We cannot fully understand the power of real estate option towards the buyers if we are not going to expose its meaning first. The simplest definition of real estate option is the right to buy a property for a predetermined price or strike price during an agreed period of time – it’s a right and not a binding obligation. For example, a property owner may put his property out for option; this act will give the option buyer the right to buy or not to buy the property for a predetermined amount during a predetermined period of time. The option buyer makes profit if the value of the property will increase during the period of the option.
If you’re looking for a strategy that will lower the risks, allow leverage, and cut on cost, then the real estate option is it. This strategy also makes possible to minimize downside and an option consideration lower than an earnest money.
To really use the full benefit of this strategy, we need to examine closely each benefit and the other benefits of this strategy.
The most advantageous benefit of real estate option is the full control over the property by the buyer of an exclusive option. While the option is in effect, you’re sure that there will be no other buyer that can lay their hands on the property during the period of the option. Even if you’ve not fully owned the property yet, you now have full control regarding its availability.
The second benefit of real estate option strategy gives you a chance to lower your risk against decreasing property value, if you’re the buyer. In case the property value dips during the maturity of the option, you can just opt not to buy the property. Thus saving you money by avoiding paying a higher price than the current property value – you will still lose the option consideration, but there’s no legal charge you should face whatsoever.
Creating leverage with very minimal or virtually no cost involved is also possible with real estate option. If you’re the investor, you could put as one provision in the option agreement that you could sublease the property to someone else. This way your monthly rent to the owner if any is covered plus you got to keep the difference between your tenant’s rent payment and your monthly obligation to the owner.
In order for you to build equity towards the purchase of the property at option maturity, you could include in the agreement that a portion of your monthly obligation will go to the purchase price of the property. What’s more exciting is that when you have a subtenant, the rent you get from your subtenant will pay your monthly obligation plus it’s building equity towards the purchase price. This is a great capital saver for you.
Some properties offered for optioning, however, are problematic. The owner could be facing looming foreclosure or government reacquisition so that you could be in big trouble if you signed up for an option with these kinds of property – you could lose your money. A thorough background check, however, should prevent this from occurring.
About the Author:
Author Jack Cockrel is a real estate investor based in Atlanta, Georgia. He has transacted more than 750 properties since 1996. For Real Estate Investing Tips get his Free Online Course Real Estate Investing Free Online Course.