From the PMs I have been receiving I can tell there is some confusion about what an OPTION is.
An Option is simply a contract which contains a contingency clause. The contingency clause could state that you need to line up financing first, you need to find a good tenant first, or that you need approval from your investment partners before you will close.
The contingency will usually have a time frame associated with it.
Options can be used for old run down houses(wholesale deals), for nice houses in nice neighborhoods, multi-million dollar homes, apartments, mobile home parks, land, etc.....
For wholesale flips, you usually allow 2 weeks to get approval or sell to your investment group. Then perhaps another week to close.
When you get an option on a nice house in perfect condition, you would usually allow 1-2 weeks to do a Highest Bidder Sale to find a buyer, then another 30 days to close (unless you are selling with seller financing then it only takes a few days to close.
An Option could even be for many years later. In my Crazy Hawaii Option deal, the option was for 10 years.
The Option allows you to control the property during your contingency clause period. You have control of the equity too. So, your Option needs to be written for less than the value for you to make a profit.
Your profit is the difference between the Option strike price and what you actually sell the property for.
Sometimes Options are written that you will split difference between the Option strike price and what you sell the house for. I use this strategy a lot to help get the Option price LOW and increase my profits.
If you combine a Lease with an Option, you can control the cash flow AND the Equity. This is more of a long term strategy.
But you do not need to get a Lease. You can only get an Option.
With an Option, the seller has the obligation to sell to you at the Option strike price by the Option date. For long term Options it is best to record a Deed of Trust or Mortgage to secure your Option... especially if there is a substantial profit involved.
But you do NOT have the obligation to buy. This is what makes Options RISK FREE. You can cancel your option at any time. If you put up an Option consideration, you will lose it or part of it, but you do not have the risk of being forced to buy the property. That is why it is important to put up as little option consideration as possible. ( think about how much money a real estate agent puts up to control a property for a 6 month listing = $0)
Here's an article to help you understand Options:
A real estate Option is the most useful of all real estate tools when it comes to making money. Not only can it control future profits, but also current profits when used for that purpose. We are all familiar with the benefits of Optioning land at a given price, then getting it rezone for a higher use, or finding a builder/developer who will joint venture to increase its value, or putting a mobile home on it to increase its value before exercising it.
A less known use of Options is when a property is being bought by you under a Lease/Option. Your Option can call for high Option payments, each counting toward the purchase price, and low rent payments. It could also be used to motivate a seller to hold the rents constant for several years prior to exercising the Option. When you subleased the property, your low rents would generate extra cash flow for you.
You might even negotiate a portion of the rents to also be applied toward the purchase price; so during the term of the lease, you could build equity by having a portion of the rents counted toward the purchase price.
The key to his is that your lease would give you the right to sub-lease, so your tenants could be paying the rent and earning credits toward the Option price that you will be able cash in on.
Another use of an Option is to control rents, and thus control value. Suppose you were renting a house and were willing to pay the landlord extra rent for an Option to Lease the house at a set rent for a number of years. This would set a cap on the rents even though the operating expenses, taxes, insurance, etc. might be climbing. If you subleased the property, each successive tenant could be paying more rent to you out of which you’d be paying the same low rent to the landlord.
Even though you had no Option to buy the property, at some point in the future the owner may approach you to buy the property because your low rents are going to cost him more than he is making after paying his rising costs. Your lease will make the property very unattractive to other landlords, and you might be the only buyer. You might be able to convert your lease into ownership of the property at a heavily discounted price.
On the other hand, for years, in lieu of rental deposits, I have used a payment for an Option to extend my Rental Contract for another year at a rent of no more than 10% more than the current rent. For this I am paid a sum roughly equal to what would have been a rental deposit, but which differs in that it will not be returned nor ever counted toward the rents.
An Option is simply a contract which contains a contingency clause. The contingency clause could state that you need to line up financing first, you need to find a good tenant first, or that you need approval from your investment partners before you will close.
The contingency will usually have a time frame associated with it.
Options can be used for old run down houses(wholesale deals), for nice houses in nice neighborhoods, multi-million dollar homes, apartments, mobile home parks, land, etc.....
For wholesale flips, you usually allow 2 weeks to get approval or sell to your investment group. Then perhaps another week to close.
When you get an option on a nice house in perfect condition, you would usually allow 1-2 weeks to do a Highest Bidder Sale to find a buyer, then another 30 days to close (unless you are selling with seller financing then it only takes a few days to close.
An Option could even be for many years later. In my Crazy Hawaii Option deal, the option was for 10 years.
The Option allows you to control the property during your contingency clause period. You have control of the equity too. So, your Option needs to be written for less than the value for you to make a profit.
Your profit is the difference between the Option strike price and what you actually sell the property for.
Sometimes Options are written that you will split difference between the Option strike price and what you sell the house for. I use this strategy a lot to help get the Option price LOW and increase my profits.
If you combine a Lease with an Option, you can control the cash flow AND the Equity. This is more of a long term strategy.
But you do not need to get a Lease. You can only get an Option.
With an Option, the seller has the obligation to sell to you at the Option strike price by the Option date. For long term Options it is best to record a Deed of Trust or Mortgage to secure your Option... especially if there is a substantial profit involved.
But you do NOT have the obligation to buy. This is what makes Options RISK FREE. You can cancel your option at any time. If you put up an Option consideration, you will lose it or part of it, but you do not have the risk of being forced to buy the property. That is why it is important to put up as little option consideration as possible. ( think about how much money a real estate agent puts up to control a property for a 6 month listing = $0)
Here's an article to help you understand Options:
A real estate Option is the most useful of all real estate tools when it comes to making money. Not only can it control future profits, but also current profits when used for that purpose. We are all familiar with the benefits of Optioning land at a given price, then getting it rezone for a higher use, or finding a builder/developer who will joint venture to increase its value, or putting a mobile home on it to increase its value before exercising it.
A less known use of Options is when a property is being bought by you under a Lease/Option. Your Option can call for high Option payments, each counting toward the purchase price, and low rent payments. It could also be used to motivate a seller to hold the rents constant for several years prior to exercising the Option. When you subleased the property, your low rents would generate extra cash flow for you.
You might even negotiate a portion of the rents to also be applied toward the purchase price; so during the term of the lease, you could build equity by having a portion of the rents counted toward the purchase price.
The key to his is that your lease would give you the right to sub-lease, so your tenants could be paying the rent and earning credits toward the Option price that you will be able cash in on.
Another use of an Option is to control rents, and thus control value. Suppose you were renting a house and were willing to pay the landlord extra rent for an Option to Lease the house at a set rent for a number of years. This would set a cap on the rents even though the operating expenses, taxes, insurance, etc. might be climbing. If you subleased the property, each successive tenant could be paying more rent to you out of which you’d be paying the same low rent to the landlord.
Even though you had no Option to buy the property, at some point in the future the owner may approach you to buy the property because your low rents are going to cost him more than he is making after paying his rising costs. Your lease will make the property very unattractive to other landlords, and you might be the only buyer. You might be able to convert your lease into ownership of the property at a heavily discounted price.
On the other hand, for years, in lieu of rental deposits, I have used a payment for an Option to extend my Rental Contract for another year at a rent of no more than 10% more than the current rent. For this I am paid a sum roughly equal to what would have been a rental deposit, but which differs in that it will not be returned nor ever counted toward the rents.
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