By Don Levy
The author has permitted the reprinting and redistribution of this article.
I would guess more money has been made with the least investment by investors using real estate options than by any other method. Many fortunes have been made when an investor has taken an option on a piece of property and then took steps to increase the value of it. Other times lucky guesses have made property values increase drastically such as when a city moves in an unexpected direction.
Many people are aware of lease with option to purchase ways of purchasing real estate but not too many know about having an option to purchase where you just control who the property can be sold to. The owner of the property continues to pay mortgage payments, taxes and insurance. He also continues collecting any income from rent or crops, etc. You don’t have any control over what the owner does with the property unless it lessens the value that you have contracted for.
The main difference with a lease to purchase is you will have lease payments and will occupy the property, although you may be able to re-lease it out and keep any difference in income. Usually you will take care of minor maintenance and maintain the property as if it were your own.
The definition of a real estate option (sometime called a straight real estate option) is from the Financial Publishing Co. dictionary website and also found in the Financial Real Estate Handbook which they publish and is available from First American Title Co.
“A right, which acts as a continuing offer, given for consideration, to purchase or lease property at an agreed upon price and terms, within a specified time.”
This sounds fairly simple and straight forward but to be able to be enforced it must be in the form of a contract. The definition of a contract is described in the Financial Publishing Co. dictionary as “A legally enforceable promise or agreement consisting of offer, acceptance and consideration or a legally acceptable consideration substitute.”
Contracts that pertain to land need to comply with the “statute of frauds” which is again defined by the Handbook as
“State laws, requiring certain contracts to be in writing. All contracts for the sale of real property must be in writing. Leases (personal property) for more than one year must be in writing.”
These are the items that need to be included in your real estate contract for it to be a legal and binding contract.
1. The contract must be in writing and any change or cancellation has to be in writing and signed by the seller.
2. It must have consideration (value of some sort) in exchange for the promises in the contract.
3. It must state how long the offer will be open. The option must be exercised within that time frame. When an amount of time is not specified a court will rule that the option must be held open for a reasonable amount of time.
4. For the time the option is to be exercised the sales price must be clearly stated or the means by which a price will be determined. If a final price can’t be determined from the contract it will not be enforced by the courts.
5. All conditions to exercising the option must be clearly stated. A condition may be limitations on how or where the option can be exercised.
A real estate option can be an easy way to make a lot of money if you are smart enough to see the future in a building or a piece of land. Almost any investor can use real estate options to control a fortune in real estate with out having a lot of money tied up.
Some of the reasons an option is the way to invest in real estate are
1. Normally just a small amount of money or value is necessary for the option fee. Any amount of money (as little as a dollar) or value (vehicle, boat other real estate, etc.) can be used to secure an option on a piece of real estate.
2. You don’t need to worry about having a great credit score or trying to qualify for a loan. Normally credit is not an issue with options and because you’re not taking possession of the property now you don’t need to try and get a loan.
3. The owner of the option property is still obligated to make mortgage payments, pay taxes, pay insurance, etc. You don’t have to worry about making any payments on the optioned property because the seller still owns it and is obligated to make any payments, pay the taxes and insurance, etc.
4. During the option period the property can’t be sold to anyone but you. You have the exclusive right to buy the property. Based on the option price, if the owner sells it he must give you any profit and if at a loss he must make up the difference.
5. You can purchase the property anytime during the option period. You can exercise your option to purchase the property any time during the option period. Make sure the option period is long enough to find a buyer
6. You don’t have to purchase the property. You don’t have to purchase the property. You can forfeit you option fee and walk away at any time or you can just let the option period expire. If you need to leave early the owner can’t hold you to the agreement.
7. With the proper wording in the option agreement you can sell your option. Make sure you have a clause in the contract that allows you to sell your option to another party. Normally putting in your name along with assigns will allow you to sell it. Check with your attorney. You should have them draw the contract up for you anyway..
Dealing in real estate options is not that difficult because even if you made a mistake in what happens to the value of the optioned property your monetary loss is usually not that much. One of the great things about options is you can walk away from a mistake free and clear. This is not possible with almost every other type of real estate investment. Most other real estate mistakes don’t go away until you sell or lose them.
I’ve found over the years that this part of the real estate cycle is the best time to look for options. When the market starts improving there will be less motivation for someone to give you an option and normally the better the real estate market the more you have to pay for an option. Right now if you have the money to help a seller out with his payments you can make some fantastic option arrangements. Do more research on options and be prepared to make a lot of money before this market straightens itself out.
Don Levy is a retired broker whose hobby is studying real estate & writing about it. See my blog at httphealthy-and-wealthy-now.comrealestate to get more info & ways to make money even without money or credit. Get a Free copy of the Foreclosure & Short Sale Report at httpprofitinforeclosures.com to learn & make money.
If you would like to take advantage of the market and learn how to invest in real estate and you are local to the Dallas Fort Worth area, I know a really great teacher and mentor here in Arlington Texas. Please take a look at his web site: DennisJHenson.com, Dennis has a great Mentoring and training program, I know because I am one of his former students. I learned a lot from his one on one teaching technique. – Michael Harman 817-457-7572 email@example.com