Investing in Options to Purchase May Be the New Wave of Securing a Great Deal

Investing in Real Estate typically requires cash and in some cases a lot of cash. In a credit crunch environment getting in on a good deal is frustrating and difficult without a large sum of ready to invest cash. Another consideration is an Option to purchase. Here are the fundamentals:

1. A seller is willing to accept a given price from you at some future time for an upfront cash payment from you, oftentimes 1% or more of the purchase price.

2. The option specifies that amount of time you have to perform in the purchase. This period of time can be months or years, the longer the better.

3. Once the seller has accepted the agreement and the option money from you the seller cannot sell to another buyer within the time period set in the option agreement.

4. As the buyer of the option you are not obligated to close the deal but the option money remains with the seller as non-returnable to you. The seller cannot pursue you in a specific performance suit.

5. As the buyer you will want to follow market pricing up until you near the expiration of the option. If the values have increased you will want to purchase the property. If the values have lagged or declined let the option expire.

6. If you have secured an option and the value has soared but you are short of cash or do not want to close several avenues are available to you. Involve a partner in the deal who will share the gains with you. The other is to sell your option to another for a premium. In some states, dealing in options requires licensing from possibly the Securities Exchange Commission or the Department of Real Estate. Follow the law on this one because they will come and get you if you don’t.

7. Allow only a licensed Attorney to draft an Option agreement. Seller’s may not want to close if the property value soars and an ironclad option is what you will want when that happens and it will.

Options are not for the faint hearted. If you invest $25,000 in options purchases on say 5 properties you can expect perhaps 2 of them to be worth closing prior to the expiration of the option. The increase of value must at least $25,000 plus any costs to break even. Developers typically prefer options for several reasons. The first being is it assures them of future land to develop. The second is that it take years to have a parcel of land approved by the city or county for a project and if it does not receive favor with the county or city for development a developer will not want it, thus the option. The third reason, there are possibilities of being sued for specific performance if everything goes south.

Not all sellers will be excited about an option but for a buyer the option is a wonderful way to control large amounts of real estate in speculation without being at a tremendous risk in the market. With real estate prices struggling some sellers might take the cash and run the risk of having you end up with a cash cow.

Properties which are not suitable for an option would be financed properties, or properties in trouble with financing. If a seller gets in trouble and loses the property to the bank, say goodbye to the option money paidand the future gains of the property. You may have a legal action against the seller, but chances are they will be broke long before you get your hands on them. Before jumping into options find a Real Estate broker who can advise you in options. Not all real estate agents have a firm grasp on this concept. Start with something small and then move on to something bigger suchas a 20 acre parcel, 4-plex or small apartment complex. Investing in land options requires more cash in the end because banks are tough on land loans and in many cases will not lend at all. If you need financing to exercise your option stick with improved properties. Enjoy the wonderful world of options!