You may have heard of stock options, or share options – well there are also Real Estate Options, which work in a very similar way to other options products. Options are one tool in the real estate investor's toolbox which is a really powerful way of controlling property without actually having to own it. Sure, a small payment is made and a contractual agreement is reached, but no titles change hands, and that can be to the benefit of all parties involved. 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 not so much 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 a great way for real estate investors to expand their portfolio, and build their wealth. The sheer potential here is staggering – it's a stunningly simple way to build your wealth.
Real estate options can and do work for many real estate investors and businesses, but you must be sure of the laws in your own state or territory. This 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 out buyers and sellers. Sometimes you're just the person to marry them up – for an option and a fee of course – let's see how it works, using an example.
Real Estate Options: How to control property without owning it
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 or two ago, real estate prices have almost but not quite doubled in the area. 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 what price they might get for the property. You decide that you might like to buy the property, and that it has the potential to rise further in value. So you buy an option over the property – you pay them say $1,500 today in exchange for the right to buy the property at a set predetermined price (say $200,000) in the future (say the next 2 years).
The best thing about options is that the terms are totally negotiable between the parties. The time limit to expiry of the option may be different – as may the dollar amount, 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 then go and seek out a buyer for the property and sell it. But how does that work – how can you sell the property if you don't actually own it? This is where the magic is in the deal.
Say six months later you find a buyer for the property – and you negotiate a price of say $250,000 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 $1,500 you paid them for the option, plus you give them the set price for the property, being $200,000. They've made a tidy sum in capital gains over the period they've owned it. You're happy too, because you get the $250,000 from the buyers! Deduct the $200,000 you give the owners and the $1,500 for the option, that's a profit of $48,500 in 6 months!
It doesn't matter how you look at it, that's a great deal. Of course, things might not always turn out so rosy for your option. Sometimes you might not find a buyer for a property you hold an option over. But really, so what? It's not an issue. So you've spent some money and got nothing in return… nothing tangible anyway. I'd argue that you've learned about the property you've had the option over, learned from the people that own it, learned from the potential buyers you've found, but been unsuccessful with… the list goes on. The amount of profits to be made with real estate options far outweigh the small amount you may lose on a deal that doesn't quite happen – it's all a matter of perspective. After all, you win some and you lose some, but real estate options are all about win win win – the owner wins, you win and the buyer wins – everyone is happy! That's the best possible result in any business transaction. Learn and Enjoy!