An option when viewed as a financing tool, provides a method by which the need to immediately finance the full price of a real estate property can be postponed.
For example, a builder is offered 100 acres of land for a house subdivision, but is not sure the market will absorb that many houses. The solution is to buy 25 acres outright and take three 25-acre options at set prices on the remainder. If the houses on the first 25 acres sell promptly, the builder can exercise the options to buy the remaining land. If sales are not good, the builder can let the remaining options expire and avoid being stuck with unwanted acreage.
A useful variation on the option idea is the lease-option combination. Under it an owner leases to a tenant who, in addition to paying rent and using the property, also obtains the right for 6 months or 1 year to purchase it at a set price. Homes are often sold this way, particularly when the resale market is sluggish.
The option can also provide speculative opportunities to persons with limited amounts of capital. If prices do not rise, the optionee loses only the cost of the option; if prices do rise, the optionee finds a buyer and simultaneously exercises the option, thereby realizing a nice profit.
Option Financing To Rental Financing