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If you have found
a favorable investment opportunity, but lack the funds to invest,
consider an “option.” An option gives the optionee (person getting
the option) a great deal of leverage with little cash output.
Essentially, obtaining an option would give you the right to
purchase or lease a property for a specific price for a certain
period of time. If you decide you want the property, you can
exercise your option to buy or lease. If you don’t want it,
you are not obligated to do anything.
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.
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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.
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