Option in the stock market is obvious, but does option for real estate works?

Quite frankly, unlike in United State, the option for real estate is not popular in British Columbia in Canada. 

A real estate option is the right for the buyer to purchase a property for a set price before the expiry of future date, whereas the seller is obliged to sell for the set price before the expiry date.

However, I strongly suggest that you should discuss the enforceability of option agreement with lawyer (not realtor) before you pursue this strategy. 

How the strategy works?

1. find the property and make an option offer
2. if the seller accept, pay some cash premium to the seller.  Enter to a valid option agreement that give you the right to buy the property at fixed price before a certain expiry date
3. When market value increase, you can either buy the property at a later date (which allow you a cash profit), or sell/assign your option to another buyer.  Make sure the option agreement allow you to assign your right.
4. When market value decrease, you don’t need to exercise your right, all you lose is the cash premium

Why the seller agrees to the option agreement?

Yes, sellers are not dumb, but option agreement is advantages to them when

1. The sellers want cash premium. 
2. They don’t expect market value go up.   If market value goes down, they earn all the premium because you won’t buy a property at a price above market.
3. Even market value go up, they are obliged to sell at a predefined price acceptable to them when they sign the option contract.  This is a win-win situation for both buyer and seller.

Remember, to be successful in this strategy, you must:

1. negotiate the strike price of the property below market value. 
2. (strike price + premium ) should be below the market value
3. market your property to find a buyer.  Target to resell / assign before expiry date at a price above (strike price + premium ).  Otherwise, you lose your premium

Advantage of using option:

1. you don’t need o qualify for a mortgage
2. you don’t own the property, and no need for closing cost, property transfer tax, insurance, maintenance, mortgage payment
3. you got relatively small amount of cash tied up for cash premium
4. you tied up the property at a  fixed price

Disadvantages of using option

1. similar to stock option, if you don’t exercise your option, it expires worthless and you lose all your cash premium
2. Buyer of the option could be sceptical to the validity of your option contract, and need to consult their lawyer.  It’s more complicated to market a option contract then a real estate.
3. Seller of property usually refuse to give you option because if they want quick sale for cash.  (You may want to try out to see the seller’s motivation)

COMING SOON …

Investment is an art work, but there is some scientific model if we build in some financial valuation and research skill

Some properties should not be in your portfolio, don’t buy !

how to rent to good tenant ..

How to maximize my sell price!

How to flip?

 When you have a contract of purchase and sale of the property, the property price increased substantially before completion date, you can assign the contract to a third party to realise the gain.  You enjoy the profit on hot market before the downturn of property price and save on closing cost. 

What is assignment 

the transfer of rights held by one party—the assignor—to another party—the assignee

When is the opportunity to flip?

§         When you buy property with intention to flip, make sure you have the buyer with you name and “assigns”.   There was an old version using “nominee” but this is prohibited because that could allow buyer to escape the responsibility on contract.

§         A long possession period for market price to elevate for your flipping gain

§         If the property is a new property, you may need to developer’s consent to assignment before closing.  Ask the builder first, before you buy.  BTW, it’s usually the assignor pay the assignment fee to the developer

Understanding the Risk? Minimizing the Risk

 If you are assigning or buying an assignment from a New Development, you may have these questions in your mind.  Clarify it!

•  What if the developer does not complete construction of the building?
• What if the developer elects not to proceeds?
• What if the construction is faulty or the units are smaller than expected?
• If you are the assignor, what if the assignee does not pay the increased deposit?
• If you are the assignor, what if the assignee does not close?
• What if the market has a correction?

What is my legal right and obligation?

Understand your legal position, are you an assignor (have a valid purchase of the property and intend to sell it to another buyer) or an assignee (a purchaser intend to buy from a person who as a valid purhase of the property)

Make sure the assignor has the right to assign and the assignee has the right to receive a valid assignement  by referring to the orignal contract.

The Seller(or Developer) has been given notice in writing of the assignment, and eventually obtained the developer’s consent to Assignement of the contract.

If either parties are corporate entities, make sure the individual signing on behalf of the corporat eentity has the authority to bind the coporation.  (company search and a copy of corporate resolution)

Proper photo id  of both parties be clear and verified. (your realtor would work on this)

Deal with the initial deposit made by assignor under the original contract.

Discuss when to release the assignment amount.  Choices are 1) on submission for Registration in appropriate Land Title Office, which favor assignee’s interest, 2) on subject removal, which favor assignor’s interest, or compromise at choice 3) such that a Portion release on subject removal and balance on submission for registration.

Assignment Contract - what to look for