Information Articles

For us to begin the inspection of why a real estate option can be a powerful strategy when it comes to making maximum profit in real estate, we first need to know what real estate option is. A real estate option is defined as the right – not the obligation – to buy a property for a specified price (strike price) during a specified period of time. An owner of a property may sell an option for someone to buy it on or before a future date at a predetermined price. The buyer of the option hopes the value of the property will either go up.

This is a powerful strategy when you want to reduce risks, create leverage, and save capital. Another big advantage is that the option consideration is usually lower than an earnest money, and you have less downside.

There are other benefits that a real estate option could bring to the buyer like those being mentioned above so that it is best to inspect them one-by-one to really avail its benefits.

The obvious and perhaps the most advantageous benefit of real estate option to the buyer is its ability to give the buyer maximum control over the property in case of an exclusive option. The buyer is sure that the property is out of reach of any other buyers while the option is in effect. In a sense this is already control of the property without spending the money to purchase it yet.

The buyers are also given protection against the possibility of a higher price than the current property value. For example, if by unfortunate circumstances the property value plummets when the option matures, the buyer can just say no to the purchase of the property without the fear of being sued. Therefore, you escape paying big money for a property with less value during the maturity of the option – a great money saver strategy.

Creating leverage with very minimal or virtually no cost involved is also possible with real estate option. If you’re the investor, you could put as one provision in the option agreement that you could sublease the property to someone else. This way your monthly rent to the owner if any is covered plus you got to keep the difference between your tenant’s rent payment and your monthly obligation to the owner.

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.

Some properties offered for optioning, however, are problematic. The owner could be facing looming foreclosure or government reacquisition so that you could be in big trouble if you signed up for an option with these kinds of property – you could lose your money. A thorough background check, however, should prevent this from occurring.