Optioning Your Way To Success - Los Angeles Real Estate |
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An option is a way of giving yourself time to make a decision or obtain funds while still taking advantage of a favorable opportunity. For just a few dollars, you can obtain control of an expensive property. And control equals money in real estate. Consideration For a purchase option to be valid, the potential owner (optionee) must give consideration to the owner (optionor). This consideration is anything of value – usually money. However, an item or right having value can also be used as consideration. In real estate transactions, the consideration given is often a percentage of the purchase price. Finding option opportunities
It is easier to find option opportunities in a slow market. When property is not moving quickly, owners are more open to alternatives like options. Some owners will take a lease option on a property they intend to sell. Known as a lease with the option to buy (or a “lease option”), this benefits the owner by giving them cash flow provided by the rental income. The optionee benefits by committing to pay the owner rent with the option to purchase at some time in the future for an agreed upon sum. This way, the optionee doesn’t have to lay out a large sum in order to get control of the property or lock in the benefit of ownership. Negotiating the option As an optionee, you want the lowest possible option costs, the longest possible option period, and (on a lease option) the highest percentage of your lease payments applied to the purchase price. In addition, you want to retain the right to sublease the property. This would allow you to turn around and lease the property to someone else (at a higher rate) and/or give your tenants the right to purchase the property – at a rate higher than the one you originally negotiated. Options on commercial and industrial properties If you option a vacant property and then find good tenants to lock into long term leases, you can make a great deal of money selling it to investors. Zoning changes and increasing property value Some investors use options to tie up a property for a period of time. They use the option period to obtain zoning changes or approval for desirable uses and then sell this more valuable property to a developer. Options to rent Owners with problem properties are often desperate enough to provide options on short-term rents – or longer term rents are very low prices. Like the purchase option discussed above, the savvy investor will use this rental option period to find a good tenant. This method, however, involves a great deal of risk and usually attracts investors who feel confident in their ability to obtain a desirable sublease. Not exercising the option An investor is not required to exercise an option, nor is the investor required to exercise the option exactly as it was given. The owner’s motivation or circumstances may have changed making them more open to renegotiation. You are not precluded from attempting to renegotiate price or terms. Right of first refusal If you are the owner of a property, you want to resist giving a tenant a purchase option that could cut into your appreciation. However, you can give a right of first refusal without fear because the tenant will not have the right to buy if you don’t want to sell. However, if you decide to sell to someone other than the tenant, you must first offer the tenant the right to purchase at the same price and terms you would except from the third party. Either way, the owner will not lose. Options provide a great way to avoid a down payment, while still offering the profit potential gained through lease or sale. << Back to Investing in Los Angeles Real Estate |
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