By: Dennis Henson
Did you know that by using real estate options you can legally take control of valuable properties to generate quick income with only a small amount of money. Learning to understand and use this technique can be extremely valuable to the success of a new or seasoned real estate investor.
In order to take full advantage, you only need to understand how options work and become familiar with, and follow, your local state laws. Having learned how to use this technique and the law, you will soon be on your way to a great return on your investing efforts.
Here are some very important questions concerning real estate options…
What is a real estate option? Is that the same as a Lease Option? I thought real estate options were illegal! What are the steps in a real estate option transaction? And–How are options used to purchase real estate at discounted prices?
What is a real estate option?
A real estate option is a unilateral agreement:
- Between an optionor (The Seller) and an optionee (The Buyer, for the rest of this article I will refer to them only as the Buyer and Seller)
- Binding only on the Seller
- Where the exclusive, unrestricted, and irrevocable option to purchase is exchanged with the Buyer for valuable consideration
- The purchase of the option does not impose any obligation upon the Buyer to exercise the option and or purchase the property
- However, the Seller is bound by the agreement to sell the property at the agreed price to the Buyer should the Buyer choose to purchase the property within the option time period
The elements that must be spelled out in an option agreement are:
- Price (consideration) to be paid for the option
- Time—when will the option start and when will it expire
- Strike Price—the mutually agreed purchase price or property during the option period
- Other terms and conditions of the option agreement
Is a real estate option the same as a Lease Option?
Yes and No! The option part of a lease option agreement could be exactly the same as the option agreement we are discussing but the lease option includes a lease for the property.
I thought real estate options were illegal!
Real Estate Options of some kind are legal in most free countries in the world. It is the lease part that may cause some legal problems in certain American States. In order to avoid any problems, be sure to consult with a real estate attorney before entering into any real estate agreement.
What are the steps in a real estate option transaction?
Here is a step by step overview of an option transaction:
- The Buyer and the Seller enter into an agreement
The Buyer pays an option consideration to the Seller
The Seller grants the Buyer the exclusive, unrestricted, and irrevocable option to purchase at a fixed purchase price during a specified period of time - The Buyer either
Sets up a closing and purchases the real estate during the option period
Sells the option to another investor OR - Lets the option expire by not purchasing the property during the option period
How are options used to purchase real estate at discounted prices?
Investors may use options to gain control of a property for short time. During that time, the investor can seek out another buyer to sell to for a higher price than the option amount. The profit is the amount of difference in the amount of the option and the sale price.
But a more creative use of an option would be to locate a seller having a hard time selling their property. Then convince that seller to sell you an option to purchase but with the right to sublease it immediately. The investor may then rent out the property on a rent to own agreement. This will allow the investor to generate some income while helping their renter get into the position to purchase the property from them at a substantial profit.
- Saving the closing costs of purchasing and selling the property
- Saving the holding costs involved in purchasing a property
- Saving the maintenance and many other holding costs of owning a property
- Saving time by avoiding the loan process–setting up and going to closings
- Putting time to use on more productive efforts like finding more options
One other thing to keep in mind is that a real estate option will expire when a Buyer fails to exercise the option within the option period of the agreement. At that point the Buyer will not only lose their control of the property but also their original option payment.
I hope this article will help you in your quest to build wealth through real estate investing. For more articles on real estate investor training, visit my website at www.7secrets4success.com. Also on that site, you may sign up for free reports, articles, and e-books and find free forms, documents, MP3 downloads and much more.
Thank you,
Dennis Henson
