Options are the rights to buy property, but without any obligation to actually go through with the purchase. When you have a lease with an option to buy, you are a tenant but you can choose to buy the property during an agreed time period for a predetermined price. Tenants are not the only people who can have options, though. If the property owner is willing, anyone can pay some money for a contract that gives him or her the right to buy the property at a set price in the future.
For example, say you pay Ollie Owner $1,000 for an option on his house. The option says you have the right to buy the house any time in the next six months for $89,000. It also says your option can be assigned (sold) to anyone else. The person who holds the option can then exercise the option and buy the home for $89,000 anytime within the six-month period.
You know that Brenda Buyer is willing to pay $99,000 for Ollie’s house in exactly the same condition it is in now. You can take your option and sell it to Brenda for $10,000. Brenda pays you $10,000, and then pays Ollie $89,000. Brenda pays exactly the $99,000 she is willing to pay for the home. Ollie receives exactly the amount he wanted for his home. You make a total profit of $9,000 (the $10,000 option sale price minus the
$1,000 you paid Ollie to secure the option), and you have no closing costs or holding costs and your name never appears in the real estate records.
With an option, though, you have to remember that the $1,000 you paid Ollie is not earnest money. It is the fully earned price for the option contract. Even if you do not find a buyer, Ollie gets to keep the $1,000.
Option flips can be very successful for people able to make cold calls and ask owners if they would be willing to option their properties. You also have to be good at networking in order to find buyers, because running ads in the paper may not be allowed unless you are the owner. Finally, you have to be able to afford the loss of the option price. In the previous example, if you are unable to find a buyer in six months, you will lose $1,000. You have to decide whether or not you can afford to lose this money. If you cannot afford to lose the $1,000 (or whatever the agreed-upon price is for the option), then you should not trade in options.