Posted by Matt (MPD) IL on September 15, 2002 at 16:30:33:
Bob,
Option - Straight Option:
Buyer and Seller agree that buyer has the right to purchase property at a pre-determined price within a pre-determined time frame. Buyer deposits some form of consideration (some small or large amount of money usually) which “holds” the property under this agreemnt, giving the buyer the opportunity if they so desire, to purchase under these terms.
If you excercise this “option” it means you agree to purchase on the terms originally set forth in a prior agreement. With an exclusive option it also means that the seller can not market the property to any other buyer until either the buyer relinquishes his contract, or in some other way defaluts.
Option - Lease Option:
Rent to own situation. Tenant agrees to a monthly payment usually where a portion of this payment is credited towards a down payment for when they excercise their option to purchase. The option is a separate document that spells out the potential buyer’s right to purchase the property at a pre-determined price within a specific period of time. In this case however, they are paying monthly as if they were renting and will eventually get qualified to get a loan and purchase the property.
Subject To:
Taking control of a property while leaving the existing financing in place. The mortgage is either already or will be brought current so that it simply resumes normal monthly payments. Usually this is done with a subsequent tenant buyer who makes regular monthly payments in the hopes of obtaining their own financing when such time the existing loan would be paid off and the tenant buyer becomes the owner. Subject to is a way where investors can control property, usually with very little cash out of pocket and make some spread monthly and market the property for a higher price than the payoff on the underlying mortgage. The investor makes their money by selling for more than is owed and essentially managing the property while the new buyer is paying and getting their own financing.
HTH.
Matt