Who makes money on real estate deals? The seller does, the realtor does, the title insurance company does, and the tax collector does. But you'll quickly notice the buyer is the one paying out all of the money without making money. As an investor, you want to be on the selling side of the transaction. Options on real estate is the only way to always be on the selling side.
Most people understand the basics of options on real estate. It's having exclusive control over the property for a specific period of time without having the obligation to buy. It's extremely low risk with almost no down side. This becomes evident when you consider what options on real estate are NOT:
There are many other things that options on real estate are not. The main point is that you are not obligating yourself to making a stream of payments, to make repairs, or any other financial obligation. You simply want to be able to assign the option to someone else and make a reasonable profit for finding an end buyer.
One benefit you can use to convince sellers to go with an option is the fact they can net more money on a sale. If they go with a traditional investor, they will have to sell at a deep discount. Selling through a realtor, means paying a hefty commission. They could do a "for sale by owner" if they have the time and knowledge. Or they can use your time and knowledge of the options method.
A preferred way of structuring an option agreement is only agreeing to pay the seller an option fee after you have a potential buyer ready to enter an option agreement with you. That puts your risk at practically zero. Should anything go wrong with the deal, you can always leave the option fee on the table and walk away without any further financial obligation.
An option gives the investor the exclusive right to buy the property but doesn't obligate the option investor to complete the purchase. However, the seller cannot sell the property to anyone else during the option period. An experienced investor makes sure of two things. The cost of the option is typically based on how long the option period exists. Obviously, you want a low option fee.
Keeping the option fee low is as simple as significantly shorting the option period. Tenants taking out a purchase option typically want up to a two-year option period to repair bad credit or for another reason. This can cost as much as 10% of the purchase cost (which is often applied to the down payment when the option is exercised). An option investor has no intention of personally exercising the option. They want to sell the option to a third party. He or she takes out the option for only as long as it takes to find the third party. Something in the range of 60 to 90 days. A short term option can cost as little as a couple of hundred dollars. Then the investor actively markets the house for more than the option purchase price.
That means the investor needs another clause in the original option contract. A clause enabling them to sell the purchase option to a third party.
An investor can convince a seller to go with the option because it avoids the seller's real estate agent's commission. At the same time, it puts a few hundred dollars in the seller's pocket while an experienced investor markets the house. It's a win-win scenario. Successfully investing in real estate takes creativity to find these win-win scenarios.
Real estate laws differ from state to state. Always know the laws in your state.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.