Real estate is considered by many Americans as single largest class of investment. Real estate is commonly perceived as one of the most reliable, safe, and profitable investments over a certain period. Still, it involves a high cost of, a considerably long investment period, and significant level of uncertainty. Nowadays, investors can consider burying real estate options as a technique to invest in real estate at a lower amount, and with fewer expenses instead of buying an actual property.
The Realistic Aspect of Real Estate
For other individuals, it is quite hard to imagine how to make money with real estate. However, a beginner real estate investor may look at a two-bedroom apartment and foresee that in about five years, the value will increase from a hundred grand to three-hundred grand, therefore enjoying the investment value that has tripled. This simple review and analysis is realistic, but it misses out the routine expenses, which may include the following:
- Financing charges for registration and stamp duty charges
- Monthly interest payments
- Maintenance and repairs
- Property purchase
- Property taxes
- Commissions to agents
- Monthly association fees
- Other applicable local taxes
These abovementioned factors can affect the final net return; but with proper review and promotion, it is one of the most effective ways on how to make money with real estate. This approach is something that may not be fully understood by an investor. Always take into consideration that any development during the investment period may result in difficulty of selling the property later. One classic example is when a highway is constructed near the property and becomes noisy most of the time due to passing cars; this can actually depreciate the value of the property. A more cost-effective way to invest and earn in real estate is by considering real estate options.
Real Estate Option?
A real estate option is a carefully planned contract between the buyer and the seller. The seller provides several options to the person interested to buy a property, for an agreed period at a fixed amount. Then the buyer purchases the selection to buy or the property or not during the specified period. To take advantage of this option, the seller will be paid by the buyer for an option premium. When the buyer exercise the real estate option, the property will be sold by the seller to the buyer in accordance to the terms of a pre-existing contract.
Property developers and investors commonly use real estate options as an instrument on how to make money with real estate. Real estate options have a proven flexibility and affordable investing and trading opportunities to buyers, but sellers receive limited benefits.
Real Estate Options Trade Sample
Let us assume that a builder has $500,000, and wants to buy a land for which the seller wants $2 million. The builder is uncertain of several issues:
1) Can the builder raise $1.5 million by utilizing bank loans or other possible sources?
2) Can the builder obtain necessary permits for either residential or commercial expansion or further property subdivision?
3) Can the builder raise enough money and obtain the permits just in time before another builder purchases the land?
In such scenario, a real estate option should work. For a defined nonrefundable cost which is also called the real estate option premium, the builder and seller can engage in a real estate option contract. This option allows the builder to secure the property sale price at $2 million over a period of up to six months. That way, the builder can raise enough funds, obtain necessary permits, or buy the property, or walk away from the property (and lose the $25,000), or even sell the option to another interested buyer for a passable price. Either way, the seller will make an extra $25,000 from the property.
Included in the real estate option contract are the following conditions:
- Details of the property
- Contract duration
- Consideration amount or option premium
- Purchase price that has been agreed if the choice is implemented during the contract
The Bottom Line
A real estate option provides a lower-cost method to invest, trade, and earn from real estate investments. However, they are efficiently OTC contracts between the buyer and the seller with no outside regulatory oversight. The buyer and seller must ensure that the options contract is fair and has been discussed properly between them. One of the major challenges in real estate options agreements is the act of default by the option seller. If this happens, the buyer’s only alternative is filing a lawsuit. Another considerable challenge is the lack of publicly available information and past records on real estate options participants. Real estate options investors should also contemplate added expenses such as fees for legal services which may include drafting and registration of the contract. Any individual can make money with real estate if they have the right mindset and professional attitude towards it.