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Basics In The Game Of Real Estate Option Transactions
In the world of stock markets, there is a financial instrument called an “option”. There are many types and variations of options that allow it’s owners to do a variety of things in the stock market. An option basically allows you to do a specific action within a specific period of time.
For example, you can purchase 10,000 shares at $1.55 within a period of 6 months. Meaning that if the price of that particular stock goes up to $2 within the time period, you have got money in the bag as you can essentially buy the stock at $1.55 and sell it for $2. To eliminate hassle, if the owner of the option initially bought the option for $1, he can just choose to sell the option to a buyer for $1.45. The profit is the same $0.45 if both transactions are compared side by side.
In the world of real estate, options are in play as well. They don’t work in exactly the same way as the ones in the financial markets. But they serve the same basic principle. The owner will have the right to purchase a particular item at a specific price within a specific time frame. This inevitably means that owners of these real estate options can profit from selling these options from interested buyers as well just like the stock markets. And we are not just talking about lease options.
7 key elements of real estate options
1) Optionee. This is the party that is purchasing the option. If the option to purchase is exercised, the optionee officially becomes the buyer.
2) Optioner. This is the party that is selling he option. If the option to purchase is exercised, the optioner officially becomes the seller.
3) Option to purchase (real estate option). This is the legally binding contract which states that a party has the irrevocable right to purchase a specific property from the selling party at a specific price within a stated period of time.
4) Option fee (consideration). This is the amount of money that the optionee has to pay to get the real estate option.
5) Option period. This states the specific time period where the option and it’s terms are valid. It can be stated as a specific date or a period of time. E.g. 2 weeks from date of option.
6) Exercise. This is the event that occurs where the buyer officially informs the seller in writing that the real estate transaction will go ahead according to the terms in the option to purchase.
7) Option expiry. This happens when the option to purchase has lapsed without being exercised.
You need to know: What lenders hope you never learn about mortgages
“As legislation varies from state to state and country to country, you should check out how option transactions work in your area before going into it.”
In order to sell an option, all the owner needs to do is reassign the optionee in the name of the buyer. This is a common practice of speculators of sub-sales under construction condominiums. If you are new to this form of property flipping, you might ask why anyone would want to transact real estate options. There are actually a number of advantages of going this route.
- Don’t have to get a loan to purchase the property outright.
- Don’t have to commit to monthly instalments for the mortgage
- Don’t have to worry about baggage that came with the property
- The prospect of foreclosure will not even be on your mind
- No worries of tenant issues especially rental collections
- No possibility of going through evection
- No need to go into debt
- Don’t have to worry about marketing your property to tenants
- No hassle of maintenance and repair worries
- No need to worry about administrative work for managing property
And if you have problems getting a lender to provide financing for real estate, the game of options mean that you do not have to go through credit checks, income checks, employment checks, and not even your income tax statement in the most recent years. This is because you will not be going to a lender for any loans. You just pay a small amount for an option, and you are ready to go. But of course, you need to have a plan before jumping head first into option acquisition. In particular, you must work out approximately how much you will be able to to profit from flipping the option. And also bear in mind that there is an expiry date for your plans to execute successfully.
As with any investment, there will surely be risks as well. For a better chance of success with investing in options, keep these rules of the trade in mind.
1) Learn how options work
2) Profit when you buy
3) Know you exit before you enter
4) Anticipate ripple effects of problems
5) Walk away if you are not sure what you are getting into
6) Have a specific goal in mind
7) Know you way around problems instead of confronting them head on
8) Buy where you are most legally protected
9) Never assume
The best types of properties to buy options on are:
1) Properties that are not fully utilizing the zoning that it is eligible for
2) Rental properties that are not well managed by their owners
3) Run down properties that you can easily give a face lift
4) Homes with big undesirable issues that you can put right