A real estate purchase option is a document that gives someone the right to purchase a piece of property at a fixed price during the term that the real estate purchase option is in effect. During the option period, the owner can not sell the property to anyone else and must sell the property to the purchaser of the option if the purchaser desires the property. The purchaser has the right, but not the obligation, to purchase the property. The purchaser can let the option expire without purchasing the property. Your only lose, in this case, would be the price you paid for the real estate purchase option.
There are three things you must determine at the time that the option is created for the property.
1. How much will you pay for the property if you decide to purchase it? It does not matter if the value of the property goes up or down during the option term, you will be able to purchase the property for the price agreed upon in the option. If the value goes up, you win, but if the value goes down, you should let the option expire and just purchase it for the going value at the time. Your maximum loss is the amount you paid the owner for the real estate purchase option.
2. How long is the term of the option? The term is a fixed amount of time and depends on what you and the owner will agreed upon. Most option contracts have a one or two year term but it can be any amount of time that you agree.
3. How much are you willing to pay for the option? You must purchase the option from the owner of the property. This money belongs to the owner no matter if you decide to purchase the property or let the option expire.
To prevent the owner from selling the property while the option is in effect, you can record the real estate purchase option with the county courthouse. However, you may want to consider the consequences of this action as some mortgage companies will call the loan due if they see a purchase option for the property as they consider it a sale. You should use your judgment for this.
Once you own a real estate purchase option, you control the property. Also, the real estate purchase option is also an asset that may be sold, or assigned to another person if you wish. Look for the next article to see what you can do with your property now that you have secured the purchase option.
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