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Real Estate Option: Powerful Strategy For The Buyer

Jan 29, 2008
A real estate option is best understood by understanding its definition first before inspecting one-by-one its many benefits for the buyer/investor. In simple terms, a real estate option is a right given by a property owner towards the option buyer to buy or not to buy the property for a known amount (strike price) during an agreed period of time - it's a right and not a legal obligation to buy. A property owner for example may sell his property for an option to someone; the option buyer is given the chance to buy the property during the period of the option. The option buyer's hope of making a profit is when the property's value increases during the period of the option.

If you're looking for a strategy that will lower the risks, allow leverage, and cut on cost, then the real estate option is it. This strategy also makes possible to minimize downside and an option consideration lower than an earnest money.

To really use the full benefit of this strategy, we need to examine closely each benefit and the other benefits of this strategy.

The most advantageous benefit of real estate option is the full control over the property by the buyer of an exclusive option. While the option is in effect, you're sure that there will be no other buyer that can lay their hands on the property during the period of the option. Even if you've not fully owned the property yet, you now have full control regarding its availability.

The second benefit of real estate option strategy gives you a chance to lower your risk against decreasing property value, if you're the buyer. In case the property value dips during the maturity of the option, you can just opt not to buy the property. Thus saving you money by avoiding paying a higher price than the current property value - you will still lose the option consideration, but there's no legal charge you should face whatsoever.

Not only this strategy can be a great money saver, it could be a leverage builder, too. To do this, you should include a provision in your agreement between you and the property owner to allow you to sublease the property to another person. You could generate income from the difference of the rent money your tenant pays you and your obligation to the property owner. You could practically say that your rent is being paid by another person in this sense.

In order for you to build equity towards the purchase of the property at option maturity, you could include in the agreement that a portion of your monthly obligation will go to the purchase price of the property. What's more exciting is that when you have a subtenant, the rent you get from your subtenant will pay your monthly obligation plus it's building equity towards the purchase price. This is a great capital saver for you.

Before signing up for anything, however, be sure to check the title and the status of the property. Some problematic property offered for option has the risk of being foreclosed or reacquired by the government so that instead of making money, you'll lose money instead. Therefore, you should now fail to double check any property you're interested to buy an option to.
About the Author
About the author: Jack Cockrel is a real estate investor in Atlanta, GA. 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.
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