How would you like to get paid 3 times in the same deal? If you’d like to have the right to purchase a property or even a piece of vacant land at some point in the future, but pay a price you determine today, you need to seriously consider using the pure option. The option agreement is really a very simple document that spells out in explicit detail the terms under which you could purchase a property. The beauty of the option is that you can decide today how much you’re willing to pay for a property without having to pay for it or even decide whether you want it for a period of time — sometimes years into the future.
Let me give you a good example of how you might utilize an option. Pretend for a moment that you’ve heard a rumor that an exciting new development may be coming to a specific area. While it’s far from certain whether or not it will actually happen, if it does, property values in that area will skyrocket. Wouldn’t it be great if you could lock in an opportunity to cash in on future appreciations in property values and pay today’s prices tomorrow? With an option contract you can.
The key to making this technique work is to locate property owners who may be indecisive about whether or not they’re truly interested in selling. Another way of utilizing this tremendous opportunity is by locating properties that you may or may not actually be interested in buying. If you’re able to locate a seller that is truly motivated sell their property, but you lack the cash to close the deal, you might offer them between $10 and $1,000 for the right to buy their property at any point of your choosing for a two-year period at a price you determine today.
You may experience difficulty in convincing a savvy property owner to give you the right to establish a future selling price today, but it does happen with stunning regularity. You might be surprised to learn this, but many more property owners than you might imagine would be willing to almost give you the right to purchase their property. However, the law stipulates that there must be consideration, and in most cases that consideration is cash.
However, don’t discount the possibility that a motivated seller might be willing to give you an option on their property in exchange for something you may not really need anyway. That’s why it’s always a good idea to listen closely and carefully to what people tell you when you’re involved in discussions with them about their property. Just by listening, you can learn a lot. So keep your ears open, and be prepared to think creatively!
The pure option isn’t the most exciting investment tool under the sun, but when you combine it with a lease/rental agreement, you have one of the most beautiful financial instruments and wealth creation tools in the universe. Done correctly, the lease option agreement can give you a tremendous amount of flexibility as well as multiple streams of income. The key here is to keep the option agreement and the lease/rental agreement as separate documents. I’ll explain why in just a minute. One of the most beautiful aspects of the lease option agreement is that you can purchase a property under the terms of the lease option agreement from a motivated seller and then turn around and sub-lease the property to another party. When you sign a lease option agreement with a motivated seller, they’re going to want you to give them an option consideration. Some people may call it a down payment, but the actual legal terminology is “option consideration”. In addition to this amount, you’ll also be agreeing to make monthly payments to the property owner for a predetermined period of time, such as two years. If you fail to exercise your option to purchase the property within that period of time, you’ll lose the money you gave them as option consideration.
There are three exciting profit centers when dealing with a lease option. When you sub-lease the property to another party, you’ll collect option consideration from them at the time that they sign a contract. Depending on market conditions and their ability to pay, you can generally collect option consideration amount of $3,000-$5,000. This is an excellent way of immediately getting back any money you may have given to the original seller of the property when you signed your contract with them.
In addition to option consideration, the second profit center you have with a lucrative lease option agreement is the spread – the amount between your lease payment amount and your tenant’s. This amount could be as little as $100 per month or as much as several hundred dollars, depending upon the details you work out with your optionee. The final profit center is the one with the greatest potential for massive profit. This is also a spread amount, but in this case is the difference between what you agreed to pay the seller of the property and the amount that you have agreed to sell the property for. For instance, if your option agreement with the seller of the property gives you the right to purchase the property for $100,000 and you have agreed to sell it for $130,000, the difference is $30,000. When the transaction is closed, you will realize a $30,000 profit. There are ways to sweeten the pot by offering a $5,000-$10,000 discount for exercising the right to purchase the property very early in the agreement. It makes sense that you would want to consider doing this given the opportunity to realize extremely fast cash. I would recommend that your contract stipulate that an early closing discount be exercised within 12 to 15 months of contract signing. I want to warn you about a trend that I’ve been seeing take place with increasing regularity in lease option agreements.
There are some unscrupulous real estate investors taking advantage of people by accepting large down payments when they know that there is next to no chance that they’ll ever be able to exercise the option to purchase. Knowing that these people are almost certainly destined to fail, they accept their money anyway knowing that in a year or two they can repeat the process all over again with a new buyer. This is not only dishonest, but it is immoral. Before giving into the temptation of doing something like this, ask yourself how you would feel if another real estate investor did that to one of your loved ones. I told you it’s important to keep your option agreement and the lease/rental agreement separate. The reason you want to do this is because in the event that you need to legally terminate the agreement with the party you sub-lease the property to, you can take them to eviction court and it can be a quick, almost painless process. However, if the contracts are together as one, some judges will erroneously interpret the contract to be a foreclosure proceeding, which can take considerably longer and cost you much more money in the long run. Lease options can be a very good way of quickly advancing your real estate investing career.
As you can see very clearly, three profit centers make it a good way to receive a large influx of cash when you initially sign the agreement, as well as an ongoing stream of positive monthly income during the rental phase of the contract, with a huge bonus paid to you when the option is exercised. When those three streams of income converge, the potential could be a river of cash flowing into your bank account.