Pure Options Low Risks High Leverage (and returns)

[CashFlowDepot]

I just added a new FAQ about Options to my web site. Here is the overview:

Question:
What type of transaction have you found to be the most profitable?

Answer:
With investments you never know which will be the most profitable until the final inning. Since we don't advocate SELLING investment property, profit is difficult to assess. Where we have made the highest yield based upon invested capitals, Options and Lease/Options clearly take the cake. Typically, I've bought 6 month Options at 80% of current fair market value on a $100,000 house for $100. By selling the Option itself or the property at a price which would be 90% of fair market value, I've made $9900 or 990% on my investment within the 6 month period. That's quite typical.

The real profits are made when an Option is used to control larger properties such as businesses, apartments, condos, land, etc. Direct ownership of these larger properties wouldn't be feasible for most people because of the costs of operation, management, interest, taxes, insurance, etc. On the other hand, buying a pure Option eliminates all expense other than the initial costs, giving the Optionee time to let the market rise or to find a buyer.


Question:
I keep hearing about buying and selling options, but I don't really understand how they work. Please expand on this subject for me.

Answer:
An option is a contracted obligation to leave an offer (to either buy or sell) open for a stated period of time. This obligation is purchased from the Optionor by the Optionee for a consideration which might be anything they can both agree on. Once purchased, the option gives the holder control over rights of sale in a property under specified terms and conditions as to price and payment. Options should be recorded to protect the purchaser, and where large sums or long terms are involved, a Mortgage or Deed of Trust should also be recorded to secure it against any intervening liens or transfers of the optioned property.

In most cases an Option can be structured to prevent any further encumbrances including leases and mortgages. Under current tax law, if held 12 months or more an option can be sold for long term capital gains. When combined with a lease, an option can produce cash-flow and all documents necessary to close the sale can be held in escrow, fully executed, to provide for quick action. In short, an Option is just like a contract to purchase which has been signed by the Seller but not by the purchaser, with the time of acceptance held open for the entire term of the Option. It has all the provisions of any purchase contract to protect everyone.


Question:
What is the ideal vehicle on which to place a five year Option?

Answer:
When we have an Option for five years, the only real benefit we will realize is the appreciation of that property. The cash flow, depreciation, and what little mortgage pay down there is will most probably go to the original owner. Therefore, we should choose a property on which we can acquire an option with as little consideration as possible relative to the amount it will appreciate during the period.

Quite often Options on houses can be acquired for as nominal consideration as one or two years' back taxes. On land investment, when one finds an owner of land who has mortgage payments due and is unable to make them, an Option might be picked up on the property in consideration of making one mortgage payment. Always keep in mind, when negotiating for an Option, that Options are purchased, not given away. Sometimes I hear the comment, "He would not give me an Option" and my response is "How much did you offer?" Rarely is the consideration offered, sufficiently beneficial to the seller, hence no deal!

Question:
When renting with an Option to buy, should the Optionee (renter) try to negotiate the Option price and terms at that time, or should one settle on an "easy" fixed price which the Optionor will accept, hoping to re-negotiate ....

Read more at http://www.cashflowdepot.com/home/pure-options-low-risks.aspx

 

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