A real estate option to purchase agreement also known as option to buy contract is a contract on a specific piece of real estate that allows the buyer the exclusive right to purchase the property.
Once a buyer has an option to buy a property, the seller cannot sell the property to anyone else.
Of course, the option contract does not last forever, but most option contracts are between 30 and 90 days, which means the seller cannot sell the property for that specified time period and the potential buyer/investor has exclusive right to buy or wholesale that piece of real estate for however long that option agreement lasts, usually 30 to 90 days.
In legal language, a real estate option is an agreement that grants the party owning the option, the Optionee (you), the exclusive, unrestricted, and irrevocable right to purchase property from the party selling the option, the Optionor, during the specified period of time that the option is in effect.
Real Estate option to buy contract in all states must have six key elements:
- Optionee: Optionee is the party buying a real estate option.
- Optionor: Optionor is the party selling a real estate option.
- Real estate option: When an optionee buys a 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.
- Option consideration: the amount of money paid by an optionee to buy a real estate option from an optionor. Please be aware that money needs to exchange hands in order of the option contract to be legally binding.
- Option period: the specific period of time stated in the real estate option agreement in which the option is in effect.
- Exercise of option: The exercising of a real estate option occurs when the optionee notifies the optionor, in writing, that he or she is going to exercise the real estate option and purchase the property under option
I want to reiterate that in order for an option agreement to be contractually enforceable, the option to buy contract must be given in exchange for consideration, or money.
The option to buy consideration is like an earnest money deposit, it can be cheap, and it gives you the equitable interest in that house.
So think of option consideration as a small amount of money from you to the seller and will give you a ratified contract.
It’s important to note that there is no special floor or ceiling for this consideration, it’s a matter of negotiation between the seller and buyer.
Depending on factors such as the price and demand of the home, the option fee can range from a few dollars to a few thousand dollars.
Being completely transparent, I sign most of my option agreement on single family homes for less than 5 dollars, however I would sign agreement for a few hundred dollars if I was super confident in deal and ability to resale. Option fees are typically nonrefundable. In other words, if you decide not to exercise your option to purchase the house within the agreed-upon time frame, you forfeit the option money.
An option-to-purchase contract must clearly state the duration of the option period. There is no correct or preferred unit of time and option periods can range from months to years. Typically, however, in the residential context, option periods range from 30 to 90 days.
Depending on the terms of the contract, the buyer may exercise the option to buy the house at any time during the set option period or at a date specified in the option-to-purchase agreement. If the buyer lets the period pass, the option expires and becomes null and void. In that situation, the tenant forfeits the option fee.
If you are a speculative real estate investor then options can be more beneficial than flipping hard real estate. I know that most investors talk about flipping real estate and making more money than they know what to do with, unfortunately this is not always the case.
There are many roadblocks and risks associated with flipping properties and while it is true that you can make a lot of money flipping properties, you can also lose a lot of money and lose out on deals because of many issues that can arise such as financing, appraisals and unscrupulous title agents to name a few.
An option to purchase contract takes the risk out of the game and is a great strategy for all investors to consider but especially those beginner investors as it is a low risk, high-profit strategy to buying real estate.
An Option to Purchase contract gives you control of property without ownership. As an investor, you need to always ask yourself what is the problem to be solved for the customer. The option to purchase contract gives you as the wholesaler/investor the ability to solve the motivated seller’s problem by helping them sell that piece of property that they are yearning to get rid of.
An option gives you the contractual and legal right to buy a house but not the obligation to buy the house. So you will have the right to buy, but you’re legally not obligated to buy unless you exercise your right. That is the beauty of the Option to purchase contract and the key to wholesaling.
The option to buy contract gives you an equitable interest in that property.
That legal equitable interest in the house, gives you the right to market the property without being a licensed real estate agent.
Anybody in America can buy and sell a house without an agent if it’s your own house.
The question is, how you can do that as an investor.
You need the right to market the house or the property. And the way that you have the right to market it is that you gain equitable interest in the house. An option to buy contract is one way that you can gain equitable interest in the house.
Once you have the option contract, you can market it, you can sell it, you can assign it, and you can make money on the deal. The beautiful thing about an option contract is that it’s truly 100% risk free. The only thing you have to potentially lose is your option consideration and some time.
Again, you have the legal interest in the property with this option contract, so it’s completely risk free. When you do find your buyer, you have some ways to resell the property. You can just write up a standard purchase contract. You can also do an assignment, or you could sell your option. You have three ways to work with your end-buyer.
Remember, the Option to buy contract gives you control of the property without ownership.
You are protected because you have an equitable interest in the property, the option consideration is what gives you the interest in the property.
If money doesn’t exchange hands than the option contract is null and void and would not stand up in a court of law.
Make sure to understand your state’s laws so you can be sure the option to purchase form that you are using is acceptable with your state’s requirements.
The Option to buy contract should be simple and easy to understand and make sure you study it so that you can explain it to all motivated sellers.
If you are interested in 100% risk free investing than the Option to buy or option to purchase strategy is the way to go.
If you don’t sell or decide not to buy the property before the option period expires than all you have lost is time and the option consideration funds.
This strategy is so valuable, especially when you are new to the real estate investing side of things as you’ll start to understand your market very quickly and the best part is you won’t pay a heavy price for that education.
Happy Real Estate Investing.
See also the following article about flipping houses. You will get super valuable tips.