An option is defined as the right to buy something within a certain amount of time at a certain price with certain terms. But you have no obligation to follow through and buy it.
Example of a Simple Real Estate Option:
Let’s imagine you want to build a home on a piece of land that is for sale for $25,000, but you are not sure you’ll be able to. Since you don’t want to lose the opportunity to build on this particular piece of land, you decide to try to “tie it up” with an option. You tell the seller you might want to buy it for full price, but you are not sure about your financing yet.
You explain that if he will give you an option to buy it at $25,000 within the next six months, you’re willing to pay an option fee of $1,000. You don’t have to buy it, but if you don’t buy it within that six months, he gets to keep the $1,000 – and presumably sell it to somebody else. If you do buy it he gets his full price plus that $1,000 (although sometimes the contract is written so that the option fee applies towards the purchase price).
Now lets go one step further with this example. You add “or my assigns,” “or assigns” or something similar (ask an attorney) after your name on the contract. This means that if you can’t buy the property, you can assign the option to somebody else, and they can buy the property according to the terms of the contract. In other words, they can take your place in the deal. You can let your friend buy it, or you can assign it for a fee to someone, and maybe get your $1,000 back.
However, raw land in this market is even better since the seller’s don’t have tons of buyers knocking down their doors looking to buy like they were a few years ago. As a result, you have much more flexibility in your terms. I’ve tied up property for 180 days with a $100 option and still asked for a discount on the price. If you’re short on cash, this is the best way to test the market and find a buyer at a higher price then your option price and do a quick flip.
Many times an option will expire and nothing will have happened – you didn’t find a buyer for it. That means you lose the option fee. That is the primary complaint that would-be options investors have against this strategy. On the other hand, those who know how to work this game just play the odds and don’t worry too much about losing several small option fees to win an occasional huge profit.
Historically, there may never be a better time to dip your toe into the real estate market without having a lot of money saved up for a down payment. Take advantage of it and exercise those options.
