Option Agreements: An Investor’s Best Friend – Part 1

Kim and I have been investing in real estate since 1995.  Long ago, we learned that options are – BY FAR – the most powerful tool in real estate.  If you are not using options as one of your primary real estate investing tools, then you’re leaving a lot of money and opportunity on the table.

When most folks hear the word “option,” they automatically think lease options.  While lease options are very popular, they are just the tip of the option iceberg.

Options allow you to control a property – a little or a lot depending on how the option is written – without the risks that come with property ownership.  You can control one or all of the benefits that come with ownership: income, profit, amortization, growth, use, management, and tax benefits.

One of the best things about options is that you can control hundreds of thousands of dollars worth of real estate for less than $100 – and control it for a bunch of years.  No other document in real estate is this powerful!

You can use options to buy, sell or just hold a property.  Options are also a great way to secure a loan when someone needs to borrow money; we’ve found that options are often a lot better than using notes.  Options can be used to secure your interest in a partnership deal. You can even use an option to control a property after you’ve sold it.  And here’s a good one: When we’re making a self-directed Roth investment, we usually use options to secure our interests.  This list goes on and on!

One of the questions we’re regularly asked is: What can an investor do once he owns an option?  This is where things really get interesting.  The investor can hold the option and exercise it down the road, or he can sell the option.  That’s right – options can be bought and sold just like notes and properties!

For example, a few years back we were selling an investment property.  One of the terms of sale was that the buyer would give us a ten year First Right of Refusal Option (FROR).  This meant that any time in the next ten years, if the new owner decided to sell, whatever agreement he made with his buyer, he had to first bring that offer to us.  At that time, we could either exercise or cancel our option – it would be our choice.

Shortly after selling the property and getting a FROR option, we sold the option for $1,100 to the man who lived next door to this property.  The man wanted the house but couldn’t afford it right then.  By buying our option, it gave him an opportunity to buy the home one day down the road.

Next week you’ll be able to read Part 2 of this column.  We’ll be looking at real-world creative deal structuring using options.

Bill & Kim Cook are a husband and wife real estate investing team. They live in Adairsville, Georgia and have been investing in real estate since 1995. They specialize in buying single-family homes, mobile homes and mobile home parks. They also run North Georgia REIA and teach folks how to successfully invest in real estate.