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.

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.

Want To Invest In Real Estate With Limited $$$ ?

If I wanted to invest in Real Estate today and had little or no money, one place I would look at would be single family houses in NICE neighborhoods. I would find houses that would fall into any of the following categories:
Houses that are vacant, probably with a “For Sale” sign in the yard.
Houses wherein the owners are having trouble making their loan payments.
Houses listed “For Sale By Owner” in the newspaper. Don’t forget to look in “The Shoppers”, “Thrifty Nickle”, etc.
Houses that have signs or are listed in the paper “For Rent”.
I might even run a little ad myself reading “House Wanted For Rent”. How do I contact these owners? If they are still living in the house I would arrange a meeting, preferably in the home where I could sit down with the owners and negotiate a deal.

In my discussion with the owners I would try to find out what the REAL situation is.
For Example:
Why do they want to sell or rent?
How much is owed on the property?
How much are the monthly payments?
Are the monthly payments current?
How much does average utilities cost monthly?
Are there any other expenses such as Homeowners Association fees, etc.?

Based on how I felt after gleaning this information, I would make the owners an offer to lease their house with lease payments equal to the current monthly payment. This offer would grant me the right to sublease the property. I would also require a 2 year option to buy the property for an amount equal to what they owe on the property now. The “Option Agreement” would contain a clause stating that I could renew the option for an additional 2 years with a payment of $500.00 at the time the option was renewed. Then, additionally, I would make the contract contingent upon me finding a tenant to sublease the property within 60 days.

I would then advertise "Lease With Option To Buy" (in such and such neighborhood) "Credit No Problem" in the local newspapers and in any freebies I could. I am confident I would receive many responses to my ad. (If I don’t, no big deal, my 60 days expire and all I have lost is my time – which is valuable).

There are many people with some cash who want a home to own; however, they have bruised credit or some other reason why they can’t qualify for a loan to buy a home. I would require an option fee of $2,000.00 (or more, depending on the ability of my party) and also a rent amount of at least $100.00 above the amount I am paying. The sale price would be at least $5,000.00 above the current mortgage balance ($5,000.00 more than my option price is.) Then I would give a credit of $100.00 per month for each month that the rent is paid on time. My experience has been that lease options really are motivated by applying a credit from part of the rent towards the purchase price.

I am confident that in today’s market, I could repeat this process over & over – (I have done it when the market was not as bad as it is now). In San Antonio we have over 1,500 properties posted for Foreclosure in January 2010; the MOST in 20 years.

THE DEALS ARE OUT THERE! As an old highly respected investor, entrepreneur, and builder Bill Zeckendorf said, “You make money when the blood is running in the streets.” Well friends, it’s running in the streets now.

By the way, if you are an investor or want to be, I recommend the book “Zeckendorf” – You may find it on Amazon. This man, William Zeckendorf, was the innovator of many things we have today – Shopping Malls, Condominiums, etc.

OK, back to our homeowners who we wish to contact. How do we find them? You can do this online; go to your County Tax Appraisal website. By entering the address, you should be able to find the owner of that property.

Finally, I know I ramble a lot, but if you have any questions about any of our information, please contact us – NO CHARGE!

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.

Private Mortgages: Interest -vs- Yield

What is the difference between interest and yield? Can the interest on a mortgage be changed without an agreement by both parties (Mortgage Lender and the Borrower)? Can the yield be changed without an agreement by both parties?
There are BIG differences between the two.

“INTEREST” is the interest rate stated on the Mortgage note. This interest rate CANNOT be changed without an agreement between both parties. Could there be an occasion wherein the parties would agree on the change in the interest rate stated in the note? YES.! There could be any number of reasons this could happen.

Here are a couple of examples.
There could be a balloon payment coming due which the borrower or payor is unable to pay. The Lender (note owner) might agree to extend the payment in exchange for an increase in the interest rate.
Subordination of this loan to a new loan. Say the mortgage is on a lot. The payor wants to build a home on the lot. The bank will agree to loan the money to build the house; however, the bank must be in senior or first loan position. Since there is already a loan on the property, the borrower asks the existing lender if he will subordinate (take second position behind the bank).
The existing lender might agree to this in exchange for an increase on the current face rate on the note. The bottom line is that usually the borrower wants something from the lender.
Sometimes the lender will agree to whatever the borrower wants by renegotiating the note – Most often with an increase in interest.

Could there ever be a time when the lender (note owner) would offer to decrease the interest rate on the note? The answer is YES! Why would the lender do this? The answer will be in the discussion of “Yield”, which comes up next.

Now let’s talk about YIELD – Yield is the anticipated return on a purchase of a mortgage note. “Yield” and ”Return on Investment” are synonymous.
Most private mortgages purchased by investors are purchased at a discount. For example –
Let’s assume that an investor is purchasing a mortgage note with the following numbers:
Balance Owed: $42,500.00
Note Interest Rate: 8%
Monthly Payment Amount: $406.15
Monthly Payments Remaining: 180

In this example, the investor desires a 12% Yield (Return) on his investment. We will use a financial calculator (in this case a Hewlett-Packard 12C – my favorite for many years).
By using the numbers given, we enter into the calculator the following numbers:
Number of Payments Remaining: 180
Monthly Payment Amount: $406.15
Now instead of the face rate of 8% – we enter the yield desired by the investor = 12% – Then we solve for present value = $33,841.09

Therefore, in this example the investor is purchasing the note at a discount of $8,658.91. The figures are very close to what investors are buying at today. The required yield, however, could vary greatly depending on what kind of property secures the loan, credit of the payor (borrower), payment history, etc.

In a future post, I will tell you how a person can become a Mortgage Investor without having to be wealthy in order to do it.

Now – About an example wherein the Mortgage Investor (Lender) would propose to decrease the interest rate for the borrower. Let’s use the same example as above. In this case the investor wants to increase his yield. A rule I learned from an instructor (Robert Ward) when I took my first CCIM Course many years ago is “More Sooner is Better” – Write that down in your things to remember.
OK – In our example the investor offers to decrease the interest rate from 8% to 4% if the borrower (payor) will increase the monthly payments to $812.30.
This might be very appealing to the borrower because now he would pay-off the loan in 58 months instead of 180 and thereby save $25,993.60.
What does that do for the investor? Let’s review the numbers:
Number of Payments: 58
Monthly Payment Amount: $812.30
The Investment Amount: $33,841.00
Using the HP-12C again, we calculate that now the investors yield is 14.35%. HOW ABOUT THAT PAPER MAGIC?

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.

Investing In Mortgages

As we discussed previously, debt instruments can come in different flavors – Mortgages, Trust Deeds, Contracts, etc. In order to simplify somewhat, henceforth, we will just lump these together and call them “PAPER”.

Further on when we talk about what you are buying when investing in paper, we will call the actual document that spells out the details of payment the “NOTE”. At any point in these posts is you do not understand what we are talking about, please let me know and I will try to clarify. PLEASE do this because it can (and will) sometimes be very confusing. It is NOT a simple subject HOWEVER it can be and is a very lucrative investment program.

Investing in paper can be, and should be, very rewarding if the investor is prudent and knowledgeable. In goal, these posts are to make you more knowledgeable and point out some things to help you be prudent.

I’m sure you’ve heard that the three most important things about Real Estate are Location, Location, and Location. The three most important things about investing in paper are Equity, Equity, and Equity. You want to be sure that if the worst happens and you have to foreclose on the security property that you have enough equity in the property to get your investment back. HOW DO YOU DO THAT?

You do it PRIOR to buying the note. As we discussed in a previous post, you need to establish the true market value of the property. This can be done by an independent appraisal (just like the bank does it) or by your own experience or by a trusted person that you know who is very knowledgeable about the local Real Estate market.

If you intend to keep the note (not resell it at a profit, which we will discuss later) your due diligence is not over. Some things you need to pay close attention to are:
Is the payor keeping insurance on the property? (If improved property; house, etc.) Be sure you are named as additionally insured on the policy and you get proof from the insurance company each year that the insurance is renewed.
Is the payor keeping the Real Estate taxes paid on the property? Demand that the payor send you a copy of the taxes paid receipt. You can always check with the Tax Collector’s office to check this out.
If improved property, drive by (or have someone drive by) the property occasionally to make sure it is being reasonably kept up.
If possible, obtain a credit report on the payor on the note. Also, check the payor’s employment situation. With this information plus the credit report you should be able to determine if the payors seem capable of making future payments on the note.
Check the pay history on the note with the person selling you the note. You want to know if the payor has consistently been on time with his payments. Verify this with actual documents such as canceled checks, deposit slips or service records if the note is serviced by another party. Be cautious if the pay history is handwritten by the owner on tablet.

Actually, even if you intend to sell the note, your buyer will want to know all this information as well. Next time we will talk about Interest, Return, and Yield. Is Interest the same as Yield?

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.

Options For Big $$ - Part II

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.

Making Big $$ With Real Estate Options

Much is written and said about making money with options by Stock Brokers, Commodity, Gurus, etc. They don’t know a thing about a much more profitable, SAFER, way to invest in options. That way is buying and selling Real Estate Options. Almost anyone, with a little coaching or training, can invest in Real Estate Options with VERY little money and reap big dividends with minimum risks. I doubt that you could buy a stock or commodity option for $10.00; however, I have bought Options to buy Real Estate for as little as that. I have known other people who got it down to $1.00. Unbelievable, right? But it’s true.

Now, where in the world would we find properties that we could buy an Option to buy with a small amount of money? Right in the local newspaper and in your area Realtor’s Multiple Listing Service (MLS). This is especially true with today’s lousy (in most areas) housing resale market.
Maybe first, so that we all know what we are talking about, we should explain a few terms, names, etc. about Options. You can’t tell the players without a scorecard.

What is an Option? An Option is a contract between two (or more) parties concerned with one party (the Optionee) buying an Option to purchase, Lease, or whatever, Real Estate from another party, (the Optionor).

Let’s further identify these two parties:
1. The Optionor: This is the party who owns or controls the Real Estate in question.
2. The Optionee: This is the party who wants to buy the Option to buy the property from the Optionor.

The Option, as stated, is a contract which should be in writing. It must contain language showing that the Optionee paid some consideration for the Option. The Option should be for some specific period of time; a month, a year, 5 years, etc. The Option must also include the purchase price of the Real Estate if the Optionor does exercise the Option.

Now, once the Option Agreement is signed by both parties, the Optionee has control over the subject Real Estate for the entire time period of the Option. To protect the Optionee I would recommend that the Option be recorded at the County Courthouse. This protects the Optionee in that if any title search is done it will show that the Option exists.

There are many variations and Objectives that can be included in an Option Agreement. In essence, maybe to better understand an Option Agreement, just look at a standard Sale And Purchase Agreement wherein the buyer has deposited earnest money (somewhat like an option) to buy the property from the Seller. If the Buyer defaults on the agreement he loses his earnest money.

In the next post (coming soon) we will go into some case histories to better explain and to show you how you can make BIG $$ using Options.

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.