How being a options trader helped me sell real estate.
It’s amazing to me how past experiences will help you in future endeavors. There is a hyper priming that can occur and help you in the most convenient ways. Where something otherwise abstract will conform and become concrete in the blink of an eye.
Real Estate sales, often result in the sales of things that at times have nothing to do directly with the Real Estate itself: items or property that can easily be bifurcated from the original property; washers and dryers, personal property like furniture and in this case a parking spot.
My client owned a condo downtown in a very hot area where parking is a premium. They owned two parking spots and only wanted to sell one with the property so they could continue to use it to park and walk to work. The buyer wanted both spots and was trying to negotiate a first right of refusal for when my client finally did sell.
After some unpleasant back and forth, my hyper priming kicked in. I thought to my self, "Why doesn’t the seller just sell an Option Contract on the spot itself?" Collect some premium now and if the buyer doesn’t close, the option will expire and my client will have collected that premium and still own the assets for a sale.
There are 4 major components in an Option Contract. Theta, Vega, Gamma, Delta. For this purpose, we will be using 2 of the Greeks as the others don’t pertain to this situation. Time decay ( theta ) , which is the value of the underlying parking spot being locked up for a certain period and the risk in that time that the value will increase. If you bought an option for 1 week there would be little to no premium attached to it. If you bought the option for 4 years there would be a significant premium attached to it because a lot could happen in 4 years to increase the spot's value.
Implied Volatility, which is how volatile the pricing of this spot is. Can it go up or down in pricing rapidly? If parking spots in the area are subject to some pending political process, or tax event, then the implied volatility would increase. Real Estate in general has a low implied volatility.
With these two major factors in place, the Seller and I calculated an increase of 2% per year for 4 years in the price. We decided that $10,000 was what the cost of locking up the spot, without being able to sell to anyone else, was worth. We then presented the buyer with an option of buying the option contract for $10,000 now and being able to purchase the parking spot in 4 years at a cost of $44,000.
Whether or not the Buyer exercises the option, the seller has still made $10,000. If they don’t buy it, he is free to sell it at the open market for what ever price he can get, at that time.
If you have Real Estate questions or another unconventional scenario that you want us to run through send a comment or info the information below.
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