An option contract is a tool that’s essential for wholesaling real estate. In real estate wholesaling, the wholesaler finds a distressed property and enters an agreement with the seller that gives the wholesaler an option to buy the property. This agreement is the option contract, and it includes language that allows the wholesaler to pass this option to buy the property to another buyer. The wholesaler then strikes a deal with a cash buyer, assigning them the option to buy the property at a higher price than the one the wholesaler and the homeowner agreed upon. This difference in the prices is how the wholesaler makes a profit from the deal.
Option contract real estate isn’t exclusively for real estate wholesalers, but it’s one of the most common use cases. Option contracts are used in a variety of real estate transactions, such as high-end real estate deals in which the buyer needs time to secure financing. Option contracts offer greater flexibility for buyers and sellers, and they can be used in the sale of houses, condominiums, multifamily properties, commercial real estate and even empty lots.
Creating an Option Contract
It’s important for wholesalers, or any real estate professional, to put the terms of the option contract into writing. That may sound obvious, but you could encounter a homeowner who wants to do a handshake deal, especially if you’re a less experienced wholesaler. Even if you have an email or text message that specifies the terms of the agreement, having a signed option contract in writing will protect all parties. An option contract in real estate should include:
- Location – You’ll need to include the property’s street address, city, and state as well as any lot or subdivision information.
- Timing – This is not an open-ended agreement. The wholesaler and the seller need to decide upon a specific timeline for how long the option will last.
- Price – Locking in an agreed upon price for the property is critical.
It’s best to work with an attorney to create the contract, but wholesalers can also look online for good examples of option contracts.
The Benefits Of Option Contracts
Beyond making wholesaling possible, there are some general advantages to option contract real estate.
Low Cost
Unlike many real estate investment deals, option contracts can give an investor more time before they need to make a serious financial commitment. You are signing an agreement, but in real estate wholesaling, the wholesaler doesn’t have to put any money down. Sometimes wholesalers will make a deposit of $500 to $2,000, but that’s at the discretion of the wholesaler. In many cases, no money changes hands until the buyer purchases the property.
Time
Once an option contract is in place, the wholesaler can take their time to secure a buyer without worrying about other investors circling the property and making competing offers to the homeowner.
Flexibility
Option contract real estate gives investors a great deal of flexibility. You have the option to purchase a property for yourself, or you can pass it along to another investor. As a real estate wholesaler, you can find a buyer from your network of individual investors, flippers, contractors, and even consumers who are looking for a home. This wide range of buyers gives you the most options possible for success.
Low Risk And High Reward
Because you don’t have to invest capital in the property, there is minimal financial risk for you. But even without a serious financial commitment, wholesalers can reap a significant profit by finding the right buyer for the deal.
No Holding Costs
Because you are not buying the property upfront, you have no worries about repairs, fees, upgrades, commissions, or other fees associated with holding a property until it is sold.
Quick Cash
Option contracts allow investors to move as quickly or slowly as they choose. While a wholesaler may stipulate that they have several months to exercise their option to buy the property, the deal can move quickly once the wholesaler finds a cash buyer.
Hedge Against Inflation
Home prices have increased dramatically over the past few years and in many markets they’re continuing to rise. Option contracts lock in the price of the property so that the wholesaler doesn’t need to worry about inflation driving up the value of the property while they try to find a cash buyer.
Next Steps in the Process
Once you have an option contract real estate in place, it’s time to find a cash buyer and assign your option to the buyer. The buyer must agree to buy the property for more than the option contract states because the difference between these two prices–aka the spread–is what the wholesaler earns from the deal.
This agreement between the wholesaler and the buyer is called an assignment contract. It’s important that the assignment contract includes language that states that the buyer cannot reassign the terms of the contract to another party. Without such a provision, the property could be reassigned to yet another buyer without your approval, dragging out the process.
Key Takeaways
In option contract real estate, having the option to buy a property is an investment strategy that gives the buyer freedom and flexibility. Option contracts can also benefit sellers, particularly in scenarios where the seller would struggle to find a buyer. This can apply to the owners of distressed properties or to the seller of expensive commercial real estate.
If you’re a wholesaler who plans on entering into an option contract with a homeowner, make sure that you work with an attorney to create an option contract and an assignment contract. You don’t necessarily need to consult an attorney for each option contract. Instead, you can work together to create a good template that you can reuse.
State laws can vary around option contracts, so it’s important that your contracts are tailored for your state. Just be mindful that the laws around wholesaling can change in your state or municipality, so make sure that your option contract doesn’t contradict any local laws or regulations.
Bear in mind that when you approach a distressed homeowner with the intention of entering into an option contract with them, it can be a challenge. Letting go of a distressed property is an emotional process for the homeowner, even if it’s their best option. If you’re new to wholesaling, it’s a good idea to start practicing your pitch to potential sellers.
As you gain experience, you will grow more confident when communicating with homeowners. Don’t stop learning about your industry or networking. Your knowledge of the market, your relationships with cash buyers, and having an option contract in place are all essential components for successful wholesaling.
