How to price an option?

[cfc]

I've been reading many of the discussions here, and I briefly searched online, but could not find out how to come up with the price for the purchase option? I used to be an options trader on the CBOE, and I'm wondering if it's similar to the way equity options are priced. I would think that there must be a "fair value" for the option, and the buyer who pays less or seller who gets more than this price is making money while the other party is losing.

Joe

[steve55121]

Hello,

Well I guess it would depend on the deal. I try get get enough money to cover 3 months mortgage payments. That way I can cover mortgage before they send me their check. And in the event they break lease or move out I have enough cash to remarket property.

-Steve

[cfc]

Thanks Steve, :smiley5:

What you suggests make sense in obtaining a minimum amount for an option. I've read all kinds of numbers, and I know you should try to get as much as you can, but I'm wondering if there is some formula to calculate the theoretical value. I guess I'm just asking this because I was an options trader and I would think that there is some way to price these things consistently across all situations given certain parameters such as option price, time to expiration, etc.

Joe

[Just Information]

This is all subjective to the market value, rent market, location, the subject property condition and the list goes on.

Real estate investing is not black and white.

The same property that sells for 100k in one state will sell for 600k in another.

[cfc]

I agree that prices vary widely from location to location, but shouldn't the option prices be some known quantity given the price of the house and the time of the option? For instance, does a 12 month option on a $500K house cost more than a 12 month option on a $100K house?

I guess there really isn't an answer to this one. :frown: It's just my desire for a neat "answer" to this problem so I know how to take better advatange of these situations when they come up.

Thanks for all the replies! I appreciate all the help on this forum and great discussions! :praise:

[Tony Putman]

I agree with the variables that John Michael stated. That said I am trying to stay within the subject numbers. For a $100,000 purchase price, the option fee runs $3000 to $5000. The rent is probably going to be around the $1000 area. Steve's plan to use 3 months rent as the option fee falls right at the bottom of the range. The more you can get the more committed the T/B will be to taking care of the house and exercising the option. Hope that helps.

[Dan Auito]

I agree with Tony 3%-5% of the purchase price is a good baseline! :thumbsup: