By Dave Dinkel |
Option contracts are legal and binding agreements between a buyer and a seller of residential or commercial property. Their power lies in the ability of the buyer (Optionee) to control a property for a small amount of money and for a limited time instead of an outright purchase with its associated market risk. But the agreements between the seller (Optionor) and the Optionee also have benefits to both parties.
The advantage of an option contract to a seller is that he will receive some income while his property otherwise would not produce this income. The amount of the option consideration may be small compared to the value of the property, but it also gives the Optionor the ability to have his property on the market usually at a non-distressed price. If the Optionee does not exercise the option contract, the Optionee will forfeit his option consideration or deposit to the Optionor.
The Optionee had huge leverage with a relatively small amount of cash to control the Optionor's property for a fixed time period, possibly with extensions if originally negotiated into the contract. While these option considerations can be in the millions of dollars for commercial properties, the average investor will be dealing with deposits in the area of $100 to control single family homes (SFH) or smaller non-commercial multi-family units (less than 5 units).
For real estate investors the option contract has a primary use of controlling a seller's property until the investor can find a buyer at a higher price than his strike or exercise price. The amount of time to do this varies by negotiation with the Optionor but is usually one year or multiples thereof. When an end-buyer is found and a closing date set, the investor will arrange to exercise his option and possibly do a double closing if the profit is over $20,000.
If the profit is less than $20,000 or the option is part of a short sale, the investor can file a Notice or Memorandum of Option Contract (NOC) in the public record. This document is essentially a lien against the property that will be extinguished at closing. The closing agent will handle the NOC as a lien against the property, have the investor sign a Release of Lien, and pay the investor the amount of money agreed to by the investor - his profit on the transaction.
Another use of these option contracts is where an investor is in competition with other investors for a property. The other investors are bidding on the property with a cash closing in mind and keeping as much of the profit spreads as possible. An investor who is option contract savvy can bid far more for the property because his investment in the property is his minuscule option consideration.
Option contracts work well where the seller is not truly motivated to sell and is looking for the maximum possible sales price especially for higher priced homes. The investor can always allow the seller to take a higher price than his option's strike price. This allows the seller less risk of getting stuck in a controlling option for an extended time. If the seller is motivated, meaning they want a solution to their problem of selling the property rather than the highest price, the investor can offer a shorter term for the option - as little as a few weeks to a few months.
In summary, option contracts are as powerful as deeds to a property. When used with a strong marketing program to sell the property, they allow an investor to control a substantial asset to closing with a minimal option consideration. Transactional funding may be necessary if there is a double closing involved, but the lien release method allows for collecting a profit; a seller can transfer his property directly to an end buyer without the seasoning issue that can kill so many deals.
About Author: Dave Dinkel has over 35 years experience in real estate investing which has given him a unique perspective into the real estate market. In case you haven't seen it yet, take a minute to see 15Ways to Make Money in Real Estate investing with No Money http://www.15wayswithnomoney.com. If you need to sell your home quickly, even if it is upside down, here is an answer - Sell Your Home in Days at Full Market Value http://www.fsbopowersellingsystem.com. Article Source: http://EzineArticles.com/?expert=Dave_Dinkel |  |
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Article Submitted On: November 23, 2010
Article Submitted On: November 23, 2010
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