How to Use Options to Acquire Real Estate

The time you buy with an option can be put to many and varied uses. It’s standard operating procedure to obtain a few months option on land to run soil tests and check out the title and municipal requirements before making an all-out commitment to commercial development.Options are also a useful speculation method. If you see progress moving toward an overlooked parcel of land, a well-negotiated option can put you in the position to profit. It’s timing your commitment that will make the difference. If you move too soon and the buyers haven’t reached you before the option expires, you end up out-of-the-money. Of course, who’s going to wait? If you’re really out to profit by reselling the option, you’ll probably know the likely buyer even before you commit. In any event, options can take many forms and are adaptable to a number of different circumstances.The basic option structure includes the price and terms for purchase of the property, the date, the right to transfer the option, and a provision allowing for extension of the option. Variations on this structure center around how the owner is compensated for granting the option, including the amount and timing of payment. These negotiable terms can have a direct effect on your profit if you plan to resell the property or to develop it. Obtain the option you need; that should not be a problem if you’re serious about buying and willing to pay a fair price.Whether option costs should properly apply toward purchase, or rest as separate payment for the time the property is off the market, is negotiable. In fact, it depends on which side of the table you’re sitting on. Certainly, you want to negotiate the best deal possible for you.

INTEREST OPTION

An interest option is an easy method of paying for an option. Although it is not quite as good for the seller as other option structures, it is a sound way to calculate option value.With this approach, the option consideration is an amount equal to the savings account interest on the value of the property for the period of the option. The details vary with circumstances. In some cases the seller is paid only if the option is not exercised; if the option is exercised, the seller gets his price but no option consideration. Consequently, the option payment is compensation for loss of the sale and is made after the expiration date. If the option is exercised and the sale closes, there’s no penalty to the seller (and no option payment) because he reached his ultimate objective: selling the property.It makes sense to tie an option payment to the property value even if the interest rate is a negotiable item. The owner may prefer that the rate be tied to the prime lending rate or the consumer price index; there’s considerable flexibility on this. For example, it may make sense to the owner that you also agree to pay the property taxes prorated over the option period. Although it may be a minor amount for a few months option in light of the total sales price, it can appeal to a seller.

EFFORT OPTION

Option structures are as flexible as the people negotiating them. Look at what you want to accomplish and you’ll very likely find a suitable option method. An effort option stipulates that you will obtain preliminary development plans and all necessary municipal approval within the option period, at your expense. If you don’t exercise the option, the plans, engineering studies, and other documentation, including any lease commitments you’ve obtained, become the property of the seller.Since the value of land is mostly determined by its use, this approach shifts a degree of uncertainty toward the seller by allowing you to verify the property‘s suitability, with no cost for the time needed to do it. If the property proves to be unsuitable for development, all you’ve lost is the cost of investigation. The seller is not paid for the cost of discovering that his property is unsuitable for your plans.Turning over the results of your effort is simply a way to negotiate option control. The paper work done on a certain parcel has value even if it merely eliminates a piece of property. This option approach reduces your costs and it covers a portion of the risk when there’s a chance that a particular location is not practical for your project.

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