|
|
|
|
Many individuals are afflicted by migraines but exactly what are migraines and what causes them?
|
New Today: 1 Last 30 Days: 362 Total Published: 9,502 Total Pending: 160 Contributing Authors: 2,810 Article Views: 5,555,834
|
|
|
|
Articles » Business » How to Use “Rent to Own” Ideas to Make a Bundle in the Stock Market
|
|
|
|
|
- Article Views: 664
- Word Count: 1365
- Date Contributed: Oct 25, 2007
|
|
- -
|
| How to Use “Rent to Own” Ideas to Make a Bundle in the Stock Market |
Let’s use a real estate example to explain how a stock option works.
Mr. and Mrs. Jones have decided it’s time to put their house up for sale. They found a lovely new home that they can not live without. They list their home with their preferred real estate broker and wait for someone to come through the door, fall in love with it, and pay them their asking price.
Mr. Jones has his mind made up on selling, but months pass and no one appears to want to buy his house. So, he and the agent decide that it’s time to get creative. They realize that in order to sell the home at Mr. Jones’ asking price, they will need to provide incentives to help sell the house. One of the best incentives to sell real estate quickly is to provide “creative financing”. This increases the number of people eligible and allows more people the opportunity to buy a home.
They decide to utilize a “lease with the option to buy” contract as a way of eventually selling the Jones’s home. This is one of my favorite, creative real estate financing methods. In the real estate business, this is often referred to as “rent to own” or “lease purchase.” All three terms essentially mean the same thing. The seller, in exchange for selling the home at his price, will have to rent/lease the property to the tenant/buyer for a predetermined time period before the sale takes place. There may be many reasons why the renter/future buyer would need the additional time to buy the home, such as lack of funds for the down payment and/or closing costs, they may not have sold their home yet, have a blemished credit report, have recently switched careers or professions, recently decided to become self-employed or the current interest rates are too high to name a few.
The “lease with the option to buy” contract is fairly simple to understand. The way it works is that the tenant/buyer agrees to lease the home from the seller for a period of time, typically anywhere from six months to three years.
The seller agrees to sell the buyer the home—that is, the seller agrees to give the buyer the option to buy that home—any time during that lease period, for a set price.
It's up to the tenant/buyer to decide whether or not he wants to buy the home—that's the option. It's the tenant/buyer’s option (not the seller's) whether to buy at any time during the lease-option period. He can also decide against buying the home, and let the option expire. But, under the terms of the deal, the seller cannot refuse to sell the house if the buyer decides to exercise his option to buy—that is, if he decides to purchase the house within the specified time period.
Of course, there is a catch. Usually the seller will insist on a monthly payment that's higher than the tenant/buyer would otherwise pay if he was simply renting the property. This is the premium. For example, if the market rate for rent on Mr. and Mrs. Jones’ home was $1,000, the seller might insist on a monthly rent of $1,250. Over 12 months that’s an additional $3,000.00 “premium” received.
We have already discussed some of the reasons that tenants/buyers would be receptive to an “option” contract. Let’s talk about the sellers. When properly handled, a lease-option can be a win-win situation. Here are the advantages to a seller in agreeing to a lease-option contract:
· This provides a source of positive cash flow. Normally, the landlord/seller will negotiate a monthly rental payment of more than the mortgage (and homeowners’ dues), giving a little extra in the landlord/seller’s pocket each month.
· The seller is having trouble selling the home and is faced with a monthly mortgage payment. Having a lease-option in place allows for money coming in each month to cover the mortgage, and there's a probable sale down the road.
· It can be an almost sure sale, which can be important if it's a tight market. The difference between a lease-option and an outright sale is time—even though the seller has to wait to get his or her money, the seller still usually gets a sale.
· The selling price is locked in. Yes, prices might go up during the lease-option period (in which case the seller would lose the difference), but prices might also stagnate or even go down. With a lease-option, the seller knows what he or she is going to get for the property. Plus, with a high enough premium, even a price increase may not represent any significant loss.
· It can be a headache relief. Many people don't want to bother putting the house on the market, and they certainly don't want the usual trials and tribulations of being a landlord. A lease-option can (hopefully) offer them a painless way to ease out of ownership.
Now, let’s talk about stock options
Stock options work virtually the same way as “lease option” contracts in real estate. Very simply, a stock option is the right but not the obligation to buy or sell an underlying stock (instrument) at a certain price (strike) within a certain time frame. The buyer of a stock option pays a fee (premium) for the right to buy within the specified time frame, while the seller receives the fee (premium) for granting the right.
The value of an option is nothing but the premium that is paid to enter into an option contract. The option premium can also be called the price of an option. The buyer pays this to the seller (writer) of the option. The factors that bear an influence on the premium of an option are, in turn, responsible for the valuation of that option. This is primarily based on the underlying stock. This is no different in real estate. The rent is based on the value of the property.
Just like in the real estate example, the stock options “contract” will expire after the time period agreed upon has passed. The length of time is determined by both parties. In the stock market these contracts can be for as short as a minute or as long as a couple of years. The longer the option time period, the more the option’s worth. Hopefully that makes sense. If I agree to sell my stock (or real estate) at a future price, the further into the future the time limit is, the more valuable that option (or property) is worth. This is because, over a longer time frame, prices are more likely to inflate.
Also in the real estate market example, the Mr. and Mrs. Jones used a broker to facilitate the transaction for the lease contract. There are many real estate brokers that are also familiar household names such as: Remax, Century 21, Keller Williams, and so on. This is also true in the stock market. I would bet that most of you have heard of at least one if not all of these brokers: Scottrade, TD Ameritrade, ETrade.
Option markets, unlike real estate, are a zero sum game. Someone wins only when someone else loses. Speculators are high-risk investors and, as most of them lose in the long run, who are the winners? There is a small portion of speculators who win over the long term, but remember, because the ‘landlord’, or writer of the option has received a premium, it is less that he ‘loses’ per se and more that he just doesn’t receive the big prize. So, apart from the market makers and the few lucky speculators out there, money flows each and every month into the hands of option writers: The Stock Market Landlords.
Christopher Roth
The Stock Market Landlord
Christopher Roth has been buying and selling both houses and stocks using this methodology for years, with very lucrative results. He has now created and easy to understand and follow course that can show you how to do the same, and potentially make 3% to 5% per month on your stocks, or new stocks you intend to purchase – “The Stock Market Landlord Technique”. To learn more and get an in depth free report please visit http://www.RentWallStreet.com
Article Source: UnArchived Articles
|
|
|
|
|
