It is a known advantage that a small down payment for an option can yield large gains in an expanding real estate market. This has been the case for many years and has produced large profits for option investors. Many people involved with real estate; real estate agents, mortgage brokers, rehabbers and long-term investors developed a belief that real estate always went up. It was generally true in most markets from the 1970s into the 21st century.
There were a few dips in the curve along the way. A few markets like Houston had a major downturn but it was not a nationwide decline. California, Nevada and Florida had their hypergrowth. It became common wisdom that this would always be true for unexplained reasons. Then came the early 2000 years. Growth rates approached 15% per year which proved unsustainable. Only weeks before the crash, the National Association of Realtors, lenders, Wall Street mortgage packagers and many economists said there was no end in sight. Only 4% of economists predicted that there was trouble ahead.
We all know what happened next. Market values were cut in half in many parts of the country. Although many areas have stopped declining and are beginning to gain, the total loss of equity in US real estate has not nearly been recovered. All involved in the real estate market suffered, especially owners and investors that had more than 65% debt. The market decline brought the loan values to 100% or better. Lenders would not refinance at that ratio and millions of houses and billions of commercial properties were foreclosed. There are still hanging over the market and there may be 10 million on foreclosed homes waiting to happen.
What did this do to option investors? They had paid a few thousand dollars for an option to buy a $200,000 house at five years in the future, for example. The value of the house declined to $100,000. Did they exercise the option? No. What did the optionor do? He had two choices. 1) Get mad, call the optionee a bum and ask for the keys back. If he did he would then call a realtor and find out the market was $100,000. The vast majority already knew that. 2) Talk to the optionee. Arrive at a reasonable current market value and close the deal. I know from experience that over 90% of optionors will reduce their price to current market value. I would do the same thing.
A cash and debt investor would and did end up busted and possibly facing a deficiency judgment of tens of thousands of dollars. An option investor bought the house at the lower price and suffered no loss. He had no liability for any loans and had no risk of property ownership. Options are the best strategy in up or down markets. The details of how to control property, get tax benefits, avoid risk and profit regardless of which direction the markets move are detailed in the course "The Secrets Of Lease Option Profits".