A real land option is a contractual agreement is similar to a standard real estate purchase agreement in several different ways. It is legally binding/enforceable, you can protect your option with title insurance if you choose, option documents may be held in escrow upon request, have clearly stated sales prices, and an option has a definite start/end date. However, because our legal system considers an real estate option a unilateral contract it does differ from a purchase agreement in one key way. It is different because it only obligates one party, the person selling us the option, to perform. In other words if we own an option we have NO OBLIGATION to purchase the property but the seller must sell the property at the agreed upon price. The neat thing is that this is clearly documented to both parties up front in order to create honest business opportunities and great profits.
A purchase agreement is considered an bilateral contract which means BOTH the buyer and seller are legally bound. The buyer MUST buy the property and the seller MUST sell the property at the agreed upon price or risk the legal consequences. It is easy to understand why options are so popular with sophisticated investors. They offer a ton of advantages with almost none of the disadvantages of other real estate agreements. Plus, when you sell a land option to another person it is a simple, clean, and easy process. This is much more than you can say about most shady and less than honest business opportunities.
Using a Land Option
The steps to putting a property under option is very easy and straight forward. We simply get the owner to sign two documents and pay them an option fee. The first document we get signed is the land option agreement and this document simply sets up the framework of our deal. In short this document states the price we can purchase the property in the future and exactly how long we have to either buy the property, assign the contract, or let the option expire. The option agreement also states the amount of money we are paying the owner for our option. (NOTE: It is important to point out that the option fee is also the MAXIMUM of money we ever have at risk and cannot be held responsible if we do not purchase the property or do not sell/assign out option to someone else.)
The second document we get signed is a purchase agreement. While the owner is always happy to get a few hundred bucks option fee they ultimately would like to get the bigger check so they sign a purchase agreement. This not only puts the stressed out owner in a better place emotionally it also removes the possibility of the owner ever deciding to take our option fee but not honor our agreement to sell the property in the future. Pretty smart huh?
This is a MAJOR asset when selling your option to someone else in the future because we have already removed all of the risk and insured honest business opportunities for our buyer. We will have the purchase agreement held in escrow for any of our future buyers to review. This technique not only tells others we are a professional but it allows us to sell our option is far less likely to be disputed at any point in the future.
The Steps in a Land Option Transaction
Step one. Find a property we want to put under option. At this point we (the optionee) pay the person selling the property (the optionor) an agreed upon amount of money (the option consideration) to put the property under option.
Step two. Now that the property is under option we (the optionee) have the right to purchase the property (by exercising the option) at the agreed upon price listed in the option contract for a fixed period of time (the option period).
Step three. Now we simply decide if we want to exercise the option ourselves to purchase the property, sell our option to someone else (this is know as assigning our option to another person), or simply do nothing and let our option expire.
Step four. If the option is exercised by either us or our assigns it instantly stops becoming a unilateral contract and now becomes a bilateral contract. When this happens the optionor is now the seller and the optionee (or assigns) becomes the buyer.
Step five. The purchase agreement attached to the option is executed and the warranty deed to the property is then transferred from the seller to the buyer at the closing table.
Assigning or Selling an Option to Another Person
Now that we have gone through the basics of how to insure profitable honest business opportunities when flipping land options you may wonder how difficult it is to sell or option to another person. Actually, it is, dare I say, easy especially if you already have the purchase agreement and warranty deed in hand. Unlike purchasing and selling properties themselves when you sell your contract you do not need to go through all of red tape. There is no bank underwriting requirements or other complicated financial documentation required. It is as simple as filling out an assignment of land option agreement, having a check deposited into escrow for our option sales price, and having someone else take our place on the purchase agreement.
Finally, the only step remaining in order to complete the process is to notify the property owner that you are assigning your option to someone else. To do this I usually just write a quick letter and send it to them along with a photo copy of the assignment of a real estate option agreement. I suggest you send this via certified mail so you have proof for your records.
Honest business opportunities exist everywhere when it comes to this real estate niche. You just need to know where to look!
I enjoy spending time with my family, friends, and traveling. I hope you have found this information useful in helping you find honest business opportunities in this real estate niche.
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