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Author: John Moore Article source: http://www.piaa.asn.au/. Used with author's permission.
Property Investing often requires creative strategies to make it successful. Professional property investors often use the option contract as a tool to develop some useful investment strategies. Here are some of the ways the option contract can be used to secure property for profit with little or no outlay.
Option contracts have long been used by Developers to secure potential development opportunities. They allow the developer to exclusively hold the property while they have the local authority approve the development application.
An options contract can give the developer the right but not the obligation to purchase a property. They pay an option fee to the vendor in exchange for this right.
When the option contract expires the developer either, buys the property and proceeds with the development, or, passes the property back to the vendor. Yes, it costs the developer a small fee to secure the opportunity (often 1% or more of the total asking price), but it is a small amount if the development cannot proceed or is not profitable. This way the developer limits their risk.
Property investors can secure a property in the similar way that developers do, like the example above, using a variation of the option contract. This type of option contract allows the investor to secure a property with a negotiated deposit and assign it to another purchaser if required without having to purchase the property first.
A property is secured by an option contract with a term of 2-6 months, sometimes more. The investor can then add value to the property before reselling it for an increased price with little or no closing costs.
Here are a few ways they are used to secure property and create profit;
1. An older property is secured with an option contract. The agreement also provides for access by the investor to renovate. Once the renovation is completed the property is marketed at a higher price, before the option contract expires.
The investor then assigns the contract to the new purchaser and the sale then becomes a contract between the original vendor and the new purchaser.
2. An option contract is used to secure an off-the-plan property, with a 12-18 month completion date.
In this situation the vendor agrees to allow the investor the option to buy or on-sell the property. The investor may purchase a number of apartments at a reduced price, when it is nearing completion, the property is sold at the original or a higher price. Providing the market has moved up during the time to completion a reasonable profit is made.
Additionally, the fixtures and fittings can be upgraded to provide even greater value.
3. An option contract can be used as a method of providing 100% finance. The property is secured on a long term option contract, 12 months or more for a set price.
Rising values in a fast growing real estate market ensure that by the time the option contract expires the value of the property has gone up sufficiently to ensure that there is enough equity in the property to cover the deposit. An option contract can provide some attractive investment strategies for property investors wishing to maximize their returns. In all cases the option contract provides security for the vendor and opportunity for the property investor.
See an Option Contract sample option contract (an alternative to the lease/purchase arrangement used in the USA) on the Property Investors Association of Australia web site.
This article may be reproduced in its entirety provided the resource box below is included as part of the article. John Moore is a Prosperity Coach specializing in Property and Business coaching. He has helped many people create wealth in their lives and is President of the Property Investors Association of Australia Inc. http://www.piaa.asn.au/ an organisation dedicated to providing news, information and resources to Property Investors.
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