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Options are simply buying low and selling high without risking buying high. With an option, a buyer rarely, if ever, actually takes a real ownership or capital risk position in between. Options require a few definitions. Option: The right, but not the obligation to do something. In real estate, an option is the right, but not the obligation to purchase property. Underlying Asset: That to which one has an option to purchase. A particular house/legal description and on which rights the purchaser has an option - fee simple, mineral only, etc. Exercise Price: Price at which the option-holder may purchase the property and at which the seller has agreed to sell the property. The lower the exercise price, the more valuable the option. Consideration: You must give the seller consideration for the option for it to be valid. Term: The amount of time for which the option lasts. The longer the better. At the termination of the option, the option-holder no longer has any rights to the property if the deed has not been transferred. In the wholesaling section, we speak of Options as one method of getting a stake in property and immediately looking for an entity that will pay more for it. If the Option-holder can find such a person, they can earn the difference between their exercise price and the higher price that a new buyer will pay. This technique requires an adept title company that can (and will) perform a double closing. Alternatively, the option-holder could assign his interest in the option to another buyer to avoid a double closing (as described in Wholesaling). MECHANICS OF AN OPTION DOUBLE CLOSE Mechanically, here are the steps:
2) Find someone to pay more. 3) Schedule closing. 4) Purchase property using the funds from the other purchaser and simultaneously deed it to them. Hence the term "double-close" 5) Collect the difference in prices less any closing costs that optionholder was required to pay (normally in the contract). LEGALITY We are not lawyers. However, we know that options are used all the time in real estate and are considered a common practice in commercial real estate and land development. Their application to the residential market is not new. However, using complex structures that a consumer could not and would not understand and which requires disclosure at each step in the process is fraught with legal risk if a party feels harmed. One other main concern to the investor is that of acting as an agent. Since an investor may not sell another's property on their behalf without a license, adequate disclosure of what the relationship of the optionholder and the property is paramount to avoiding prosecution under the Texas Real Estate Licensing Act as enforced by TREC. In fact, real estate agents are discouraged from "net listings" (where the agent promises the client that they will get a net from sale, regardless of the price the agent can get - the agent keeps the difference). An option agreement looks a lot like a net listing. And an unlicensed individual performing a service heavily discouraged is not well-positioned for a TREC hearing. Discosure too has its risks - although they are business risks, not legal risks. Disclosing that the investor holds an option is an invitation to another investor to make an offer on the house directly to the seller when the option expires. In sum, finding a property, getting the option, identifying a buyer and working to ensure a closing, while making disclosures of your activity is the toil. If you can get an option at a low enough exercise price, then you will earn money. If you have questions and would like more dedicated and one-on-one/small group education, we can set up live in-person or on-the-job learning sessions - upon request or at a regularly scheduled time. Related Articles -BASIC EDUCATION OVERVIEW - Basic Investing ARV - After Repair Value Birddogging Contract for Deed Dealing with Contractors Estimating Profits Evictions - A Primer Executory Contract Foreclosure Overview Foreclosure Types Overview Hard Money Loans - a/k/a Asset Based Lending* Lease Options Leverage MAO - Maximum Allowable Offer Multi-Family Investing Basics as Presented by David Lindahl on March 4, 2006 No-Money Down Real Estate Investing Options Part-Time v Full-time Passive Investing For Beginners Pre-Foreclosure Profit Calculation Remodeling for Beginners Rent vs Buy Is Really Rent vs Sell Seller Financing as Investor Buying Tool Skiptracing Subject To Wholesaling Return to Listing Return to Investor Education |
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