If you are new to real estate investing, and you have not yet learned about using options, you are missing out on an incredible tool. Learning how to use options will enable you to hold large amounts of property with very little money. In fact, options offer one of the best leverage situations in the business. Once you learn this technique, you will be well on your way to turning many more deals that you ever did in the past.
An option is a unilateral agreement. It involves a buyer and a seller. However, it is binding only on the seller. You as the buyer make an offer to purchase this property sometime in the future, but you are not bound to do so. You could walk away at any moment.
The seller on the other hand, promises to accept a certain amount for the property at a designated time in the future, and that seller is obligated to follow through and honor the contract.
The option agreement could be set for anywhere from 3 to 6 months, or several years. Meanwhile, you have the property tied up, and you now have plenty of time to find the right buyer. During this time, you need not keep up the property nor do you have to pay any taxes.
Creating the Agreement
The option agreement will spell out several stipulations:
o Price (consideration) to be paid for the option
o Time – when the option will begin and when will it expire
o Strike Price – the mutually agreed upon purchase price of property during the option period
o Other terms and conditions of the option agreement
If you, as the buyer, decide at the end of the option period not to buy, you lose your initial deposit and that is it. No legal problems ensue as they might with a broken contract. This means you are not unduly entangled in a legal agreement that could create complications down the road.
For the option to work well, you must be fully aware of the prices in the area of your bargain property. Especially if you plan to hold the option for a couple of years. Make sure this is in a location where the prices will be on the increase.
Use Options to Flip or Hold
Now that you see the basics of how an option works, you can see how it would be possible to use options to control a piece property for short time. During that time, you can be seeking out a buyer (this might be another investor – perhaps a rehabber) and sell it for a higher price than the option amount. With this process you’ve made a quick profit with no out-of-pocket investment other than the small amount you put down to bind the option agreement.
One other strategy that you might consider in conjunction with the option, is to include a clause allowing you to sub-lease the property. This will be done during the option period. If you can find a renter for the property, now the mortgage payments are taken care of. In this day and age of multiple foreclosures in every neighborhood, you can easily find a seller who is strapped with payments and who would rather allow you to lease than have to struggle to make those monthly mortgage payments. You will have stepped in and helped to ease this seller’s pain. In a year or two, the tenant may qualify for a conventional loan, at which time you will purchase and sell at the same time and make a good profit.
When you use options to hold property, you are using one of the most powerful creative financing methods available. Take the time to do a little research and learn all you can about options.