Here is a sequential outline of the mechanics of a real estate option transaction:
Step 1: The optionee pays a real estate option fee to the optionor.
Step 2: The optionor grants the optionee the exclusive, unrestricted, and irrevocable
right and option to purchase a property at a fixed purchase price
during the option period by executing a real estate option agreement with
the optionee.
Step 3: The optionee assigns or exercises his or her real estate option or lets
it expire.
Step 4: Once exercised, a real estate option agreement turns into a bilateral
agreement in which the optionee becomes the buyer and the optionor becomes
the seller.
Step 5: The seller transfers the property's title to the buyer at the closing.
The Legal Status of Real Estate Options
Varies from State to State
Unfortunately, there's no Uniform Commercial Code equivalent for real estate
options. The legal status of real estate options varies from state to state. In most
states, the legal status of real estate options has evolved over the years from a
combination of common and case law. The case law that regulates estate options
in most states is the result of various lawsuits involving legal disputes between
optionees and optionors over the use of real estate options.
To know the legal status of real estate options in your state, you should consult with a boardcertified
real estate attorney who is familiar with how real estate options work
in your state. I suggest that you ask your real estate attorney the following four
questions:
1. What constitutes a valid and fully enforceable real estate option agreement?
2. Does a real estate option, prior to its being exercised, create an estate in
land?
3. Can a real estate option be recorded in the public records so it constitutes
constructive notice?
4. Does a real estate option violate any rule against perpetuities that your
state may have?
In some states, most notably California, courts have ruled that real estate
options are personal property rather than real property. For example, in a federal
bankruptcy case, In re Merten, 164 B.R. 641 (Bankr. S.D. Cal. 1994), the
court ruled that under applicable California law, an unexercised option to purchase
real estate is personalty personal property and not realty real property.
I suggest that you check with a real estate attorney to find out if real estate
options are considered to be personalty or realty in your state. Your state's real
property statutes should be available online via the Internet or at your county's
public law library. If there is not a public law library in your area, check with
your local public library to see if they have a current copy of your state's civil
statutes. A listing of state statutes, by subject, is available at the following web
site: www·law·cornell·edu/topics/state_statutes·html.
No Licensing Requirement to Buy and
Sell Options for Your Own Account
Every once and awhile, I will read on the Internet that a private individual investor,
acting as a principal on his or her own behalf, must have a real estate
salesperson's license to buy and sell real estate options. This is unadulterated
bullspit! The fact of the matter is that there are no states that have licensing requirements
for private individual investors who act as a principal when buying
and selling real estate options.
Why You Should Add Real Estate Options to
Your Repertoire of Strategies
Typically, many real estate options are bought more on speculation than on anything
else. However, buying real estate options on speculation is not what this
book is about. If you follow the advice contained in this book, all you should be
doing is changing your name from buyer to real estate optionee. When used
properly on the right types of undervalued properties, real estate options provide
an excellent low cost, low risk, high profit potential property control technique,
which knowledgeable, savvy investors should add to their repertoire of real
estate investment strategies. The real estate option strategies outlined in this
book are based on a very simple concept:
1. Buy a low cost real estate option on an undervalued property with immediate
resale profit potential.
2. Package the property under option to highlight its best future use.
3. Market the property under option on the Internet to potential buyers
worldwide.
4. Sell the real estate option on the property for maximum profit.