promise to buy and an automatic refund do not follow merely from the option. If the agreement instead already obligates the holder to purchase, reconsider the option classification.
2. Which statement correctly separates the two parts of an option arrangement?
- A supported keep-open agreement can bind before the purchase offer is exercised
- The optionee must accept every later price offered by the owner
- Paying the fee necessarily accepts the purchase offer
- There can be no binding agreement until a deed is delivered
Show answer and explanation
Answer: A. A supported keep-open agreement can bind before the purchase offer is exercised
The keep-open agreement and the underlying purchase offer serve different jobs. Deed delivery is later performance, paying for the choice is not necessarily exercise, and the holder need not accept a different price simply because it is proposed. Effective exercise changes the analysis of purchase duties.
3. The option grants a genuine choice and requires no present promise to purchase. Which distinction best explains the usual unilateral classification?
- Only oral options can be unilateral
- The optionor need not honor the option
- The optionee owns the property already
- The holder has not made a reciprocal promise to buy
Show answer and explanation
Answer: D. The holder has not made a reciprocal promise to buy
The relevant distinction is the absence of a present reciprocal purchase promise. It does not excuse the supported keep-open promise, transfer title or make oral form sufficient. A later effective exercise can create mutual purchase obligations under the agreed terms.
4. A supported option is still open, and its holder has met every stated condition. May the owner simply revoke it because a better offer arrives?
- Yes, a higher price always ends an option
- No, the supported keep-open promise remains binding on these facts
- Yes, unless the optionee has moved in
- Yes, unless a deed has already recorded
Show answer and explanation
Answer: B. No, the supported keep-open promise remains binding on these facts
A better offer does not itself undo the stipulated binding option. Recording a deed and taking possession are not the stated conditions for keeping this choice open. If the option period expired or a required extension payment was not made, the contractual facts would be different; do not invent a remedy from this answer.
5. A $240,000 option expressly credits a $4,000 fee toward the price at closing. With no other payments, costs or adjustments, what price amount remains?
- $240,000 because an option fee can never be credited
- $4,000
- $236,000
- $244,000
Show answer and explanation
Answer: C. $236,000
The stated credit leaves $240,000 minus $4,000, or $236,000. Ignoring the express credit is wrong, adding it reverses the agreed treatment, and the fee alone is not the remaining price. Without the express credit, this arithmetic would not prove an automatic entitlement. This is not final cash to close.
6. An option requires receipt by 5:00 p.m. Central Time. It is sent at 4:58 p.m. and received at 5:02 p.m.; no modifying facts are given. What follows from the stated clause?
- Every deadline includes a five-minute grace period
- A read receipt is the only legally relevant event
- Dispatch automatically makes it timely
- The required receipt is late
Show answer and explanation
Answer: D. The required receipt is late
Receipt at 5:02 is two minutes late under the given received-by clause. Neither a dispatch rule nor a grace period has been supplied, and the clause does not make a person's reading the test. A dispatch-based agreement or a legally effective extension would require different analysis.
7. The option already incorporates a financing contingency. The holder properly exercises on those existing terms. What happens to that contingency?
- Every contingency automatically vanishes
- It becomes a new demand made by the holder
- It remains part of the agreed purchase terms unless otherwise satisfied, waived or changed
- Its presence means no purchase contract can ever form
Show answer and explanation
Answer: C. It remains part of the agreed purchase terms unless otherwise satisfied, waived or changed
Accepting the agreed terms can create a purchase contract subject to its existing financing contingency. That is different from adding a new condition during exercise. Automatic waiver and the claim that no conditional purchase contract can exist both go too far. A new financing demand absent from the option would present a different acceptance issue.
8. The option price is $240,000. The holder replies, I exercise only if the owner accepts $225,000. No price amendment is agreed. What is the response?
- A deed transferring title at $225,000
- A conditional proposal rather than acceptance of the stated option terms
- A unilateral amendment binding the owner
- An exact election at $240,000
Show answer and explanation
Answer: B. A conditional proposal rather than acceptance of the stated option terms
The response makes acceptance depend on a new price. It neither accepts the original figure nor transfers title, and one party cannot make the proposed amendment binding merely by demanding it. If the owner separately agreed to revised terms, those new facts would need their own analysis.
9. Which statement about electronic option notices is safest under current Illinois law?
- Every sent email is received when the sender presses Send
- An unread email can never have been received under UETA
- Electronic form overrides every contractual delivery clause
- An electronic record may qualify, but agreement, attribution and the notice requirements still matter
Show answer and explanation
Answer: D. An electronic record may qualify, but agreement, attribution and the notice requirements still matter
UETA recognizes qualifying electronic records and signatures without eliminating the agreement or applicable law. Sending and receipt are distinct, and its default system-receipt rule does not require individual awareness. The parties' notice terms and the particular record still must be checked; none of the three automatic rules is sound.
10. A first-refusal agreement is triggered only by a qualifying third-party offer. None exists. What should you conclude from those stated facts?
- The owner has already conveyed title
- The right is necessarily invalid
- The holder can force a sale at any price
- The specified trigger has not occurred
Show answer and explanation
Answer: D. The specified trigger has not occurred
The stipulated third-party-offer trigger is missing. That does not prove invalidity, conveyance or an unrestricted purchase power. If the required offer occurred, the agreement's notice and matching procedure would become relevant.
11. A covered residential transaction is a lease with an option to purchase, with no Section 15 seller exemption. What does current 765 ILCS 77/10 establish?
- The Act expressly includes a lease with an option to purchase, subject to its scope and exemptions
- Terraces abolished disclosure duties for all lease options
- Only an unconditional purchase contract can come within the Act
- Every transaction called an option is exempt
Show answer and explanation
Answer: A. The Act expressly includes a lease with an option to purchase, subject to its scope and exemptions
Section 10 expressly lists that transfer method. A pure purchase-option decision cannot erase the statutory lease-option language, and an unconditional purchase contract is not the only listed form. Change the property, exemption or transaction facts and the detailed disclosure analysis may change.
12. The facts establish effective exercise of a purchase option and a later closing. Which statement is correct?
- The option fee is always refunded at exercise
- All rent obligations disappear in every lease option
- The exercise notice necessarily delivers the deed
- Agreed purchase duties can be binding while conveyance and closing still remain
Show answer and explanation
Answer: D. Agreed purchase duties can be binding while conveyance and closing still remain
Exercise and closing are different steps. The notice alone does not deliver a deed, and neither universal rent cancellation nor automatic fee refund follows. The purchase and any continuing lease terms control the later performance questions; a completed conveyance would add a different fact.
Common questions
What is an option contract in real estate?
It is a supported agreement giving its holder the right to buy on specified terms during an agreed period, ordinarily without a present duty to purchase. Separate the contract keeping the offer open from the later election to buy. The legal effect depends on the terms, not just the title option contract.
Who are the optionor and optionee?
The optionor grants the right, commonly the owner. The optionee holds the election, commonly the prospective buyer or a tenant with a purchase option. Check the named parties, signing authority and any assignment conditions rather than assume an unnamed person can exercise.
Is an option unilateral or bilateral?
Before exercise, a typical purchase option is described as unilateral: the owner is bound by the supported keep-open promise, while the holder has not promised to buy. After effective exercise, the purchase can impose obligations on both sides and remain executory until those duties are performed. This does not mean the holder can ignore an option fee or other agreed option obligations.
Does an option contract need consideration?
A binding promise to keep the offer open needs legally sufficient consideration. Identify the bargained value supporting that promise; the purchase price or an option heading alone does not prove it. Whitelaw illustrates why a writing can amount to an offer rather than an enforceable option. The actual agreement and consideration still need their own analysis.
Is there a standard Illinois option fee?
The cited authorities do not set one universal dollar amount or percentage for all real estate options. Read the actual bargain and applicable law. A hypothetical $4,000 fee illustrates the distinction; it is not a state tariff or recommended transaction price.
Is an option fee refundable or credited toward the price?
Neither treatment follows automatically from the word option. Read the refund, forfeiture, credit, exercise and default terms and applicable law. Terraces enforced the expressly nonrefundable payments in that particular agreement. It does not make every option payment in every transaction nonrefundable.
Is paying the option fee the same as exercising the option?
Usually those are separate steps: payment supports or maintains the choice, while exercise accepts the underlying transaction in the agreed manner. Read the document because it can give a payment more than one function or require a further payment with exercise. Do not substitute a general fee rule for the actual clause.
Must an Illinois real estate option be in writing?
Land-contract enforceability raises the Statute of Frauds. Section 2 requires the relevant contract or memorandum in writing and signed by the party to be charged, or the properly authorized agent described there. A short option period does not by itself remove a land transaction from writing requirements. The actual documents and any claimed exception need legal review. Electronic form can qualify under UETA when its conditions and other law are met.
How do you exercise a purchase option?
Read the exact clause for the election, price, deadline, recipient, address, delivery method, receipt or dispatch test and any tender or accompanying document. Communicate a present acceptance of the agreed terms and retain proof. A proposed new price or condition can fail to accept the option. Do not use this glossary as a notice form for an actual transaction.
Can an option be exercised by email?
Potentially, but current 815 ILCS 333 matters alongside the option. Check agreement to electronic transactions, attribution and any required notice method, recipient and timing. Unless otherwise agreed, Section 15 requires a retrievable, processable record to enter a system designated or used for that type of record; a person need not be aware of its receipt. That does not make every sent message a timely or compliant exercise. The agreement and other applicable law remain relevant.
What if exercise adds a financing contingency?
Ask whether it was already part of the offered purchase terms. Exercise on terms that already contain a financing contingency can form a contract subject to that qualification. Making the election depend on a newly demanded financing condition is a different problem. Unconditional acceptance of the option's terms does not mean waiving every existing contingency.
What if notice is late, sent to the wrong person or worded vaguely?
Do not assume compliance or an automatic extension. Check the exact clause and the entire record, including any claimed waiver or legally available relief. Michigan Wacker was a commercial lease-extension case: even assuming waiver of the specified method, the proposed extension remained equivocal in context. It does not make every phrase such as would like invalid in isolation, or prove that waiver and equitable arguments can never matter.
What happens after the option is exercised?
Effective exercise can create binding purchase obligations under the agreed terms. Surviving contingencies, title work, payments and closing still must be addressed. Exercise alone is not a deed and does not decide every possession or continuing rent issue. Read any incorporated sale contract and lease together.
How is an option different from a right of first refusal?
An option gives the election described in its terms during its period. A right of first refusal depends on its agreement's trigger and matching process, commonly involving a proposed sale to someone else. Read the actual trigger: do not assume the holder can force a sale whenever they wish or choose a price the agreement does not provide.
Are lease options exempt from Illinois seller disclosure?
There is no blanket option exemption. Current Section 10 of the Residential Real Property Disclosure Act expressly includes a lease with an option to purchase, subject to the Act's property scope and Section 15 exemptions. Terraces addressed a different unexercised purchase-option agreement under the law and facts before that court. Use the current Act and transaction stage, not an option label, to analyze disclosure duties.
Can an option be assigned or recorded?
Do not assume every option is freely transferable or that recording is valid, necessary or sufficient to exercise it. Read restrictions, authority and the proposed transaction, and obtain attorney and title review for assignment, recordability, priority and legal effect. This glossary makes no property-specific determination on those issues.
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Official sources and scope
The published cases explain different transactions: a purchase choice, the land-contract writing problem and a commercial lease extension. Use the cited current Illinois statutes for electronic records and residential disclosure. The examples are original exam exercises with stated assumptions. For an actual option, have the complete agreement, notices and transaction facts reviewed by qualified Illinois counsel.
- PSI June 24, 2026: option agreements and related contract topics
- Whitelaw v. Brady, 3 Ill. 2d 583 (1954): option structure and writing
- The Terraces of Sunset Park v. Chamberlin (2010): paid purchase choice
- Michigan Wacker, 2018 IL App (1st) 171222: commercial extension-option notice
- 740 ILCS 80/2: land-contract writing and signature
- 815 ILCS 333/5, 7 and 9: electronic agreement, recognition and attribution
- 815 ILCS 333/15: electronic sending and receipt
- 765 ILCS 77/10 and 15: covered lease options and seller exemptions
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.