Lease Option Investing Different From "Normal" Option Investing?

Lease option investing involves obtaining an option to purchase real estate at some future date. Lease options work similarly to option investments but do not involve the same market for the purchase, or execution, of the option. Use of the term lease option investing can sound misleading because it sounds like you are getting involved in the securities market but these transactions are not defined as securities or regulated by the Securities and Exchange Commission.

Lease Option Investing
Lease option investing involves acquiring a lease on a piece of real estate and with the ability to purchase it at some future date. The option has a predetermined price fixed in the contract and allows the option holder the right of first refusal when the option term ends. During the time the lease option holder has the contract, they can rent the property, which produces an income and creates equity. That income or equity can be used to purchase the real estate at the option price. In this way, a lease option offers a way to purchase real estate with little or no money down.

Stock Options
A stock option involves two parties engaged in a contract to buy or sell stock. The option holder buys the right to buy or sell the stock within the option period of 9 months, for which they pay a premium. The option writer receives a premium as income or profit for the obligation to buy or sell stock if the option contract is exercised during the period.

Holders use options to minimize their risk against dramatic rises and falls in the market that may effect their stock positions. A writer seeks to profit from the market by selling the contract. The premium that the writer receives is the maximum profit they can earn for the option contract. The premium paid by the holder is the maximum loss that the they can receive.

The Regulation of Options
Stock option contracts are regulated as securities and are subject to certain restrictions and limitations as set by federal securities laws and the exchanges on which these contracts trade. An investor in a stock option contract has to open up a brokerage account and be qualified to trade option contracts. This provides more scrutiny and a way to detect and prevent fraud. Lease option investing in real estate is not subject to the same level of scrutiny so it is up to the individual investor or purchaser of the option to perform due diligence and ensure that the transaction is not fraudulent.

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