REAL ESTATE OPTIONS:  What They Are And How They Work

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Over the years, a lot of myths, lies and fairytales have been told about real estate options at so-called real estate investment conventions by ignorant hucksters whose collective knowledge on the subject wouldn’t fill a thimble! As a result, there’s much confusion about what exactly straight real estate options are, how they work and when to use them. However, when fully understood, properly prepared, and correctly used, straight real estate options are an excellent way to create leverage, reduce risk and conserve capital while holding the controlling interest in undervalued properties. In no other single aspect of real estate investing is specialized knowledge so richly rewarded than when using real estate options to control undervalued properties with immediate resale profit potential. But, if you decide to “play around” with straight real estate options without really knowing what you're doing, you'll be harshly punished for your ignorance and lose a lot of money.

What You Need To Know About Straight Real Estate Options

In order to avoid the potential caveats and pitfalls that plague most uninformed and unsuspecting real estate option investors, you need to know:

1. The difference between a “straight” real estate option and a “genuine” lease option.
2. What a straight real estate option is.
3. The seven elements of a straight real estate option transaction.
4. How a straight real estate option transaction works.
5. The essential elements of a valid real estate option agreement.
6. The legal status of straight real estate options in your state.

A Straight Real Estate Option Agreement

In general legal terms, a “straight” real estate option agreement is a unilateral agreement, binding only on the optionor, the seller, in which a promise, the exclusive, unrestricted and irrevocable right and option to purchase is exchanged for performance, the exercising of the option by the optionee, the buyer. The purchase of a straight real estate option doesn't impose any obligation upon the optionee to exercise the option and purchase the property. However, once the optionee exercises the straight real estate option, the agreement becomes a bilateral contract, binding on both parties, at which time the optionee becomes the buyer, and the optionor the seller. For example, in Florida, a straight real estate option agreement is distinguished from a purchase agreement in that no equitable interest passes to the optionee until the real estate option is exercised. Once exercised, the straight real estate option agreement “ripens” into a bilateral purchase agreement.

Seven Key Elements Of A Straight Real Estate Option Transaction
A straight real estate option transaction is comprised of the following seven key elements:

1. Optionee: Optionee is the name given to the party buying a straight real estate option. Once a real estate option is exercised, the optionee becomes the buyer.
2. Optionor: Optionor is the name given to the party selling a straight real estate option. Once a real estate option is exercised, the optionor becomes the seller.
3. Straight real estate option: When an optionee buys a straight real estate option, he or she buys an exclusive, unrestricted and irrevocable right and option to purchase a property at a fixed purchase price within a specified option period.
4. Option consideration: Option consideration is the amount of money paid by an optionee to buy a straight real estate option from an optionor.
5. Option period: The option period is the specific period of time stated in the straight real estate option agreement in which the option is in effect.
6. Exercise of option: The exercising of a straight real estate option occurs when the optionee notifies the optionor, in writing, that he or she is going to exercise their real estate option and purchase the property under option.
7. Expiration of option: A straight real estate option expires when an optionee fails to exercise his or her real estate option within the option period stated in the real estate option agreement.

How A Straight Real Estate Option Transaction Works

Here's a sequential outline of the mechanics of how a “straight” real estate option transaction works:
Step #1: Optionee pays real estate option consideration to optionor.
Step #2: Optionor grants optionee the exclusive, unrestricted and irrevocable right and option to purchase property at a fixed purchase price during the option period by executing a straight real estate option agreement with optionee.
Step #3: Optionee exercises his or her real estate option, or lets it expire.
Step #4: Once exercised, a straight real estate option agreement turns into a bilateral agreement in which optionee becomes buyer and optionor seller.
Step #5: Buyer and seller execute a detailed purchase agreement.
Step #6: Seller transfers property’s title to buyer at closing.

Why I Like Using Straight Real Estate Options To Control Undervalued Properties

My basic real estate investment philosophy of only buying financially and physically distressed problem properties hasn't changed one iota since I began using real estate options to control undervalued properties with immediate resale profit potential. The only thing that has changed is that I now prefer to buy real estate options instead of properties. That’s because since I've made the switch from buyer to real estate optionee, my resale profits are no longer being eaten up by transaction, maintenance, management, debt service and other holding costs that go along with outright property ownership. I can now fully concentrate on:

1. Finding undervalued properties with immediate resale profit potential to buy real estate options on.
2. Performing due diligence on potential option properties.
3. Negotiating low-cost straight real estate option fees and below market purchase prices.
4. Expanding my network of qualified real estate option buyers worldwide.
5. Marketing properties worldwide via the Internet that I own real estate options on.
6. Selling my real estate options for maximum profit.

Thomas J. Lucier is the President and CEO of Home Equities Corp, a privately held Florida Corporation established in 1995, that specializes in the purchase, fast-turnaround and resale of small residential rental properties in the Tampa Bay Area. Tom’s one-of-a-kind 78 page special report, How To Use Real Estate Options To Control Undervalued Property , $29.95, is available for purchase at the Landlord.com FIND FORMS & PUBS .

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