Last Updated on October 5, 2020
Who Makes Money in Real Estate?
Before discussing how can you use the real estate options to profit, let’s begin from defining who primarily makes money in the real estate industry.
- The seller makes money
- The real estate agent
- Insurance Agent
- And State (tax collectors) make money
The buyer pays (even if the buyer buys a distressed fixer upper for no money down, at the start of any deal the buyer (unless he is very clever) pays something. His profits, which end up being the biggest of all, are deferred.
Each year, people who want to “Get Rich Quick in Real Estate” fall for the same old pitch. They buy courses, tapes, manuals, and books on “How To” buy distressed properties, buy with no money down, buy tax lien properties, or buy fixer-uppers.
Then, in regular cycles of about 10 years each, the markets become too crowded. It starts with everybody and their dog making money from ever-rising prices. Then all at once, the bubble bursts. Values often sink below the mortgage loan amount, and equity is wiped out.
The (financially) strong or those who bought at the start of the boom hold on for an inevitable recovery. The weak hands are foreclosed upon. However, those who bought cheap and are not highly leveraged, can usually rent and hold on for a recovery. Unless they made the mistake of buying in a bad location.
Real estate that you buy must be in a great location where there are jobs or other reasons for strong demand.
Real estate buyers have to make the monthly payments, pay the interest and principal, pay the taxes and assessments, pay the cost of upkeep and maintenance. When they decide to sell usually pay a (6%) commission to a local real estate agent. Of course, they can sell directly to a new buyer.
But here is a risk-free way to make money in real estate without investing anything.
How Can You Sell Something If You Don’t Buy It First?
You could become a real estate agent/broker and earn commissions for selling but being a real estate agent/broker requires a few courses and a license.
It is a full-time job that only pays well when the market is active and rising. It allows you to discover opportunities (bargain deals and partners) to build your own a real estate empire – it also requires a lot of work. Nothing wrong with working. But here’s the lazy man’s way to riches in the real estate profession.
If you aren’t a Banker, Appraiser, Lawyer, Insurance Agent, or Tax Collector, and you want to be on the profitable selling side in real estate deals consider using Real Estate Options.
What Are the Real Estate Options?
The real estate options give you control of a piece of real estate without buying it.
Investopedia.com defines the real estate options as follows:
Broadly, a real estate option is a specially designed contract provision between a buyer and a seller. The seller offers the buyer the option to buy a property by a specified period of time at a fixed price. The buyer purchases the option to buy or not buy the property by the end of the holding period.
By having an option on a piece of real estate property, you have the exclusive right to either buy that property or not to buy it. The choice (option) is yours.
It is an exclusive right. That means that no one else can buy or sell that particular Real Estate property during the term of your option. It can be a lot, a house, a condo apartment, a store, a factory, or warehouse.
During the period of your option, the owner keeps paying all of the inherent costs of the property, taxes, assessments, upkeep & maintenance. S/he also collects the rent. In many cases, you as a tenant can get an option to purchase your rental property from the owner.
How to Buy a Real Estate Option
“Mr. Landlord, your place is worth about $100,000 would you give me the option to purchase it during my tenancy for $100,000 using any rent I have paid as the down payment?”
As often as not, you will get an option. If you ask!
In real estate, all such contracts must be in writing. Contract forms for real estate options are usually free online.
What could be better than controlling a real estate without buying it? Let the owner keep paying the taxes, maintenance, and costs. During the option period, you can either sell the property or sell the option itself, for a profit.
If the seller sells the property to someone else, while you hold this exclusive option, you are entitled to any monies the seller receives over the price you have agreed to pay for the property. Or if the seller sells the property for less than what he agreed to sell it to you on your option, you are legally entitled to collect the difference from the seller.
Exclusive means exclusive under the law.
Control the Sale of the Property until the Option Expires
When you hold an option on a real estate property, you control the sale of that property until your option expires.
No one, not even the owner of the property can buy or sell that property, legally, without first satisfying your option.
You own the exclusive right to buy that property, or not buy it, or sell it to someone else, or sell the option itself to someone else.
When you use an option, you are not buying real estate; you are buying the exclusive right to buy (or not buy) that real estate. That means you also have the exclusive right to sell the property as well.
Advantages from Holding an Option on a Real Estate
You will usually be dealing with prime (or at least acceptable and presentable) real estate properties. If you deal with distressed properties, you are often dealing with garbage real estate. Of course, at the right price, anything can be sold.
Suppose the apartment you occupy as a tenant needs some tender loving care to make it shine and worth more than your option price? You fix it up, advertise, show it, and with any luck, you can make a $50,000 profit on your option price of $100,000.
If you don’t get a buyer, assuming you have been paying to say $1000 a month in rent for 2 years, you can go to a lender, show you have paid a $24,000 down payment in the form of rent, and get an 80% loan with payments similar or for less than the rent you have been paying.
That’s a no money down deal. When the smoke clears, you own your apartment and are paying less than you did to rent it.
It is easier to get a loan with evidence that you have been able to afford rent around the same as the future loan payments. Thus, you can use an option to buy an apartment you formerly rented. In this case, if the place is really worth $150,000, you have bought it for around half of the value.
The seller does not need a broker and is probably going to be very happy to avoid the 6% broker’s commission on a direct deal.
This is way both insiders and novices can make money in real estate.