Sunday, February 7th, 2016

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Video: Real Estate Option Vs. Contract

Hey, it’s time for some more Reader Mail! This one comes from the little survey thingy in the sidebar of this here blog…

“My biggest real estate investing question *right now* is why would an investor use a purchase contract when an option contract doesn’t have the same requirements of us as investors? Is this usually a case of getting a contract if it’s worth it, assuming they don’t want to sign an option contract?”

Tom, Tampa Bay FL

Great question, and one I’ve actually heard a number of times over the years.  So here’s a video with my perspective on this…


Hey, hope that helped shed some light on it for ya, Tom!

Additional Resources I Mentioned…

What’s In a Viable Real Estate Option?

One part I left out of the video above is that there are some basic requirements that must be present to make a real estate contract valid:

  • Mutual Agreement – Basically you need a “meeting of the minds” on what you want to do and how.
  • In Writing – While verbal contracts might be legal, they’re rarely enforceable. So put it in writing.
  • Identify the Parties – You need to clearly identify who the seller/optionor and buyer/optionee are…by name.
  • Identify the Property – Many people use the legal description, but this is overkill in my opinion. I just put the full street address and that’s just fine.
  • Purchase Price – The contract must state the purchase price of the property, either specifically (e.g., $40,000) or a reasonably ascertainable figure (e.g., “appraised value as determined by XYZ Appraisal Company”).
  • Consideration – A contract must have consideration to be enforceable. this is (technically speaking) the benefit, interest or value that induces a promise; it is the glue that binds a contract. In an option, think of it as a fee (not a down payment) the potential buyer pays in return for the privilege of having a binding option to purchase.  The consideration amount really isn’t all that important, but rather whether there is consideration at all.
  • Signatures – A contract must be signed by all parties to be enforceable. (Duh, right?)

So what are your thoughts?  Any other insights to offer or additional questions?  Post ’em in the comments below!

Thanks for tuning in…

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About 

JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at REItips.com and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. :-)

  • http://www.thesoutherninvestor.com/ Brooks

    My personal opinion.
    It's important to make sure that you have the correct items in your contract to make it an actual contract (legally binding). But don't get soooo caught up in them that it keeps you from doing a deal.

    I also know an investor in my city (Mobile, AL) that only does deals on handshakes. He either buys or he doesn't. I wouldn't do this either.

    My advice. Use the correct contract, yes. But make sure you are working with someone (whether buyer or seller) that is easy to work with. It makes the deal (and your life) so much easier.

  • http://REItips.com/ jp moses

    GREAT advice, Brooks. Thanks, man.

    …jp

  • Jeannette

    Agreed, Thanks Brooks, Life is too short to work with difficult people – if you can avoid it!

  • Sandor Ochoa

    Whaoo JP!
    Great explanation and advice.
    I really enjoyed this video.
    Thanks!!
    Sándor Ochoa
    BuyRealEstateInMiami.com

  • Estatehope

    The option agreement also gives buyer option to market the deal as you don't want to be seen as practicing real estate without a license. Then you can put it under contract (exercising the option)

  • Bob

    What incentive is there for an owner to accept an option contract when they can simply list the property and sell it via the MLS, unless there are problems with the property. My agent will not deal with options and tells me none of the folks she deals with like them either since as you say it is unilateral, buyer has all the leverage. Property is off the market seller cannot solicit higher offers except from me. Don't see any advantage to seller. Bob

  • http://www.thesoutherninvestor.com/ Brooks

    Bob, I always have these same thoughts.
    Knowledge is power.
    While listing on the MLS may seem common practice to you, your potential seller may not have any clue about the MLS. Or they may not know any real estate agents. They may not be thinking ''let me get someone market my house'' but instead ''I want to sell my house''
    So maybe they called a We Buy Houses sign.

    Here's a weird MLS situation.
    We just bought and sold a property for $25k and sold it the same afternoon for $32k
    It's weird because looking on the MLS, we saw that it was listed for $70k 3 months before they called us to see if we wanted to buy it.
    Could they have slowly lowered their price until they sold it? Yes. But they didn't!
    They didn't have the knowledge to.
    Maybe the agent didn't advise it for some reason.

    Either way, these things happen every day and if you have the knowledge then you have the competitive advantage.

  • http://www.thesoutherninvestor.com/ Brooks

    Jeannette, you can't afford to NOT avoid it :)

  • Pingback: Real Estate Options And Purchase Contracts: The Difference - PLUS FREE Contracts! | Real Estate Investing News Watch Blog Aggregator()

  • Devo

    The option contract gives you equitable intrest when structured correctly when the standard contract agents use do not. if you use a agents contract please record a memorandum of option or take the option contract and attach it to the agents contract in the adendum

  • http://www.flippingmom.com flippingmom

    Hey JP, Love the video, lots of cool tips. I get asked that question a lot too, so next time I'll just refer people to your video. The very first deal I did was done using your free forms and it's very easy and straight forward. Keep up the good work.

  • Solomon131906

    Hey JP. Are you getting a title policy on option interest?

  • Trisha

    J.P.,
    I REALLY want to compliment you on this video – Top Notch! You really KNOW your stuff, and just your
    wording alone and its flow, clearly attests to your hands-on knowledge and savvy experience! Your handle
    on what works and what does not, what is right and what is NOT, what to do and what NOT to do – is communicated very clearly. In short, I think this is an excellent video for both the new investor as well as someone with field experience who possesses an open mind, seeking to both learn more, and perfect their craft! Well done my friend! Sincerely, Trisha

  • http://REItips.com/ jp moses

    Wow…THANKS! 😉

  • L

    My question is so basic, it is not included in your basic video. I am brand new to all this. Can I create a real estate option on a house that I want to buy for me to live in….not to flip or sell? I can not buy this house now, but I probably can in a year. How do I start? Do I just approach the seller with the idea? Do I just say “I would like to buy an option on your house for $_______” Then we must agree on the price and terms and draw up the contract?

  • http://REItips.com/ jp moses

    Yes, technically you can do that…but you have to ask yourself, “What's in it for the seller?” In other words, how will it be in his/her better interests to give you that 1-year option you want. If you can't answer that question, then you probably can't pull it off. But if you can, then that's the crux of the case you make when you present that as your offer…

    “I'd like to have a 1-year option to purchase your property…and here's why/how I think this is ideal for both of us…”

    Make sense, L?

    …jp

    PS…Must be cool having a single letter for a first name. Nice. 😉

  • L

    Thanks jp,
    I think I heard or read on your site that a real estate agent is not needed to buy an option. Is that true? In other words, do I need to get an agent from Coldwell Banker, for example, to do this with? Or can I just deal directly with the agent representing the seller.
    BTW, the seller is also willing to rent the property. My idea is to rent the property for a year and then exercise the option to buy it in a year if I can. so the seller will be getting monthly income for his property in the meantime. I won't do this unless I am really sure I want to buy it. I figure the option price can go towards the down payment?????

  • http://REItips.com/ jp moses

    You're correct…you do NOT need to be an agent.

    And sounds to me like you're looking to do a “plain vanilla” lease option…happens all the time! :-)

    …jp

  • Jonathan

    When I send an offer to buy whit a proof of funds (CASH from a transactional funder), since there is a contingency to get proper financing for the buyer to go along the contract in the contract, am I bound to buy the property? Should I put contingnecy upon getting someone to buy the property?

  • L

    Thanks JP, for getting back to me so fast. I really appreciate it. I have learned a lot from you through your site. And, I have a feeling I am going to end up doing more with options than just getting myself a house. It is pretty cool stuff.

  • http://real-estate-investors-marketing.com/ Steve

    Good stuff JP! Good teaching and tips!!!!

  • Princemonstrositys

    hey jp i entered a contract lease with option for 2 years with right to extend for another year ,i put down an option fee gave them 4 months payments in advance to show high interest and good faith well the ,Company i entered said agreement just bailed on me and said i have to pay the original owner well they did have ownership when i sighed but i guess the owner wanted his home back so they just bailed and broke my contract and then said i need to pay the new guy not to mention this was the 30th of the month ,the next payment was due on the first well by the 7th so i paid him that month and he then sold the home to another person 7 days later im guessing he already had it lined up so my contract got broke again yet i still paid all my monthly payments and had to put money in attorneys trust due to i really am honoring my contract and have done so now its the end of the 3rd year and 21 thousand dollars later ,just got a notice to evict me ive done every thing by contract i know it couldn’t be just dumped on me ,as well as couldn’t be assigned nor rented or for show even until the last month of the 2 years so i guess ill be going to court im all in and in the right so i cannot lose my dignity and my home nor my investment ,now and the kicker is the 2nd time it sold this all happened in the first 5 months of my 2 year lease with option ,its been hell bro i now will ahve to sue the person that bought due to ilegal  eviction and as well as illegaly optaining my home ,then the original owner for selling it to her and then the people i made the contract with in the first place and bailed i stayed only because of my honer and integerty any comments reguarding my defense would be greatly appreciated its all in black and white easy enough to see but im exausted mentally .