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 option consideration. Show all posts
Showing posts with label option consideration. Show all posts
Thursday, August 5, 2010
Friday, July 30, 2010
Lease With An Option
It seems that many times something that is a bad situation for some, creates a situation that is good for others. Case in point: Today’s housing market is really bad in many areas of the country for people who would like to sell their homes. Also, many in these bad market areas are in danger of losing their homes because they are having difficulty in making the mortgage payments. The lease with an option to purchase can be a Win-Win situation for both home owner (seller) and buyer or entrepreneur.
Let’s build a hypothetical situation wherein you are in Las Vegas, Nevada. I hear the housing market there is pretty bad. You buy the local newspaper, pick up a free “Thrifty Nickle” and another freebie classifieds. You go to Starbucks, get yourself an Americana, and settle down to a table with your drink, cell phone & classifieds, and start “Dialing For Dollars”. You look for ads in the Homes for Sale by Owner, and look for ads that seem to be urgent. For example: “Owner Desperate”; “No Money Down, Take Over Payments”; “Rent To Own”; “Must Sell”; etc.
You locate a home which the owner has been unable to sell. He must move to Dallas for a new job and he doesn’t want to have two mortgage payments so he is willing to rent. The owner values the home at $125,000 with an existing, non-assumable mortgage of $120,000. Monthly payments are $900.00 (including taxes and insurance). You offer a three year contract to lease the house at $900.00 per month with an Option to Buy for $120,000. You require the right to assign the lease (or sub-lease) and the option to purchase to a third party. You agree to pay $1,000 as option money to include the first month’s rent. Your offer is subject to you finding that third party prior to closing. This will give you a simultaneous closing on both deals which means you won’t have to come out of pocket to close.
Now your marketing begins. You put up bandit signs all over town offering “Rent To Own” and run the following ad in the papers: “Rent To Own Your Future Home. $1,000 per month with 100% rent credit for one year. NO QUALIFYING, Upscale neighborhood – 3 bedroom, 2 bath – Call 433-2424 for details.” Your phone rings off the hook! You find a couple, Mr. & Mrs. Smith, who want to move in right away. Their credit is not too good due to Mr. Smith being laid-off from a previous job. He’s solidly employed now and they anticipate that they can improve their credit situation in a couple of years enabling them to qualify for a bank loan. Your terms are $4,000 Option Money including first month’s rent. They have a two year Option to Buy for $135,000 with rent at $1,000 per month. Full rent credit for one year ($12,000). They have only $2,000 to put down now, so you take a Note for $2,000 payable at $100.00 per month.
THE PROFIT: $1,000 cash now, $100 per month for 20 months with Option Note, $100 per month in lease difference, and $3,000 if they exercise their Option. This kind of deal can be done over and over, in any part of the country and in many cases for MUCH MORE PROFIT.
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.
Let’s build a hypothetical situation wherein you are in Las Vegas, Nevada. I hear the housing market there is pretty bad. You buy the local newspaper, pick up a free “Thrifty Nickle” and another freebie classifieds. You go to Starbucks, get yourself an Americana, and settle down to a table with your drink, cell phone & classifieds, and start “Dialing For Dollars”. You look for ads in the Homes for Sale by Owner, and look for ads that seem to be urgent. For example: “Owner Desperate”; “No Money Down, Take Over Payments”; “Rent To Own”; “Must Sell”; etc.
You locate a home which the owner has been unable to sell. He must move to Dallas for a new job and he doesn’t want to have two mortgage payments so he is willing to rent. The owner values the home at $125,000 with an existing, non-assumable mortgage of $120,000. Monthly payments are $900.00 (including taxes and insurance). You offer a three year contract to lease the house at $900.00 per month with an Option to Buy for $120,000. You require the right to assign the lease (or sub-lease) and the option to purchase to a third party. You agree to pay $1,000 as option money to include the first month’s rent. Your offer is subject to you finding that third party prior to closing. This will give you a simultaneous closing on both deals which means you won’t have to come out of pocket to close.
Now your marketing begins. You put up bandit signs all over town offering “Rent To Own” and run the following ad in the papers: “Rent To Own Your Future Home. $1,000 per month with 100% rent credit for one year. NO QUALIFYING, Upscale neighborhood – 3 bedroom, 2 bath – Call 433-2424 for details.” Your phone rings off the hook! You find a couple, Mr. & Mrs. Smith, who want to move in right away. Their credit is not too good due to Mr. Smith being laid-off from a previous job. He’s solidly employed now and they anticipate that they can improve their credit situation in a couple of years enabling them to qualify for a bank loan. Your terms are $4,000 Option Money including first month’s rent. They have a two year Option to Buy for $135,000 with rent at $1,000 per month. Full rent credit for one year ($12,000). They have only $2,000 to put down now, so you take a Note for $2,000 payable at $100.00 per month.
THE PROFIT: $1,000 cash now, $100 per month for 20 months with Option Note, $100 per month in lease difference, and $3,000 if they exercise their Option. This kind of deal can be done over and over, in any part of the country and in many cases for MUCH MORE PROFIT.
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, July 15, 2010
Rolling Option
Situation: A Land Developer, Mr. Tierra, has located a large parcel of land that he would like to develop into smaller tracts (5 acre tracts) for which there is a great demand.The land totaling 640 acres is owned by Mr. Grande who has had the land on the market for some time with no success in finding a qualified buyer. Mr. Grande does not want to finance the land for a buyer. It is difficult to find a lender who will lend on raw land. Mr. Grande’s firm price on the land is $1,000 per acre.
Mr. Tierra can raise the cash to buy 40 acres of the land and put in the improvements (Roads, Water, Septic Tanks, Electricity, etc.)
Possible Solution:
1. Mr. Tierra will buy 40 acres for $1,100 per acre, cash payment.
2. Mr. Tierra negotiates and buys an Option from Mr. Grande to purchase the remaining 600 acres in
40 acre or larger parcels over the next 5 years at a price of $1,100 per acre.
3. Mr. Tierra pays $4,000 for the Option which will be credited toward the purchase of the last 40 acre parcel.
Let’s look at some of the benefits for both parties.
Mr. Tierra:
1. Is able to start the development of the first 40 acre parcel which he can afford to do, wherein, if he had to purchase the entire 640 acres he could not do it.
2. By developing the first 40 acres, Mr. Tierra will increase the value of the remaining land because he has now built the popularity of 5 acre parcels being available.
3. Developing and selling the first 40 acres in 5 acre tracts will provide additional funds to buy and develop the next parcel of 40 acres or more.
Mr. Grande:
1. Receives a cash price of $1,100 per acre. He could eventually receive an additional 64,000 cash for the land.
2. Receives $4,000 as Option Consideration which he will not have to pay tax on until the final parcel is purchased or the Option is not exercised.
3. Each sale will be on individual parcels and not the entire 640 acres; therefore, Mr. Grande does not have an installment sale and will only have to pay taxes on each parcel as it is sold.
4. The development of the first parcel by Mr. Tierra will increase the value of the remaining land. If Mr. Tierra does not exercise any portion of the Option, the remaining land will be more valuable. Plus, Mr. Grande gets to keep the $4,000 Option Consideration.
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.
Mr. Tierra can raise the cash to buy 40 acres of the land and put in the improvements (Roads, Water, Septic Tanks, Electricity, etc.)
Possible Solution:
1. Mr. Tierra will buy 40 acres for $1,100 per acre, cash payment.
2. Mr. Tierra negotiates and buys an Option from Mr. Grande to purchase the remaining 600 acres in
40 acre or larger parcels over the next 5 years at a price of $1,100 per acre.
3. Mr. Tierra pays $4,000 for the Option which will be credited toward the purchase of the last 40 acre parcel.
Let’s look at some of the benefits for both parties.
Mr. Tierra:
1. Is able to start the development of the first 40 acre parcel which he can afford to do, wherein, if he had to purchase the entire 640 acres he could not do it.
2. By developing the first 40 acres, Mr. Tierra will increase the value of the remaining land because he has now built the popularity of 5 acre parcels being available.
3. Developing and selling the first 40 acres in 5 acre tracts will provide additional funds to buy and develop the next parcel of 40 acres or more.
Mr. Grande:
1. Receives a cash price of $1,100 per acre. He could eventually receive an additional 64,000 cash for the land.
2. Receives $4,000 as Option Consideration which he will not have to pay tax on until the final parcel is purchased or the Option is not exercised.
3. Each sale will be on individual parcels and not the entire 640 acres; therefore, Mr. Grande does not have an installment sale and will only have to pay taxes on each parcel as it is sold.
4. The development of the first parcel by Mr. Tierra will increase the value of the remaining land. If Mr. Tierra does not exercise any portion of the Option, the remaining land will be more valuable. Plus, Mr. Grande gets to keep the $4,000 Option Consideration.
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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