Monthly Archives: May 2012

In other words, with the option you control the property without owning it. Let’s add some numbers to this controlling property with options scenario. How much property could you control using $2.4 million as option fees? Let’s say the option fee percentage is 10 percent. Some of you can do the math in your head. This amount, $2.4 million, is 10 percent of what number? That’s right—$2.4 million is 10 percent of $24 million. No wonder Donald Trump likes to use real estate options.

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What would our $200,000 transaction look like from a return on investment perspective if we put up a 10 percent option fee of $20,000 for a 12-month option period? The return on the cash investment looks a lot better than what you are getting on your CDs, doesn’t it?

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For every $1 the investor put up in option fees, $3 remained in cash reserves. This is with a 25 percent option fee, which is about 15 percent too high because of the three fees. If it was only one fee of $200,000 we would be looking at an 8.33 percent option fee.

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Ten Reasons to Use an Option Contract (2)

This can make your remaining property purchases very expensive. It can be a disadvantage because you tip off other real estate investors who could be your competitors that you are buying property in a particular area. Do you think that Donald Trump targets an area to make a real estate investment in and then makes a public announcement or tips his hand to let his competition into the bidding? Of course not. Use an option contract to maintain your privacy.

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There are 10 key reasons to use an option contract as a real estate investor. These reasons are to maintain privacy, protect your cash, provide limited risk/high return, control property, buy time, assemble partners, watch the direction of the market, handle contingencies, procure financing, and do income tax planning.

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