Investors Have 'Options'
For Buying Real Estate

Real-estate investors may want to assess their options.

We're talking about real-estate options -- a creative, but sometimes risky, way to buy properties on the cheap over a period of time.

An investor can purchase an option for a property, giving him or her the exclusive right to buy the property at an agreed price within a certain period of time, typically 12 months. (Exclusive right means the property owner can't sell the property to anyone else during that time.) The investor can exercise the option and buy the property or he or she can sell the option to another investor. The property owner wouldn't have any say in whom the option holder sells the contract to, unless that was written into the option agreement.

Options typically cost 3% to 5% of the property's purchase price. The amount paid to the property owner for the option normally is applied to the down payment on the property. Real-estate options aren't federally regulated, but they are governed by state statutes under real-estate contract law.

Individual investors can benefit from this strategy. For instance, buying the option and guaranteeing a fixed price for the purchase of the property could save an investor money if the property's value increases. An investor also can sell an option for much more than he or she paid, if the property value appreciates.

And even if a deal sours, financial planners say, investors would lose less money buying an option than if they had bought the property from the outset.

"This is good for someone that doesn't have a lot of capital [upfront] and who believes they can [improve] a piece of property," says Gary M. Sullivan, a certified financial planner in Woburn, Mass.

But investors also can be exposing themselves to quite a bit of risk. For one thing, the property could be foreclosed during the option's time period if the owner defaults on the mortgage -- and the investor would lose the money spent on purchasing the option. The value of the property also could decline over the time period of the option, meaning either the investor will pay more than the property's worth after the option expires or he or she may get less for the option itself when trying to sell it to another investor.

Investors can buy an option in a building or land. In the case of vacant land, the investor can get the land zoned for commercial use and then sell the option to a developer. "Most developers would prefer to buy something with [the zoning] already approved," says Phil Storms, a Denver-based certified financial planner. He cautions, however, that getting approvals to build a certain type of property can be expensive and time consuming, with approval far from a sure thing.

Financial planners say real-estate options transactions are typically initiated by the buyer. "The key is to look for small, vacant, kind of run-down properties, properties that look a little neglected," says Thomas J. Lucier, chief executive officer of Home Equities Corp., a Tampa, Fla.-based real-estate firm. The theory is that owners of such property may be more inclined to sell. "Find out who the owner is, approach the owner," he says, "and make the owner an offer to buy an option on the property." Another idea, Mr. Lucier adds, is placing property-wanted classified ads.

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