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The Options Game in Real Estate

Options are almost like a reservation on a piece of property, but at an agreed upon price and you pay for that option until you actually purchase the property. What you pay is called consideration, whether it’s a certain percentage of the value of the property or another agreed upon figure between you, the buyer, and the seller.

The lower the consideration and the longer the option the better for you as the buyer, since it gives you more time to either find another buyer or gather the money to buy the property, lease the property, or even sell the option.

You can find sellers who are willing to option a property in advertisements in the newspaper or make an ad yourself that states you’re seeking options to purchase property. This gets to the question of what’s your niche as an investor? What type of property do you buy? What strategy do you undertake? What’s your plan? How much money will you make and or lose?

Motivated sellers might be willing to option the property in order to get some cash in their pockets right away and pay off debts. Remember the characteristics of a motivated seller: out of town owner, retiree, new job, family growth, loss of job, and so on.

Holding an Option

The question remains though, how much consideration are you paying and what's the reason the seller is giving you the option. Is this earnest money that goes towards the possible purchase of the property? Have a contract written up to ensure the terms are clear.

Like a lease, with an option you want as much of the money as possible to go towards the principal. Additionally, you want to make sure the owner isn’t on the verge of foreclosure and ready to just take your money and walk away from the property. If it’s too good to be true it usually is.

With a long term option to buy you could gain value via appreciation, but usually the option to buy is given for a short period of time. Options are an experienced investor’s arena, but if you have a good plan in place, it's certainly something to consider. The value of an option is in your ability to lock into a price and then you time to find buyers or gather enough funds to buy the properties yourself.

Commercial Options

Tenants are crucial to a property, if you can secure a tenant, then the option to buy is a no brainer, and that one tenant can lead to another tenant or potential buyer—and the longer the lease agreement with that key tenant, the more the property value increases, since it lowers the risk.  The cash flow is in place for the long term.

Doing your research enables you to make a decision on your option. If you know a new grocery store, school, park, public transportation extension, or stadium is going in place, the outlook of the area changes entirely, your option, at the locked in price is golden. Negative cash flow for a period of time while you're optioning the property can be recouped if appreciation balance things out.

From the Owners Viewpoint

If you’re an owner giving the option to purchase to a tenant, it’s a good idea to have ‘right of first refusal’ in place. This way you can get a good price for your property.  If you have a buyer lined up, you still have to go to the tenant and offer the property at the terms the buyer is willing to pay, but this allows you to get market value for the property.

As the owner of the property, if you’re leasing a property with the option to buy, then the tenant has a vested interest in the property.  They will take care of the unit and they're more likely to buy the property if a lot of their money is going towards the principal each month.

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