I love Options. I definitely believe that more people involved in Real Estate should learn and use the power of Options. Unfortunately, not too many are bold enough to try anything beyond the old methods of putting Real Estate Deals together.
Well, one of my readers is venturing further into the creative world of Deal Structuring. I recently received the following message, which I am condensing somewhat: “Hello Jack, I need a little guidance. I have a question about using a Rolling Option. I am a realtor representing a seller who owns abut 30 acres in Florida. we have a buyer who wants to buy 4 acres now, but he also wants to buy the remainder of the land later, in portions. To exercise the Option, can the Option money be made in payments? Does it have to be paid in one lump sum? Also, the seller has a loan on the entire 30 acres and is reluctant to sell of a portion, which might trigger the bank to call the loan due. Because of this, the seller would like to have some kind of ‘Lease Agreement’ on the balance of the land.”
My response to his message was:
“Exercise of the Option can be as agreed by the parties – Examples:
a. Each time a parcel is bought, could be with cash – or
b. Could be by Note & Deed of Trust – Secured by the parcel being bought payable as agreed by the parties.
How is the buyer paying for the Option – Could be
a. Purchase of the portion taken down, keeps Option alive on the remainder of the land – or
b. A consideration could be paid up front for the entire 30 acres, or as agreed by the parties.
If the initial 4 acres are not being released from the bank, then you might want to use a Lease with Option. You could do a Lease with Option for the entire parcel.
If existing loan does not have release provisions, the Owner might want to negotiate with the Lender to create release provisions. For example: Let’s say the loan is $120,000 or $4,000 per acre. The Owner might offer the Lender 125% of the loan amount per acre to obtain release.
Owed portion of loan on 4 acres = $12,000
Offer to pay $15,000 (125%) to release the 4 acres
The release price might also be affected by the lay of the land. If some portions of the land are more valuable than other portions, it would probably affect the release price of the portion being released. For example: Let’s say that part of the 30 acres fronts on a highway or street. The frontage land will be more valuable than the back portions of the land.
Is the buyer going to borrow money to do his Development/Building?
I would like to help you on this; however, not knowing all the variables, it is difficult to make specific recommendations. If you would like to call me to get more specific, please do.
Whatever you do, Good Luck and keep learning creative ways to put Real Estate deals together. It will set you apart from the crowd and will prove to be very lucrative for you.
Jack”
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.
Thursday, December 30, 2010
Monday, December 27, 2010
Options Education
What and how much does the average Real Estate Investor or Real Estate practitioner know about Options? Even though there is a fair amount of general educational information and material available on the subject, it is surprising that so few Options are being used. Part of the reason for this is probably due to a shortage of specific, ["This is how you do it"], information and even more so, a shortage of Real Estate practitioners (Brokers, Lawyers, CPAs, etc.) who are knowledgeable enough about Options to give advice and guidance.
If these practitioners, and especially Real Estate Brokers, were to glean the education necessary to become knowledgeable in the use of Options, it would set them apart from the crowd and prove to be very lucrative for them.
I do not know of any Real Estate technique that compares with the “Option” when it comes to Leverage, Profit, Potential, Minimum Risk, Simplicity, Tax Benefits, and Flexibility.
Options can be used in almost any Real Estate situation; such as, investment properties and speculative endeavors. An old friend and mentor, Jack Miller, taught an exhaustive course on Options and their uses. Jack has since passed away; however, one might be able to obtain his instruction material from Common Wealth Press, P.O. Box 24837, Tampa, Florida 33623.
I think what I will do in a few Blog posts is show you some case studies of Options in action. The first one involves a 43 acre parcel of land which my company owned, fronting on Copano Bay in Rockport, Texas (on the Texas Coast). We had owned the property for some time and had anticipated developing it ourselves, at some point, but never seemed to get around to it. [You know what a Round Tuit is, don't you? We are all going to do something when we get one.]
Anyway we were approached by a Developer through a realtor who wanted to make an offer to purchase the property. This Developer planned to develop a mobile home park. Mobile Home parks do very well in this part of the country due to the thousands of “Snowbirds” that fly South in the winter. The Developer’s offer asked for a six month closing date with return of the Earnest Money if the Developer was unable to close due to financing or other problems. He also wanted the 6 months to do his Feasibility Study, and Engineering, etc.
We didn’t have any other potential buyers at the time so we decided to try to work with the Developer; however, we were unwilling to tie up the property for six months with no compensation. After some negotiation we agreed to give the Developer a six month Option to purchase the property. The Option fee was $10,000. In addition, if the Developer failed to exercise the Option, he agreed to turn over to us all his Engineering Work, Feasibility Study, Plats, etc., that he had done on the property.
The end of the story was that the Developer did not exercise the Option, therefore he forfeited the $10,000 plus the work he had done.
If you have some Option case histories, I would like to hear about them. Also, I would appreciate any other comments you would like to share with me.
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.
If these practitioners, and especially Real Estate Brokers, were to glean the education necessary to become knowledgeable in the use of Options, it would set them apart from the crowd and prove to be very lucrative for them.
I do not know of any Real Estate technique that compares with the “Option” when it comes to Leverage, Profit, Potential, Minimum Risk, Simplicity, Tax Benefits, and Flexibility.
Options can be used in almost any Real Estate situation; such as, investment properties and speculative endeavors. An old friend and mentor, Jack Miller, taught an exhaustive course on Options and their uses. Jack has since passed away; however, one might be able to obtain his instruction material from Common Wealth Press, P.O. Box 24837, Tampa, Florida 33623.
I think what I will do in a few Blog posts is show you some case studies of Options in action. The first one involves a 43 acre parcel of land which my company owned, fronting on Copano Bay in Rockport, Texas (on the Texas Coast). We had owned the property for some time and had anticipated developing it ourselves, at some point, but never seemed to get around to it. [You know what a Round Tuit is, don't you? We are all going to do something when we get one.]
Anyway we were approached by a Developer through a realtor who wanted to make an offer to purchase the property. This Developer planned to develop a mobile home park. Mobile Home parks do very well in this part of the country due to the thousands of “Snowbirds” that fly South in the winter. The Developer’s offer asked for a six month closing date with return of the Earnest Money if the Developer was unable to close due to financing or other problems. He also wanted the 6 months to do his Feasibility Study, and Engineering, etc.
We didn’t have any other potential buyers at the time so we decided to try to work with the Developer; however, we were unwilling to tie up the property for six months with no compensation. After some negotiation we agreed to give the Developer a six month Option to purchase the property. The Option fee was $10,000. In addition, if the Developer failed to exercise the Option, he agreed to turn over to us all his Engineering Work, Feasibility Study, Plats, etc., that he had done on the property.
The end of the story was that the Developer did not exercise the Option, therefore he forfeited the $10,000 plus the work he had done.
If you have some Option case histories, I would like to hear about them. Also, I would appreciate any other comments you would like to share with me.
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.
Friday, December 3, 2010
Packaging Your Project For Your Private Lender
You have found a private Investor who has agreed to consider funding your first Real Estate project. The investor has informed you that he has to be very comfortable with the deal and is utmost concerned that his interest is well secured at all times.
So, let’s say that you have located and negotiated a purchase price on a vacant Single Family Residence (SFR) that needs considerable fixing-up. Let’s take a look at some of the details.
1. The house has 3 bedrooms, 2 baths and has approximately 1400 square feet of living area plus a 2 car garage.
2. You have done your homework and based on comparable sales the house, after it is put back in good shape, should sell for approximately $75.00 per square foot of living area which computes to $105,000.
3. You have negotiated a purchase price of $35,000. You have also received bids from three different contractors to complete all necessary repairs in order to make the house totally ready for the resale market. The average bid comes to $21,000 or $15.00 per square foot. The estimated time to complete the repairs is one month.
4. Because of current resale market conditions being slow, you are considering offering Owner
Financing. Having met several Note Buyers at The Real Estate Investors Association Meetings, you determine that if you financed the sale yourself, you could expect 80% to 85% on the dollar of the face amount of the Note if you sold it for cash.
5. Financing details and costs- Your investor has agreed that if he/she finances the deal for you,
he/she will give you a 6 month loan at 10% interest which can be paid along with the principle due in six months. If for any reason the investor extends the loan he/she will charge an additional 2% of the loan balance.
6. Let’s summarize your anticipated costs to determine if this project would appear to be profitable:
Purchase Price……………… ………………..$35,000
Fix Up (Rehab) Costs………………………….$21,000
Hazard (Fire) Insurance………………………..$600
Title Insurance For Investor…………………..$625
Appraisal Fee…………………… ………………..$300
Other Purchase Closing Costs…………………$300
Interest Expense……………………………….$3,000
Miscellaneous Expenses………………………$2,000
TOTAL………………………………………. …..$62,825
The investor will also require a minimum of 4 months interest, even if you sell the property earlier than that. This will reimburse him/her with cost & inconvenience of transferring funds from other sources.
7. Now, let’s look at your anticipated proceeds from your resale. You may be able to sell the house to a buyer who can qualify for a bank loan: however, let’s look at a worse case scenario and anticipate that you will finance for the buyer and sell the Note:
Sales Price………………………………………..$105,000
Down Payment…………………………………..$10,000
Note back from Buyer payable at………..$95,000
$697.08 per month including 8% interest amortized over 30 years
SUMMARY
Cash Down Payment…………………………..$10,000
Sale of Note (80%)……………………………….$76,000
TOTAL CASH PROCEEDS………………………$86,000
Less
*Closing cost to sell………………………………$9,000
Pay-off loan……………………………………….$60,000
6 months interest………………………………..$3,000
TOTAL……………………………………………….$72,000
*Closing costs include Real Estate Commission of 6% of Sales Price which you won’t
have if you sell the property yourself, which you should do.
NET PROFIT……………………………………….$14,000
Also other things to consider -
If you sell in less than 6 months, which you should be able to do with Owner Financing, you
will save interest costs. Also if your buyer has bank financing, you will save $9,000 in Note
discount. From the information provided, I would say this is a “Go” deal. The better you perform, the more it will enhance your relationship with your investor.
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.
So, let’s say that you have located and negotiated a purchase price on a vacant Single Family Residence (SFR) that needs considerable fixing-up. Let’s take a look at some of the details.
1. The house has 3 bedrooms, 2 baths and has approximately 1400 square feet of living area plus a 2 car garage.
2. You have done your homework and based on comparable sales the house, after it is put back in good shape, should sell for approximately $75.00 per square foot of living area which computes to $105,000.
3. You have negotiated a purchase price of $35,000. You have also received bids from three different contractors to complete all necessary repairs in order to make the house totally ready for the resale market. The average bid comes to $21,000 or $15.00 per square foot. The estimated time to complete the repairs is one month.
4. Because of current resale market conditions being slow, you are considering offering Owner
Financing. Having met several Note Buyers at The Real Estate Investors Association Meetings, you determine that if you financed the sale yourself, you could expect 80% to 85% on the dollar of the face amount of the Note if you sold it for cash.
5. Financing details and costs- Your investor has agreed that if he/she finances the deal for you,
he/she will give you a 6 month loan at 10% interest which can be paid along with the principle due in six months. If for any reason the investor extends the loan he/she will charge an additional 2% of the loan balance.
6. Let’s summarize your anticipated costs to determine if this project would appear to be profitable:
Purchase Price……………… ………………..$35,000
Fix Up (Rehab) Costs………………………….$21,000
Hazard (Fire) Insurance………………………..$600
Title Insurance For Investor…………………..$625
Appraisal Fee…………………… ………………..$300
Other Purchase Closing Costs…………………$300
Interest Expense……………………………….$3,000
Miscellaneous Expenses………………………$2,000
TOTAL………………………………………. …..$62,825
The investor will also require a minimum of 4 months interest, even if you sell the property earlier than that. This will reimburse him/her with cost & inconvenience of transferring funds from other sources.
7. Now, let’s look at your anticipated proceeds from your resale. You may be able to sell the house to a buyer who can qualify for a bank loan: however, let’s look at a worse case scenario and anticipate that you will finance for the buyer and sell the Note:
Sales Price………………………………………..$105,000
Down Payment…………………………………..$10,000
Note back from Buyer payable at………..$95,000
$697.08 per month including 8% interest amortized over 30 years
SUMMARY
Cash Down Payment…………………………..$10,000
Sale of Note (80%)……………………………….$76,000
TOTAL CASH PROCEEDS………………………$86,000
Less
*Closing cost to sell………………………………$9,000
Pay-off loan……………………………………….$60,000
6 months interest………………………………..$3,000
TOTAL……………………………………………….$72,000
*Closing costs include Real Estate Commission of 6% of Sales Price which you won’t
have if you sell the property yourself, which you should do.
NET PROFIT……………………………………….$14,000
Also other things to consider -
If you sell in less than 6 months, which you should be able to do with Owner Financing, you
will save interest costs. Also if your buyer has bank financing, you will save $9,000 in Note
discount. From the information provided, I would say this is a “Go” deal. The better you perform, the more it will enhance your relationship with your investor.
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.
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