Rolling Option - Part II

In the last post we talked about a Land Developer tying up and controlling a 640 acre parcel of land that he wanted to develop over time. However, he could only afford to develop 40 acres initially and the seller would not finance the land. So, they worked a deal beneficial to both wherein the developer would take down the first 40 acres and have an Option to purchase the remaining land in 40 acre parcels or larger, over time.Let’s look at another example of how this concept could be used on a smaller scale.

Let’s say that Mr. Charles, an experienced Home Builder, wants to build some Spec houses and needs lots on which to build them. He has funds to build the first house, but can’t buy several lots at the same time. Mr. Charles, through a realtor, locates a Mr. Apple who owns 20 lots in a Residential Subdivision. As in our other example, Mr. Apple wants to cash out of the lots, but is in no great hurry to do so. He also doesn’t want to finance the lots to a builder who is building Spec houses. The builder could go broke and leave the lots tied up in legal actions.

The Realtor, who had been to an Option Seminar, proposed the following solution:
1. Mr. Charles will purchase an Option To Buy the 20 lots. The Option terms allows him to take down lots one or
more at a time by paying cash for the ones taken down.
2. Mr. Charles will pay cash for the first lot. This allows him to do all the things necessary (permits, site work, etc.)
and build his first house. With the return of his funds plus profits from the sale of the first house, he can buy
the next one or more lots.
3. This allows Mr. Charles to “Roll” through all 20 lots over a period of time which he can afford to do.
4. Mr. Apple gets cashed out of his lots and does not have to worry about the builder being successful.
5. In the event the builder does not complete the purchase, the remaining lots should be more valuable.
6. Mr. Apple will only have to pay income taxes on the funds as he receives them and not on the entire
proceeds from all 20 lots at one time.

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.