I then explain that in the condition only a typical investor would purchase the property.

@Tyler McKendry I hate to jump on the bandwagon, but the method @Dave Savage explained above is really how you should evaluate deals like this.

I know thats pretty open ended just trying to understand the difference between the two.2)How much do i need for an option fee (3-5%) How do i explain why this is different then a security deposit?

I saw a reply dealing with what agents can do but it was not fully explained. 

Let me explain...1) Investor #1 will fund 100% and has purchased land to accommodate 10 single-fam residences.

If the latter then have your lawyer send both buyer and seller a very nasty letter explaining the consequences of attempting to rip you off.If the former then you can always sue if you think you can win.

Be very conservative and explain to your seller that you don't know the area, you're an investor and need to make a profit.

Marian - A $1000 total is a very resonable price, and most will split the fee between the sale and purchase, so if you do not end up identifying, you are only spending a portion of the fee.A GOOD QI will answer all of your questions, explain the process, and explain the tax code, prepare the exchange agreement and other necessary documents as per the IRS regs, setup an account for your exchange funds, have security measures in place to be sure your funds are secure, prepare exchange documents for your purchase, review your closing statements to be sure there are no items that may cause you a tax consequence, fund your closing, keep you updated through the exchange with account statements.Most importantly they will be bonded, insured and know what they are doing.

All of these are time better spent than listening to somebody explain cap rates or mortgage applications.  

And how do I explain it the seller.