Re: recession REI? options [long response] - Posted by Ronald * Starr
Posted by Ronald * Starr on September 13, 2001 at 15:05:50:
When an investor expects a commodity price to decline in the future, the way to invest is to sell an option to somebody who does not think there will be a decline. This is a gamble. The idea is that the money from the option is extra income. If the optionee does not excercise the option because values have dropped, the optionor (owner of the commodity) gets to keep the option consideration and still has the commodity.
So you could sell an option on your one rental property to somebody who would like to get that price sometime in the future. You might set a option exercise period when you expect the price to be lower than the price in the option – say 2 years from now. If the property is worth more than the option price, there is a likelihood that the optionee will go through with the purchase.
Another way to play this game, with less risk, is to option to people the chance to buy a property which you do not own. Not too interested in doing jail time for selling somebody else’s property? Not to worry, you do not need to own the property to sell an option on it. You need only have to have an option to purchase the property from the owner.
The idea would be to pay less for your purchase option than the amount that you charge somebody else for the sales option. You could then sell your option to your purchaser – optionee, actually. Then that person could purchase if things look good. Or, you could hold your purchase option and sell your sales option to the property, hoping to cash in on the option if it is excercised later. This could be true if you have agree to pay a lesser price than the person to whom you have optioned the property.
If you have acquired control of the property with a lease/option to purchase, you could rent out the property to a renter and sell an option to an investor. The idea is that your rental amount should be more than the rental expense to you. Plus you get the option consideration.
Or your could do a sandwich lease/option, where you have a renter/optionee who rents from you and has the right to purchase the property later. Again, you should be able to get some option consideration up front, hope to get rental income, and then, sell the property for more than the price you have agreed to pay for the property.
If prices drop and your optionee does not excercise you sales option, you could decide whether to excerise your purchase option, try to find a buyer for the property, or let your option expire. The worst that happens is that you have no added profit beyond the option consideration and possible rental cashflow.
If you have just an option, without a lease, you will not have rental income. But you also have less risk. When you are the leasee as well as the optionee, you take on responsibility for the property. So if your renter or renter/optionee does damage to the property, you are on the hook for that. If you are strictly an optionee, without a lease, you do not have responsibility for the property. You may also, of course, not have much say what happens with the property, so the owner or the owner’s renter may do damage to the property, making it less attractive to you and to your optionee. I suppose you might have some obligation to your optionee to monitor the property and to prevent the owner or owner’s renter from continuing to damage the property should you see it happening.
Anyway, options are a way to play the market when you expect a declining price of a commodity.
Good Investing********Ron Starr****************