In our last post we went through some definitions and other preliminaries about Options, who the players were, etc. To better understand the power of Options let’s discuss some case histories. Now in a previous series of posts (see the Eddie Nivens story) we talked about doing Lease Options with Shared Future Appreciation between the Optionee and the Optionor. This is one of my favorite programs because it is so easy to do. You are working with highly motivated sellers (Optionors) and you don’t need much money to make it work. If you missed this series I suggest you pull it up from our post archives in the “Investor Corner” section. Just look for the Eddie Nivens story.
Now, meanwhile back at the ranch, let’s get into some examples of using pure Options. You probably have heard about “Flipping” houses or other properties wherein a party (Buyer, Flipper) enters into a Sale & Purchase Agreement with a seller, puts up some earnest money, then goes out and finds another party that they can contract to “Sell” the property to before they have actually closed on buying the property. Then they either assign the Sale & Purchase Agreement to the third party or do a “Double” escrow wherein they close on the purchase with the first party, turn right around and close on the sale to the third party.
This is really nothing but a form of an Option. In my opinion it is much cleaner, better, less paperwork, etc., to just buy an Option on the property than it is to go out and find another party who would like to buy the property and sell the Option to them. By buying and selling the Option it also saves time and money for both the eventual Optionee (buyer) and the Optionor (seller). Less closing costs, etc.
I’ve been promising a case history, so let’s do one.
Mr. Adams is a Land Developer, Entrepreneur, Real Estate Investor, etc. Mrs. Walters is a widow who owns several Real Estate properties. Mr. Walters had been the one who handled and managed the Real Estate. His passing has left Mrs. Walters owning the Real Estate with little experience or interest in trying to continue to manage these properties. Therefore, she has most of these properties up for sale. Also, Mrs. Walters’ cash flow situation is not good. She really needs to sell off some of those properties.
One of the properties is a 40 acre piece of land located fairly close, but outside the city limits. Mrs. Walters has the land listed for sale at $1,000 per acre or $40,000. Mr. Adams knows that there is a shortage of lots with restrictions allowing Manufactured Homes (mobile homes, but God forbid, NOT trailers). After spotting the 40 acres for sale, Mr. Adams visits several Manufactured Home dealers located on the same side of town where the land is.
In checking with the County Tax Office Mr. Adams discovers that there is the previous year’s taxes owed on the property, in an amount of $450.00. Mr. Adams makes the following offer to Mrs. Walters.
1. Mr. Adams will pay the back taxes on the land as consideration for the Option to buy the land for a price of
$40,000. The Option is for a period of one year.
2. Mrs. Walters accepts the offer and they enter into an Option Agreement which Mr. Adams has recorded at the
County Courthouse.
BENEFITS TO THE PARTIES:
1. Mr. Adams has total control over the land for only $450.00 . If he does exercise the Option, he will get the $450.00
back as the taxes will be paid. He knows if the land were developed into Lots allowing mobile homes, it would
sell quickly.
2. Mrs. Walters is hard pressed for cash flow. The Option pays the taxes and stops the penalties. Even if Mr. Adams
does not exercise the Option, her taxes are paid.
We have seen the beginning of an interesting deal. – What comes next? As Paul Harvey would say, see the next post for the “Rest of the Story.”
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 escrow. Show all posts
Showing posts with label escrow. Show all posts
Thursday, August 5, 2010
Tuesday, July 27, 2010
Investing in Mortgages, Trust Deeds, or Contracts
It is not difficult. It’s just you loaning your money to another party. The loan is secured by a Mortgage, Trust Deed or Contract, on Real Estate. There are different ways you can invest in these loans. You can make the loan yourself to another party or you can buy an existing loan. There are several different names for these security instruments, and they are structured differently as well. Let’s briefly examine some of them. Mortgages and Trust Deeds are the documents securing the loan on the Real Estate. These documents are recorded showing the evidence of debt. There is one significant difference between the two. With the Trust Deed there is a separate note which is not recorded. With Mortgages and Trust Deeds, the borrower owns and has a deed to the Real Estate.
There are other debt instruments which have different names (depending on what part of the country you are in). They may be called Contracts For Deed, Agreement For Sale, Land Contract, or perhaps other names I am not familiar with.
The significant difference between these instruments and Mortgage and Trust Deeds is that the borrower DOES NOT have a deed to the Real Estate until the loan is paid off. The lender holds the title to the property and when the loan is paid, the lender deeds the property to the borrower. Sometimes these instruments are recorded but most often probably not.
In our subsequent discussions, to keep it simple, let’s just refer to all these debt instruments as mortgages. Investing in mortgages can be very lucrative with yields (return on your investment) that can range anywhere from 10% to 18% (more or less). Obviously the greater yields will normally go along with greater risk. However, if the investor is prudent and does proper “due diligence”, I can’t think of any investment today which offers a better and more predictable return.
Now, let’s talk about that “due diligence”. With investing in mortgages as with any investment, there are some risks. However, these risks can be minimized if the investor takes prudent precautionary measures. So, lets discuss the preliminary steps to take to substantially reduce the risk.
1. Be sure you get Title Insurance -normally paid by the borrower if you are making a direct loan or by the mortgage seller if you are buying a loan; however, this is negotiable.
2. Have an independent Escrow company, Title company or an attorney prepare the correct documents to ensure that the necessary documents are recorded in your name.
3. It is a good idea to have the property securing the loan appraised unless you as the investor are knowledgeable enough to know that you have adequate security and equity above the loan.
4. If it is an improved property (has buildings on it – not just land) insist on Fire insurance on the property.
Look for the continuation of this article in next week’s Paper Chase section of Jack’s blog www.realestatejack.net
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.
There are other debt instruments which have different names (depending on what part of the country you are in). They may be called Contracts For Deed, Agreement For Sale, Land Contract, or perhaps other names I am not familiar with.
The significant difference between these instruments and Mortgage and Trust Deeds is that the borrower DOES NOT have a deed to the Real Estate until the loan is paid off. The lender holds the title to the property and when the loan is paid, the lender deeds the property to the borrower. Sometimes these instruments are recorded but most often probably not.
In our subsequent discussions, to keep it simple, let’s just refer to all these debt instruments as mortgages. Investing in mortgages can be very lucrative with yields (return on your investment) that can range anywhere from 10% to 18% (more or less). Obviously the greater yields will normally go along with greater risk. However, if the investor is prudent and does proper “due diligence”, I can’t think of any investment today which offers a better and more predictable return.
Now, let’s talk about that “due diligence”. With investing in mortgages as with any investment, there are some risks. However, these risks can be minimized if the investor takes prudent precautionary measures. So, lets discuss the preliminary steps to take to substantially reduce the risk.
1. Be sure you get Title Insurance -normally paid by the borrower if you are making a direct loan or by the mortgage seller if you are buying a loan; however, this is negotiable.
2. Have an independent Escrow company, Title company or an attorney prepare the correct documents to ensure that the necessary documents are recorded in your name.
3. It is a good idea to have the property securing the loan appraised unless you as the investor are knowledgeable enough to know that you have adequate security and equity above the loan.
4. If it is an improved property (has buildings on it – not just land) insist on Fire insurance on the property.
Look for the continuation of this article in next week’s Paper Chase section of Jack’s blog www.realestatejack.net
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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