Understanding the Option Contract

Option contracts are legal agreements if used correctly will help you make money in real estate with little or no money down out of your pocket. A real estate option contract is defined as an agreement between a seller and a potential buyer of real property that allows the potential buyer the right to buy at a specific price within a specific amount of time.

Typically a deposit or option fee is paid to the motivated seller or property owner for the rights to exercise the option to purchase within the allotted time frame. Because an option is derived from your standard real estate purchase contract, it’s considered a financial derivative. This means that the contract itself can be transferred or assigned, and may be sold to another cash buyer or real estate wholesaler for a profit.

One of the greatest things about an option contract is the freedom it provides you. Depending on how you set the terms it can give you more time and flexibility to secure financing, complete inspections, attract business partners, find cash buyers, due-diligence period market the property or investigate potential pitfalls. Securing an option to purchase real estate means that while you’re researching the condition of a property, its title or lien history, and all the things that could affect its value and give you the ability to close, you won’t be at losing anything using the option to purchase correctly. Once you’ve completed all your research, obtained your funding, located a another investor buyer or gathered up all your partners, you can then execute the option or decide to pass on the deal if it seems like a bad deal. No harm, no foul.

Let’s look at the mechanics of how these deals work. Say a motivated seller contacts you from one of your direct mail campaigns. The motivated seller wants to liquidate there property for $100,000 dollars which is the equivalent to fifty percent of its true market value. You’re the first real estate investor to hear about it however you don’t have the cash in hand, but you’re pretty sure you can get it shortly or find someone who’s interested in buying the house outright for the market value. What you can do is negotiate with the motivated seller to accept an option to sell for the price they’re looking for or maybe even a less. If you know the property will sell at least sixty percent of the market value, you can sell your equitable interest in the property for sale that’s stated in the terms your option contract. For example, I use options to partner up with other real estate wholesalers who can’t find buyers for their current wholesale deal inventory. Simply by stating in the terms that “once I locate a qualified buyer with an earnest money deposit I will have my end buyer sign an assignment contract to the rights of the original sales contract”. On the other hand, when I am not partnering up with another real estate wholesaler I can simply assign my rights to my option contract I have with the original motivated seller to my end buyer with the same assignment contract that will have terms in it to ensure the rehabber or buy & hold investor will perform.

In short, using real estate options are an excellent method for a real estate investor to complete his or her due diligence around a property before jumping in head first. Or if you spot a “killer” deal on the market that is impossible to pass up, you won’t have to empty your pockets to close on the deal. No matter what property you’re looking at buying whether residential, land, or commercial, an option can be one of the best ways for you to control the real estate with little money out of pocket. And on top of it, you can just sell your option, forego if you’re having second thoughts or can’t find a buyer.

I”ll See you at the closing table,

Marcel Umphery the “R.E.I. Successmaker”