Options

6 Replies

Help I don't get it. It is said that Donald trump invest mostly in option for real estate. That's how he became famous. Can some one break it down for me and explain it to me like I'm a 10 year old kid.

An option is a contract between a buyer and a seller.  It gives the buyer the right, but not obligation to buy a property, usually at some specified price.  The seller is obligated to sell by an option, if the buyer chooses to buy.  The buyer pays the seller a "premium" when they buy the option.  In real estate, this might be called "option money".  If the buyer chooses to "exercise" their option and buy the property, the option money is typically applied to the purchase price.  If the buyers doesn't exercise the option before it expires, the option is worthless and the seller keeps the option money.

@Jon Holdman  is correct and here is an example to illustrate.  You see a lot in an area of town that is zoned single family.  Currently it is worth $100,000, but you know if it is rezoned to commercial it would be worth $200,000.  You find the owner and offer them $5,000 as an option to buy the lot for $100,000 within six months ( like the price of the option the length of the option is negotiable).    They agree and you immediately set about getting the property rezoned. If you're successful at getting it rezoned commercial you pay the owner the other $95,000 to buy the property and then put it on the market for $200,000.  If you fail to rezone it before your six month option runs out the owner keeps your $5k and can now sell it to someone else, which they couldn't do while you held an option. 

What other scenarios would one use just an option as opposed to a lease option? They seem to basically function for the same purpose of holding a property til you can get a buyer. Would the difference be that the lease is preferable in a case where you could rent it out to cover your cost to hold it? 

What you're asking about is a "Sandwich Lease" search that on BP.

The option gives you the right to purchase, a lease gives you the right to occupy or control the property physically. These are separate contracts but we call them a lease-option when used together. 

While by custom, most sellers will wait to sell honoring the intent of an option, however they are not required to legally. A property with an active option can be sold "subject to" that option. Then, any buyer will be obligated to sell if the option holder desires to buy at that originally agreed price. An option "runs with title" as an encumbrance. 

Another bit of misinformation about options, an option does not give you an equitable interest in the property, your interest is only in the option contract.  You can sell your option contract.

Rezoning a property as mention above can take longer than 6 months to accomplish, notice of rezoning must be given and there is time allowed for public comment, this can put you well over 6 months, so if that is the plan, use an option of 1 year. 

Laws changed this year, options greater than 12 months will be determined to be a sale, talk to a CPA before getting into longer term options. 

Search for current posts about options, you'll find many of my posts about changes.

Good luck :)

    

Originally posted by @Bill Gulley :

What you're asking about is a "Sandwich Lease" search that on BP.

The option gives you the right to purchase, a lease gives you the right to occupy or control the property physically. These are separate contracts but we call them a lease-option when used together. 

While by custom, most sellers will wait to sell honoring the intent of an option, however they are not required to legally. A property with an active option can be sold "subject to" that option. Then, any buyer will be obligated to sell if the option holder desires to buy at that originally agreed price. An option "runs with title" as an encumbrance. 

Another bit of misinformation about options, an option does not give you an equitable interest in the property, your interest is only in the option contract.  You can sell your option contract.

    

Thanks Bill.  That was informative.  Didn't know that.  As far as sandwich lease options,  I was wondering just about the difference between regular options,  not sandwich lease options,  and in what scenarios investors use them without a lease,  if at all.  Maybe they dont(?).  

In particular I've been trying to figure out how flex options work :

So how do flex options work in FL? 

If you wouldn't mind checking that out.  

Originally posted by @Bill Gulley :

... 

A property with an active option can be sold "subject to" that option. Then, any buyer will be obligated to sell if the option holder desires to buy at that originally agreed price. An option "runs with title" as an encumbrance.     

Ah,  OR the buyer could purchase the option their self to remove the encumbrance correct? I'm assuming the original seller would point out the existing option that the buyer would need to purchase in order to obtain title free of the option correct?  

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