Property options explained – how to control real estate without actually owning it.
Property options are one tool in the real estate investor’s toolbox, which is a compelling way to control a 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 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 an excellent way for real estate investors to expand their portfolios 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 doubled in size. After talking to the couple, you learn that they would like to sell because they need the money but are a bit fearful of the process and price for the property. You decide to buy the property to boost its value. So you buy an option over the property – you pay them to 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 two years).
Options are appealing since the conditions may be negotiated between the parties. The time limit to the option’s expiry may differ, 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 go then and seek out a buyer for the property and sell it. However, how does it work — how can you sell a property you do not own? 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 work for many real estate investors and businesses, but you must be sure of the laws in your state or territory. It 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 buyers and sellers. Sometimes you’re just the person to marry them up – for an option and a fee, of course. Enjoy!
