For us to begin the inspection of why a real estate option can be a powerful strategy when it comes to making maximum profit in real estate, we first need to know what real estate option is. A real estate option is defined as the right - not the obligation - to buy a property for a specified price (strike price) during a specified period of time. An owner of a property may sell an option for someone to buy it on or before a future date at a predetermined price. The buyer of the option hopes the value of the property will either go up.
When you want to decrease risks, generate leverage, and save on cost, a real estate option should come in handy. The lesser downside and the lower than an earnest money option consideration is an advantage of this strategy.
The other benefits of this strategy aside from being mentioned above and knowing each closely will allow you to exploit its full benefits.
The number one benefit of a real estate option is possible in an exclusive option: the option buyer is given full control over the property during the option's period. That is to say that the property is not available to other buyers while you hold the option. Even though you have not spent purchase money yet, you have 100% control over the property.
The buyers are also given protection against the possibility of a higher price than the current property value. For example, if by unfortunate circumstances the property value plummets when the option matures, the buyer can just say no to the purchase of the property without the fear of being sued. Therefore, you escape paying big money for a property with less value during the maturity of the option - a great money saver strategy.
The third advantage of real estate option is the possibility to create leverage with practically zero cost or only a minimum cost involved. The agreement between you and the property owner could be set to allow you to rent the property to a third party so that you could earn cash flow while the option is in effect. Your monthly obligation to the owner can now be paid by the third party plus you can keep the extra if any.
Another option you could include in the agreement is a provision wherein a portion of the option consideration will go to the purchase price of the property at option maturity. This way you could save your capital needed to purchase the property if ever you decide to buy it. Also, if you have a subtenant, your subtenant is practically the one paying your capital for you.
Some properties offered for optioning, however, are problematic. The owner could be facing looming foreclosure or government reacquisition so that you could be in big trouble if you signed up for an option with these kinds of property - you could lose your money. A thorough background check, however, should prevent this from occurring.
When you want to decrease risks, generate leverage, and save on cost, a real estate option should come in handy. The lesser downside and the lower than an earnest money option consideration is an advantage of this strategy.
The other benefits of this strategy aside from being mentioned above and knowing each closely will allow you to exploit its full benefits.
The number one benefit of a real estate option is possible in an exclusive option: the option buyer is given full control over the property during the option's period. That is to say that the property is not available to other buyers while you hold the option. Even though you have not spent purchase money yet, you have 100% control over the property.
The buyers are also given protection against the possibility of a higher price than the current property value. For example, if by unfortunate circumstances the property value plummets when the option matures, the buyer can just say no to the purchase of the property without the fear of being sued. Therefore, you escape paying big money for a property with less value during the maturity of the option - a great money saver strategy.
The third advantage of real estate option is the possibility to create leverage with practically zero cost or only a minimum cost involved. The agreement between you and the property owner could be set to allow you to rent the property to a third party so that you could earn cash flow while the option is in effect. Your monthly obligation to the owner can now be paid by the third party plus you can keep the extra if any.
Another option you could include in the agreement is a provision wherein a portion of the option consideration will go to the purchase price of the property at option maturity. This way you could save your capital needed to purchase the property if ever you decide to buy it. Also, if you have a subtenant, your subtenant is practically the one paying your capital for you.
Some properties offered for optioning, however, are problematic. The owner could be facing looming foreclosure or government reacquisition so that you could be in big trouble if you signed up for an option with these kinds of property - you could lose your money. A thorough background check, however, should prevent this from occurring.
About the Author:
About the author: Jack Cockrel is a real estate investor in Atlanta, Georgia. He has made more than 750 real estate transactions since 1996. For Real Estate Investing Tips get his free course Real Estate Investing Free Course. Visit the Uber Article Directory to get a totally unique version of this article for reprint.
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