Real Estate Options?

what are real estate options and how do they work and what are the advantages and disadvantages of options/ (2) Are they the exact opposite of real estate contracts? the subject sounds like a unique investment is it?

There are multiple types of options used in real estate. They are are powerful tool for a couple of reasons:

Most contracts are bi-lateral (executional) - which means that both parties are required to perform on the contract in order for the contract to be fulfilled. If I use a standard purchase contract to buy a property I have to perform (buy), and the seller has to sell in order for the contract to be fulfilled or damages can be sought (like loosing your earnest money - or more).

Options create a unilateral condition, where I do not have to purchase your property (perform) - but you have to sell it to me based upon the agreed price and within the agreed time frame (bankruptcy is an exception). If I hold an option on the property and you try to sell it - I can halt the sale or make it invalid and potentially seek damages. If I do not buy - I can only loose my option consideration (usually money).

as for options - there are a few:

Lease with option to purchase (the most common) - this is just another form of owner financing that allows you to lease a property with the option to purchase. Here you are obligated under the lease, but not under the option contract to purchase the property (different than a lease purchase - which creates an obligation to buy) I use this in selling and buying - I like to call it my "try before you buy program."

Pure Option. This is just as it sounds - it is an option contract that has no underlying lease with it - it simply states that you have an option to purchase the property at a given price within a given time. It is also assignable, so you could flip options without running into

Both of these options strategies are powerful ways to control property without owning property (which I think is the real strength of options)

You should understand the laws in your states concerning options (for example in Texas there are issues with selling homes using lease options, and how they treat the transaction).

Often when I buy properties around the country - I use an option to control and limit my financial risk.

Good Luck..
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When you buy an option to purchase in a hot market, the price goes up, you buy and flip it on sale to make a profit. The seller sells the option to get the money you pay. The vendor still risks not being able to sell it for its current value should the price drop more than the amount you pay for the option.

The buyer risks only the cost of the option, which is 100% of the 'investment', but may, to protect the investment compound the loss by buying into a declining market. Often the option buyer will not be able to buy into the declining market because lenders will not lend. That is a kindness they offer.

SIMPLE Answer
Option: Contract that enables you to purchase a property in XX month/year timeframe, but does not bind you to purchasing it.

If you have a 3 year option starting 1.1.08, you can buy the property at any point, for a predetermined price before 1.1.11 or you can walk away.

Yes it is a very powerful investment technique when you learn when, where and why to use it.

Advantages are that you control the purchase for the timeframe specified, Disadvantages, you legally must give a concession for "The Option", but that is very minor if used properly.

Best of Luck