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Hi! I’m a little confused as to how you would present an Option to a seller who has a property that needs to be rehabbed.
Example. Tara has an offer from another investor on her house for $190k, I told her I could give her $200k if she’s willing to continue to hold title while we go in and repair the property. She gets $200k when we sell the rehabbed property and we keep everything above $200k. We pay for our own repairs of course. House is vacant and has been for awhile.
I have seen “Option” come up in reference to this scenario more than once but I’m still confused. I’m not sure how to phrase it to the seller? What does the paperwork look like?
Any help here would be appreciated! Still trying to wrap my head around “Options”! Thanks!
First, it’s not a good idea to spend any money on a house you do not own. Too many things could go wrong & you lose all your investment and equity potential too.
Using an option, here are a couple of ways you could do this deal ( it would help to know exactly what it is worth all fixed up)
Option #1 – Get an option for $200,000. Then sell your contract OR sell the house to a rehabber for more – maybe $210k. You get your money and you’re out of the deal. You can quickly move on to the next deal without being tied down to a rehab project.
Option #2 – Get an option for $200,000 with an agreement that you will do a Highest Bidder Sale and you will split any proceeds over $200,000 with the seller. Let’s say you sell for $250,000. You get $25,000 in a few weeks. The seller gets $225,000 – much more than she would with the $190k offer. You get your money and move on to the next opportunity without being tied down to a rehab. Oh yea, she tells all her friends how you helped her make more than she thought she would get so now they are all calling you to help them too.
Option #3 – Buy the house for $200k with $10,000 down and no payments no interest until the house is fixed up and sold within 12 months. The seller gets a note and a deed of trust to secure her position. You get ownership of the house before you start spending $ to fix it up. OR… Then, you have several options – you could sell the house with seller financing (wrapping underlying loan) for $230,000 with $15,000 down and 8% interest rate to a rehabber. 9 month balloon. When it is about time for them to pay you off you could negotiate a discount on the note when you pay off the original seller to increase your profit margin plus you got monthly cash flow with someone else did all the heavy lifting. OR .there are so many ways you could structure this opportunity but you should always keep three important things in mind
1. reduce your risks and liability ( rehabs have both)
2. have as little cash in a deal as possible ( for every $1 in, it is a $1 you could lose)
3. know your exit strategy before going in to a deal.
WE have a ton of training about OPTIONS in the Premium Training Section.
This is awesome! Thanks Jackie! Exactly what I was looking for. This house fixed up is worth about $260k. Talking to an investor friend he mentioned your #3 of putting some money down and having the seller carry a note for the remaining balance. Few new ideas as I am meeting with the seller on Thursday.
What I love about real estate is that there are almost always more than 1 way to do things. I’ve been trying my best to take in a lot of the content on the site, it’s been great! Very eye opening! Sometimes I just need things a little more black and white as Jack, Peter and these guys talk in stories and you have to really pay attention and infer how their story can relate to your deal. They got to their greatness by being creative and really learning the ropes and I sense that part of them wants you to get there the same way.
If the retail, fixed up, price for this house is $260,000 — then a $200,000 strike price is not good enough to interest most investors and certainly not rehabbers.
I know from personal experience that what you think will be a $10k rehab job can quickly turn in to a $20k rehab job with hidden defects — when you combine that with holding costs, there is NO (or very low) PROFIT in this deal.
An Option is the only SAFE way to do this deal. Get an option for $190,000 with agreement to do a highest bidder sale and that you will split anything over $190k with the seller. She will still make more than $190,000 and you will make a profit without the risks.
If it’s just cosmetic repairs, you will probably sell to someone who lives in the neighborhood who can pay cash.
If it’s more repairs than cosmetic, you need to market to investors. They would be much more likely to buy for a higher price if you could sell it with seller financing for the first year so review Options #3 above.
It is impossible to give an evaluation without knowing all the numbers involved like estimated repair costs, fixed up retail price, average DOM, etc
Read about this deal that my daughter did – very similar to what I’m suggesting you do
Thanks Jackie! This is very helpful! Can’t wait till my brain works like that! Hehe
On Option #1 above, for how long would you get the option for? 2-3 months + an extension for example?
Also, is it a good idea to include in the option that the optionee (buyer) has the right to assign the contract/option and therefore to show the property for a quick sale or is that not necessary? Especially if you are not a licensed REA?
I have done this type of deal twice already but there’s always some people saying that it could be considered illegal because I am not an agent, blah, blah….
Normally, in the Option #1 example, I would ask for a 30 day option. I would usually already have a buyer lined up and a good buyers list. But, if you don’t have buyers lined up, they a 60 day option with the right to renew for another 30 days would be good.
Definitely include that you have the right to show the property with a 24 hour notice or get a key if it is vacant.
When you write the contract, you could say Buyer is Rafael and/or assigns —
If you have a contact to buy the house, you can market to sell your contract or the house. But you need to have the contract to buy.. Always tell sellers that you or your associate will buy the house and you will need their approval.
Agents do not have a contract to buy the house – getting a listing is completely different
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