How to Make Money With Real Estate Options: Low-Cost, Low-Risk, High-Profit Strategies - without the Burdens of Ownership or Loan Liabilities

Why be a Real Estate Trader instead of an Investor or Wholesaler?

A Real Estate Trader is the equivalent of a Stock Options Trader who buys and sells Houses at hefty prices instead of shares in Corporations at comparative small prices. While Stock Traders might put a few thousand dollars or even just a few hundred dollars in to Trades, Real Estate Traders will put in a lot more money with the prospect of making not a few hundred dollars profit on most trades but tens of thousands and even hundreds of thousands of dollars profit per property.

Real Estate Traders put down more capital per deal than a Stock Trader - often 3% to 5% of a home's value with expectations of large profits in the longer term. The Cash they need to commit to property deals by trading Options is a lot less than what a Real Estate Investor puts in to a property acquisition. When title is taken to a House - like owning a Stock - there is a lot more money needed for the Buyer to have in order to take ownership.

The Economics of Real Estate dictate that Traders resort to options and hardly ever to Cash or Financed Acquisition of Properties. Only Investors and Home Seekers go the full length of the field to actually settle on a property and become the new owner.

Consider a RE Trader who hands to a Home Owner for a 5 year Option to buy their home Cash amounting to 5% of a Home's Value as a bet (an Option Premium or Installment). In many instances that initial Option money might be credited towards the purchase price of the property - otherwise it is written off as a cost of doing business. For our example assume the Option Premium paid by a Trader to a Home Owner is to be credited towards the Purchase Price of the Home. *If the Option Buyer does not proceed to purchase the property ultimately they will forfeit the option premium to the home owner (sometime termed in contracts as agreed liquidated damages).

Examine the Economics of Trading Real Estate by Buying Call Options in preference to paying Cash or using Finance necessary for transfer of title:-

Early on there is a Saving of Stamp Duty and other settlement costs, plus there is annual savings of Rates and Taxes, Repairs and Maintenance and the Loan Interest - as there is no loan involved.

It is a significant benefit for the Trader when they do not incur the liability of a loan and the hassles involved in qualifying for finance; trading options there is no requirement for them to produce financials, no proof of income is needed and it does not matter what your FICO score might be.

If an investor intends to re-sell a property in 5 years or even sooner they are far better off adopting the stance of an Options Trader instead of being a Cash Buyer or Buying with Finance. There are significant savings in cash outlays - which dramatically improve ROI.

Say the Trader uses $25,000 for a 5 year Option - They save the 20% deposit ($100,000). Which means they have control over the property for only a quarter of the money they would need if they were buying the house. Or, they save the $500,000 a Cash Buyer would put down to acquire the property in their name.

In addition, day one they save approximately $20,000 in closing costs and stamp duty (*actually a bit more if the home is priced above $400,000) AND annually they save $10,000 in Land Tax and rates ($50,000 over 5 years) plus loan interest which may or may not be offset by rental income (leaving costs for repairs and maintenance swinging like an axe above their head).

Either add those numbers up in your head or punch them in to a calculator to see the comparison between being an Investor to being a Real Estate Trader.

Once a Trader has purchased the 5 year Option they are able to deal in the property - via the Option they own. There are a few paths which can be taken:

1) Do nothing for 5 years and then decide whether to exercise the Option and BUY the house

2) As above but instead of Buying the House SELL the Call option to someone else before expiry or on expiry of the 5 year Option - who will Buy the House from the Home Owner and pay them the difference from the Strike Price - which might give them a Profit and save all the settlement costs

3) Do nothing for 5 years and if the House has gone down in value by more than the Option Fee they paid just walk away, not exercising the option but instead just letting it expire worthless

4) Instead of Doing nothing for 5 years the TRADER could make some money immediately - by quickly selling the Option they hold (assigning it to someone else for a Fee greater than they paid for the Option)

5) If the Market no longer looks rosy the Trader might choose to cut their potential losses and sell the Option they hold to someone else for a lesser price - but that may be better than waiting 5 years to end up with an unsatisfactory result.

6) The Trader could become a bit entrepreneurial and write a Call Option for a shorter time period at a higher Strike Price than what they have contracted to pay the Seller of the House in 5 years. Say the Trader sets the Strike Price for a 1 year Option at $525,000 and collects immediate cash of $10,000 from another Option Buyer. The immediate cash is 2% of the Property's current value and works out to be a 40% return on the Money they paid to the home owner.

If the market moves up within the year so the property is worth more than $525,000 the owner of the short Call will be able make a profit or reduce the cost of the option fee below the $10,000 which they paid - by either exercising their Option or selling it to someone else who wants to settle on the property at the $525,000 set by the Trader. Either way the Trader makes $25,000 on the appreciation of the house plus the $10,000 option fee for a total of $35,000.

As they paid $25,000 for their option from the home owner the profit they make is still only $10,000 and they are out of the game with a 40% profit. The Trader should have considered a higher figure when setting the STRIKE Price for the 1 year Call Option they wrote - which would suggest they set the STRIKE Price at $535,000 or more. In which case if the 1 year Call Option is exercised they make a Capital Gain of $10,000 plus the $10,000 of premium they received at the beginning of the year. Thus in total they make $20,000 - giving them an 80% ROI.

Did you notice that the short term Options Trader only paid $10,000 for the 1 year Call Option - which gave them control over the property for a year, with a massive amount of leverage at very limited risk (especially after considering that the premium they paid is tax deductible against income). So there are both Short Term RE Traders as well as the longer term professionals and each can make money trading the Real Estate Option.

7) If the 1 year Call Option expires worthless - so it is not exercised the Long Term Trader still has control over the home with their 5 year Call Option. In which case the TRADER can write another 1 year Call Option for year 2 - at a suitable STRIKE Price (which they determine based on the then current market value of the property plus what they would be prepared to settle for as a profit if the 1 year call were exercised).

Say the Trader sets a New Strike Price of $545,000 for the 2nd 1 year Call Option, which they can price at a figure they determine. For the example say it is $10,000 - and each year they make the premium the same. Then as long as the 1 year call is not exercised each year the Trader makes $10,000 - which is a 40% return on their $25,000 - amounting to $50,000 over 5 years or 200% on their invested capital.

8) Before the end of the 5 years the Trader can continue to write short term calls, and assuming the property increased in value they can either buy the home themselves or sell the Call Option which entitles them to profit when someone else buys the home. Either way the Trader ends up with 5 years of income from writing Call Options plus a Capital Gain on the exercising or sale of the 5 year Call.

9) You might expect the home to appreciate each year by about 3% (in line with inflation) or around $100,000 by end of year 5. That would give the Trade a Capital Gain return of 400%. If you like to play with numbers then add the income from the annual Call premiums to the Capital Gain and then percentage the total profit on the $25,000 which the Trader paid for the 5 year Call Option. Can you do the Math?

10) Now - compare the returns which Investors might be making as Cash Buyers or on Finance with that of the TRADER. Also look at what a Wholesaler might have made by flipping the deal instead of Buying the Call Option to be a TRADER.

To enjoy the Luxurious Life of a Real Estate Trader (Connect Today and follow up with a Personal Message using the Magic Word "OPTIONS" - also include your SKYPE plus email address to facilitate contact)

For an elaboration of this article please visit the Partner Accounting Website by clicking here NOW! This is essential if you have no prior experience with Options Trading in Stock or Commodity Markets - as it details how you should proceed with your Application to become a Real Estate Options Trading Business Partner and Qualify for $225,000 of trading capital.

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