Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a Real Estate Option Contract.
When a potential buyer is looking to purchase a property, they might sign an option contract with the seller. In this episode, Charles discusses what a real estate option contract is, and why a buyer, and seller might utilize one.
· Usually when a seller puts their property on the market, they are able to consider many buyers and are able to sell to whichever one of them they choose. However, when there is an option contract involved, this changes, to the effect that the buyer now has the right to purchase the property if they choose but, they are not obligated to do so.
· A real estate purchase option is a contract on a specific property that allows the buyer the exclusive right to buy the property.
· Once a buyer has the option to purchase a property, the seller is unable to sell the property to another party. The buyer pays for the option to purchase the property. The option normally includes a predetermined sale price and is valid for a specified timeframe, usually 3-12 months. The buyer does not need to purchase the property however, the seller is obligated to sell the property to the option holder within the timeframe set in the option contract. If the buyer does not purchase the property within the agreed-upon timeframe, the seller keeps the buyer’s money that was paid for the option.
· What are the advantages for the buyer?
o A purchase option can be great for buyers who might not be ready yet to purchase a property. If you want to purchase a property lot to build a house but you are still improving your credit or building a down payment for financing, the option will allow you to keep the lot available for a certain amount of time, until your financial situation has improved.
o If you are an option holder on the lot, the property owner is unable to sell the property to anyone else during the term of the option. If you decide to purchase the lot during the term of the option, the landowner is required to sell you the lot at the predetermined price, even if the value has increased since the option was executed. In certain options contracts, there might be other factors considered to determine the final price.
o Real estate investors may utilize option contracts to limit their risk. For example; in a quickly growing area, an investor may locate a lot that would be great for a new development. Instead of purchasing the property outright, the investor purchases exclusive rights to the land through an option. Once the option contract is in place, the investor speaks to developers in order to resale the property at a higher price. Once the contract is accepted, he can sell the option itself to the developer or purchase the lot, and then resale it to the developer; keeping the difference for themselves. If the market drops during the option term, the investor can simply walk away from the option contract without any other expenses, liabilities, or risks.
· What are the advantages for the seller?
o Allows a seller to command a higher price for a property for being lenient with a potential buyer. A seller looking to maximize their return when selling a property may enter into an option contract in order to be compensated upfront, while possibly also selling the property within the option timeframe.
o A seller might not be looking to sell a property, however, when approached by a buyer they like the idea of being compensated for the option of possibly selling a property a month down the road for a predetermined price.
· Lease options, known also as rent-to-own agreements add another level of complexity to the traditional option contract.
o A lease option offers the ability for the renter to purchase the property they are renting after a predetermined rental period, which the tenant/buyer pays for. The lease option could list a preset sale price or simply that the property will be sold at market value. Rental payments will now be higher, to incorporate the new lease option premium. The lease option premium may be applied to the future purchase.
o The buyer/tenant risks loss of the lease option funds if they do not purchase the property however, there are no additional risks or liabilities they are responsible for. The owner is compensated for not selling the property during the lease-option period and is able to keep the additional rent premium if the buyer does not purchase the property.
Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a real estate option contract.
Charles:
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Charles:
Usually when a seller puts their property on the market, they’re able to consider many buyers and are able to sell to whichever one of them they choose.
Charles:
However, when there is an option contract involved, this changes to the effect that the buyer now has the right to purchase the property if they choose to, but they’re not obligated to do so. A real estate purchase option is a contract on a specific property that allows the buyer the exclusive right to buy the property. Once a buyer has the option to purchase the property, the seller is unable to sell the property to another party. The buyer pays for the option to purchase the property. The option normally includes a predetermined sale price and is valid for a specified timeframe, usually three to 12 months. Now, the buyer does not need to purchase the property, however, the seller is obligated to sell the property to the option holder within the timeframe set in the option contract. If the buyer does not purchase the property within the agreed upon timeframe, the seller keeps the buyer’s money that was paid for the option.
Charles:
So what are the advantages for the buyer? Well, a purchase option can be great for buyers that might not be ready yet to purchase the property. If you want to purchase a property lot and build a house, but you’re still improving your credit or building a down payment for financing, the option will allow you to keep the lot available for a certain amount of time until your financial situation has improved. If you are an option holder on the lot, the property owner is unable to sell the property to another person during the term of the option. If you decide to purchase the lot during the term, the option, the landowner is required to sell you the lot at the predetermined price. Even if the value has increased since the option was executed. In certain options contracts, there might be other factors considered to determine the the final price, but in most of ’em, there’s a predetermined price.
Charles:
Now this is a great strategy for real estate investors and they can utilize option contracts to limit their risk. For example, in a quickly growing area, an investor may locate a lot that would be great for a new development. Now, instead of purchasing the property outright, the investor purchases an exclusive right to the land through an option. Once the option contract is in place, the investor speaks to developers in order to resell the property at a higher price. Once the contract is accepted, he can sell the option itself to the developer or purchase lot and then resell to the developer afterwards keeping a difference for themselves. Now, if the market drops during the option term, the investor can simply walk away from the option contract without any other expenses, liabilities or risks. So what are the advantages for the seller or allows a seller to command a higher price for a property for being lenient with a potential buyer?
Charles:
A seller looking to maximize their return when selling a property may enter into an option contract in order to be compensated upfront while possibly also selling a property within the option timeframe. Now, a seller might not be looking to sell a property, however, when an approached by a buyer, they like the idea of being compensated for the option and possibly selling a property a month down the road for a predetermined price. For example, if you want to buy a three family house that was fully rented, you maybe want to live in one of the units and rent out the other two, and you go to the landlord and say, Hey, can we get a six month option on this? They’re gonna get paid right away. They’re gonna put in there a predetermined price that they probably already like. So it works great for them and for you.
Charles:
If your financial situation doesn’t improve or you’re unable to purchase in six months, you just lose the money for the real estate option. The investor on the other hand, they are able to pocket that money for which you paid for the option contract. Now, lease options known also as rent-to-own agreement at another level of complexity to the traditional option contract. So a lease option offers the ability for the renter to the purchase property they’re renting After a predetermining rental period, which the tenant buyer pays for the lease option could list a preset sale price, or simply the property will be sold at market value rental payments will now be higher to incorporate the new lease option premium. Now, the lease option premium may be applied to the future purchase. So the buyer tenant risk loss of lease option funds if they do not purchase the property.
Charles:
However, there are no additional risks or liabilities they’re responsible for. The owner is compensated for not selling the property during the lease option period and is able to keep the additional rent premium if the buyer does not purchase the property. So this is great for people that might wanna buy a property. So they’re renting a single family house and before they sign the contract they go to the landlord, Hey, we really love this neighborhood, all this kind of stuff. We’re gonna sign a contract with you and with an option to purchase this in 12 months. In 12 months come around, they don’t have the financial ability to purchase the property, or they’re, they got relocated ’cause of a job or whatever it might be. They’re just gonna lose that premium that they’re paying onto their rent every month. And the landlord is compensated for that for the ability of if the property goes up in one year.
Charles:
At that time, they’re gonna be paid market price for what it was when they signed it initially. But the re rent premium it’s kind of like a gamble on their end as well, because if it does go up in value, this is the set amount from a year ago. But if it doesn’t go up in value they still are gonna have that preset price of what it was a year before. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.
Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
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