Hi Investor1313!
Perhaps an example will help clear your fog.
Say you buy a property for $180,000 and have a client that will lease / option from you on a 12 month contract at a purchase price of $200,000.
They pay you $2000 to take up the option and will pay rent of $200 / week of which you will credit $20 as an option fee. The two scenarios are

• After the 12 months, the property is valued at $220,000. The client exercises their option and they get a $220,000 property with only $196,960 to pay ($200,000 – 2000 – 20*52). You get your option fee as the contract unfolds and then the lump sum at the end.

or

• After the 12 months, the property is valued at $160,000. The client doesn’t exercise their option and walks away from the deal. You still have the property and the 2000 + 20*52. While the client may not really win, they had the opportunity to make a gain but things didn’t go their way. You then have to decide what to do with the property and one avenue may be to renegotiate the lease/option if the buyer is interested.

And so it goes…
Does it make any more sense to you now?

Cheers,
Joan