Everybody Uses Options!

Well, almost everybody. All of the following are Options:
1. Putting down a deposit for a seller to hold something for you that you can buy later. Example: You put down a $500.00 deposit for the dealer to hold a car you really like for 60 days, giving you time to arrange financing or come up with the balance of the purchase price. If you do not come up with the purchase price in 60 days – the dealer may keep your deposit (the option money).

2. What about the Real Estate Buy – Sell agreement? The buyer USUALLY puts up some “earnest money” – say $1,000 – with the agreement to close on the purchase in 45 days. This is an option. The purchaser could lose his earnest money if he fails to complete the purchase.

3. A developer finds a piece of land he would like to develop into a subdivision, however, there is much he needs to know before he buys the land – Example: Zoning requirement; environmental impact; availability of utilities; drainage problems, etc. Let’s say the asking price of the land is $200,000. The developer negotiates an option wherein he agrees tp purchase the land in 90 days (or less) for $10,000.00 option money. Also, he might agree that in the event he does not buy the land, he will give the seller all of the pre-development work the developer had done.

This is a good deal for both parties.
a) The developer does not have to put up the $200,000, then find out later he can’t use the land or he just wants to back out.
b) The seller receives $10,000 now and maybe the balance later and if the sale doesn’t close, he keeps the $10,000, plus he now has valuable information regarding the land use.
Let’s go a step further – Let’s say that the sale has not closed and another party comes along who really wants the land. Let’s say he is willing to pay $250,000 for the land.
Can the owner of the land give the $10,000 back to the developer and sell to the new 3rd party? NO WAY! HOWEVER, CHECK THIS OUT! The developer can sell his option to the new party for whatever he can get, for example $60,000.00 – Not a bad profit within less than 90 days.
Many fortunes have been made by investors buying options, then selling the option to other parties.

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.