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.
Showing posts with label Option. Show all posts
Showing posts with label Option. Show all posts
Monday, December 27, 2010
Tuesday, August 10, 2010
Big Bucks With Options - Part II
A quick review: Mr. Adams purchased an Option for $450 to buy 40 acres of land for $40,000. He then did research with County Planning & Zoning, utility companies, and an engineer. He then determined 1) The 40 acres could be developed into 40 one acre lots, the size of the lots, 2) The close proximity of the property to the city and 3) Assurance that zoning would allow manufactured homes to be place on the lots. Doing the math shows the following:
Gross Sales proceeds from 40 lots @ $32,500 per lot is $1,300,000
Less: Cost for streets & other off-sites $160,000
On-site improvements for 40 lots $400,000
Cost for sales commission (20%) and other overhead $260,000
TOTAL ESTIMATED COST TO DEVELOP & SELL is $820,000
NET ESTIMATED PROFIT…………$480,000
Mr. Adams compiled the above and other promotional information into sales presentation brochures and presented them to several developers already experienced in developing and selling lots for manufactured home owners.
Mr. Adams decided that a 100% Gross Profit would be a fair return on money that he didn’t even have to pay. Therefore, he asked $40,000 for his Option to purchase the land. Hardly had he made the presentation to the first developer when his offer was accepted. As stated before, lots acceptable for mobile homes were in short supply. The developer could see a quick profit of $400,000 as soon as he could get the site work done.
So our hero, Mr. Adams, with a little research work was able to make a profit of $39,550 in a few weeks. Not bad!
There are deals like this available in any market at anytime. It takes a little knowledge about the Real Estate market. Even if you don’t have this knowledge, you can find assistance. Ask around for a good Realtor who knows the market. Many of them do.
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.
Monday, August 9, 2010
Big Bucks With Options
As we left off in our last post, Mr. Adams has obtained an Option from Mrs. Walters to purchase 40 acres of land on the outskirts of the city. In doing a little homework, Mr. Adams has discovered there is a shortage of lots that allow manufactured homes. In discussing this situation with dealers of manufactured homes, Mr. Adams has also obtained the names of developers who have been selling developed lots to buyers of homes from these dealers. They have explained to Mr. Adams that the majority of buyers of manufactured homes do not usually already have land or a lot to put the mobile home on. Some of these home buyers have the home placed in a mobile home park wherein they rent the space for the home. However, many of these buyers would rather have their own land to place the home on.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
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.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
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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