Options - whether you're buying or selling, they're a great tool!

Options are widely used in many markets because they offer great flexibility with reduced risk for the holder of the contract. They are extremely useful in real estate markets because they confer upon the holder of the contract the right, but not the obligation to buy, sell or lease real property.

How do they work for buying?

These agreements can be used to buy property either as an independent contract or in conjunction with a lease.

An independent contract can be used by a real estate investor to secure the right to buy property at a certain price with the intention to quickly sell the property for a higher price. The investor pays the owner a fee, called the option deposit or premium, to acquire the right, but not the obligation, to buy the property for a set price within a set period of time.

Having tied up the property for the time being, the investor can then look for a buyer who is willing to buy the property for a higher price. If the investor is successful in finding a buyer, the investor then exercises his contractual right to buy at the lower price with the assurance that he has an immediate buyer for the higher price. If the investor is unsuccessful in finding a new buyer, he can simply forfeit his premium deposit and not exercise the option.

Alternatively, if the investor finds a new buyer, he can sell his contract right to the new buyer in exchange for an amount equal to his anticipated profit, and the buyer can then exercise the contract right to buy at the lower price.

Likewise, a developer might use independent contracts to acquire a number of properties from various owners of adjacent properties with a view toward putting together one large project. This has the benefit of setting up the purchase of a large area of land with a reduced risk of some of the property owners jacking up the price. This also has the benefit of allowing the developer to pass on exercising the contract rights if he is unable to acquire enough land to make the project work. This technique is particularly helpful if the developer uses various agents to acquire the options under different names. Disney is reputed to have used this technique in acquiring land in Orlando.

Options are often coupled with or made a part of a lease of the real property. This technique is used both in commercial properties and residential properties.

A tenant in a commercial lease often seeks to obtain two types of options - one a right to extend the lease for one or more additional terms, and the other a right to purchase the property for a set price during the term of the lease. This situation is common in commercial market.

This scenario is becoming more common in the residential market also - both for investors and tenant-consumers.

An investor can use this technique to control a property, put it under contract, and sublease it to a prospective buyer - all without the risk of falling property values and loan obligations. The investor is only obligated through the term of the lease.

If a residential tenant-consumer is able to couple a right to buy the property with a lease of the property, it gives the tenant some incentive to take care of the property and the hope that he can eventually own the property. This is a great alternative if the tenant doesn't have good credit or the down payment necessary for a purchase of the property.

If these agreements are such great deals for buyers, what's in it for sellers?

In the present real estate market with its glut of foreclosures and the disappearance of easy credit, sellers are having a much more difficult time selling their property. The spigot for cash buyers has been turned off. Sellers have been forced to lower their prices and to find alternative ways to sell their properties. A great alternative is the lease option.

Now, instead of simply listing a property for sale, many owners are finding it necessary to offer their properties as

"Rent to Own." This has lots of advantages to the seller/owner:

• It puts an occupant in the property rather than letting it sit vacant.
• It creates a monthly cash flow.
• It puts a tenant in possession who is more likely to have pride of ownership and to treat the property as his own.
• It creates the opportunity for "cash now," that is, it creates the opportunity for collecting a non-refundable option deposit. This deposit, of course, should be allowed as a credit toward the purchase price if the tenant exercises the right to buy.
• It creates an opportunity to get a larger monthly cash flow than might otherwise be possible. Here's how: the lease should provide for a monthly rent at market rates. Additionally, the landlord can negotiate for an additional non-refundable monthly amount to be applied toward the purchase price. This monthly payment is to supplement the initial non-refundable deposit with a view toward getting the deposit up to at least 3% of the purchase price.

A thorough understanding of these concepts - and the forms to implement them - is a big advantage in the present real estate market. Dave Guinan offers coaching, teleseminars, and workshops for investors. This affords the investor coaching support, understanding of the concepts, and the necessary forms to operate in this changing environment. If you would like more information about what Dave Guinan has to offer, click here.

Return from Options page to Real Estate Law page