Property options are one tool in the real estate investor’s toolbox which is an amazingly powerful way to control property without actually having to pay for it. Sure, a small payment is made and a contractual agreement is reached. However, in essence, if you have an option over a piece of real estate, you have more control over it than the registered owner of it.
Real Estate Is A Fickle Mistress
Real estate options have been used widely in the past, but surprisingly sparingly these days, probably because most people don’t know how it works, and find the whole process a bit too difficult. That’s a bit of a disappointment because they can be a great way for real estate investors to expand their portfolio, and build their wealth. That’s why I learned how it works, because I saw the potential and I got a little excited.
Let’s say for example you come across a property that’s a little run down in an area that’s experiencing decent population growth. Since the owners bought the house a decade ago, real estate prices have not quite doubled in the area. After talking to the couple you learn that they would like to sell really because they need the money, but are a bit fearful of the process and what price they might get for the property. You decide that you might like to buy the property, and that it has the potential to rise further in value. So you buy an option over the property – you pay them say $2,000 today in exchange for the right to buy the property at a set predetermined price (say $250,000) in the future (say the next 2 years).
Selling A Property You Don’t Own?
The best thing about options is that the terms are totally negotiable between the parties. The time limit to expiry of the option may be different – as may the dollar figure, but the principle remains the same. You now control that property and it cannot be sold while you hold that option. So this allows you to then go and seek out a buyer for the property and sell it. But how does that work – how can you sell the property if you don’t actually own it? Easy!
Say six months later you find a buyer for the property – and you negotiate a price of say $300,000 for the property. Great! You hold the option over the property right, so you tell the owners, it’s time to go, this is what’s happening, I’ve found a buyer, isn’t that great! They’re happy because they have the $2,000 you paid them for the option, plus you give them the set price for the property, being $250,000. They’ve made a tidy sum in capital gains over the period they’ve owned it. You’re happy too, because you get the $300,000 from the buyers! Deduct the $250,000 you give the owners and the $2,000 for the option, that’s a profit of $48,000 in 6 months!
Real estate options can and do work for many real estate investors and businesses, but you must be sure of the laws in your own state or territory. This is one of those investment areas where it makes good sense to lean on your team a bit. Use your lawyer to draw up the contracts and real estate contacts to source out buyers and sellers. Sometimes you’re just the person to marry them up – for an option and a fee of course. Enjoy!