the purchase contract. A contingency in a contract is a condition that has to be met, satisfied, or accomplished; otherwise, the whole deal can be blown out of the water.

When you are buying the owners equity in a pre-foreclosure situation, you may have to handle several contingencies. Can you take over the owners loan? Will you be able to get clear title? Can you find a buyer to whom you can assign the purchase contract?

We recommend you consider using an option contract to purchase the owners equity. After you have handled all the contingencies, then you exercise your option and purchase the equity.

9. Procure Financing By using an option contract you can take your time procuring the best-available financing for your real estate deal. We have seen interest rates for real estate loans go from historical highs in the early 1980s to historical lows in the early 2000s.

By doing a 6-month, 12-month, 18-month, or even longer option period, you should be able to find an attractive interest rate to finance the transaction. If not, then you do not have to exercise your option.

10. Income Tax Planning When you use an option contract, you can get certain income tax advantages as an investor. You may want to use an option contract if you are involved in an Internal Revenue Code section 1031 tax-deferred exchange.

When doing a 1031 exchange, the process sometimes becomes a chicken-and-egg debate. Which comes first? Do you sell the property you have and then look for a property to buy? Or do you find a property to buy and then sell the property you have?

We recommend you buy the property you want to exchange into using an option contract. When you find a buyer for the property you are exchanging out of, then you exercise your option and buy the property you want to complete the exchange.

How to Option

Optioning begins with the option contract. You can take a standard purchase contract and turn it into an option contract. Or you can use an option contract from the beginning.

A real estate option contract is similar to a grant deed or warranty deed in that only the seller needs to sign the document to make it valid. Just like in a grant deed or warranty deed, the seller will be granting something in an option contract.

In a grant deed or warranty deed the seller is granting title or ownership in the property to the buyer. In an option contract the seller grants the right for the buyer to buy the property during the option period for a price agreed on in the contract.

Purchase Contracts

You can start with a purchase contract and turn it into an option contract. To do this, go to the supplements section. This is the section in the purchase contract that states that the attached documents are incorporated into the purchase contract. Add the real estate option contract to this section. Attach the option contract to the purchase contract.

The two contracts together become one contract when the option is exercised. You can find a copy of the option contract we use in our book The New Path to Real Estate Wealth: Earning Without Owning.

Option Contracts

We recommend using an option contract from the beginning of the transaction. That way both you and the seller know you are interested in putting together an option at the outset of negotiations.

Memorandum of Option A memorandum of option can be recorded to protect your optionee interest in the property. Your name as the optionee does not have to appear on the memorandum of option.

If the optionor/seller does try to sell the property to another buyer during your option period, a title company doing a title search for the other buyer will uncover the recorded memorandum of option. This will prevent the seller from transferring clear title, and the deal with the other buyer will fall apart.

Assigning an Option Contract We use an option contract that is already set up to be assigned by the wording in the contract itself. In the event you are using an option contract that is not set up to be assigned,

all you have to do is add the words and/or assigns to the buyers name portion of the contract.

Lease Option Contract A lease option contract can be known by several other names. It may be called a lease with purchase option. It may be called a residential lease with option to purchase. No matter what it is called, its purpose is to combine a lease with an option to purchase.

In a standard lease the lessor, the property owner, gives a lease to the lessee, the tenant. In return the lessee pays the lessor rent. In a standard option the optionor, the property owner, gives an option the optionee, a potential buyer. In return the optionee pays the optionor an option fee.

In a lease option the lessor/optionor, the property owner, gives a lease and an option to the lessee/optionee, the tenant. In return the lessee/optionee pays the lessor/optionor rent. There is no option fee in addition to the rent.

The lease may require a deposit to be applied to a security deposit, a key deposit, a cleaning deposit, last months rent, and/or whatever else the landlord wants. These deposits are not an option fee.

When to Option

As we have already said, by using a real estate option contract you can control property without buying it. In foreclosure investing timing is everything. You need to be in the right place at the right time. You also have to use the right investing tools at the right time.

Lawsuits, Creditors, Divorce, and IRS Liens

Aside from not tipping off surrounding property owners and potential competition, there are four more important situations when it may be in your best interest to use an option contract to protect your privacy. These include being involved in a lawsuit, being hounded by creditors, going through a divorce, and having the IRS on your case.

Lawsuits When you own real estate, you are a target. Attorneys file lawsuits against people they think have assets worth going after.