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I have gotten a verbal agreement to do an option on a house with 3 acres for $180K which the comps say is a good price. The option is no payments, no interest for 6 months and I pay her mortgage in the mean time ($600/mo). I can rent out the existing house for $1500 a month in that neighborhood. The land is sub dividable and I plan to put a couple of my mobile homes on it which will each rent for a minimum of $700 so it will bring in some good income, or I can sell off an acre to bring in some capital. Ive talked to the local jurisdictions and will need to put in water submeters, electric pedestals, etc and with moving costs for each mobile, it will come to at least $15k per new mobile to get them in there. The mobiles were free. Even if I wait to move anything and invest in anything, the home is move in ready except for a few minor repairs so it will cash flow as soon as I get it rented.
So my question is, is this a good deal? What kind of paperwork should I use to seal this deal?I’m definitely open to suggestions. To the owner, I’d like to be able to pay over time but that isn’t going to happen so I’ll need to pay her off at the end of the term and perhaps I can stretch the option time out with an extension clause. For my lender, I’m assuming its ideal to do an interest only loan with no prepayment penalties. I would use the rental income to pay off the debt as well as a possible acre selloff to contribute as well. I’ve read interest rates are anywhere between 5-10%. A graduated interest rate would be ok too. Is there anything you would recommend Don?
I have heard from Pete Fortunado that some investors would like to keep the loan as long as possible to make more money long term but yes, I agree that I need a cash investor and that some will want that balloon. I have started to hard money lenders here in my area to start with because they will be able to physically visit the property. I’m also planning on reaching out to investors in my local RIA groups, real estate agents who know investors, and cash buyers who buy in this area. Am I on the right track?
I have heard Pete Fortunado speak and he says that many investors would like to keep the loan as long as possible to make more money long term but yes, I agree that I need a cash investor and that some will want that balloon. I have started to hard money lenders here in my area to start with because they will be able to physically visit the property. I’m also planning on reaching out to investors in my local RIA groups, real estate agents who know investors, and cash buyers who buy in this area. Am I on the right track?
Elizabeth,
Looking back, if you do the deal make sure you have the right to occupy and improve the property. Pete as usual is correct. Some investors want to keep their money working long term. Get with your investors and see what works for them. See how they want to position themselves in the transaction. I am curious what your thoughts are on in a perfect world with no money restrictions what you would do with the property?Don, yes, I am writing into the agreement that I have the right to occupy, improve, lease the current house and anything else I can think of to allow me the control over the property.
My ideal plan is to move 3 of my mobiles onto the land, add the utilities and septic systems they each need (master metered or at least sub-metered) and subdivide the land and carry notes on each individual, new lot/home. I’ve gotten the requirements for all of this from the various jurisdictions that oversee this kind of development. Now I need to pinpoint very specific costs, not just general costs for each improvement. But before I have to do any of that, I can move someone into the existing home as soon as the owner moves out (in 2 weeks). We happen to have the Gem Show here in Tucson right around the corner and hotels are booked and AB&B’s and short term rentals as well. Prices double and even triple so 4 bedroom homes are going for $2000 a week in some instances. This will bring in income right away and then in a couple of months I will put a long term renter in.Here is a draft I am starting with for our Option Agreement. Does anyone have any suggestions/edits?
Real Estate Option Contract
The Seller and the Buyer (named below) hereby enter into this Option Contract for Sale and Purchase of real estate for property located at: ______________________. The Seller, in consideration of the Buyer paying $100.00 (the “Option Deposit”), gives to the Buyer the exclusive option (the “Option”) to purchase the property described herein (the “Property”). At the time the Buyer exercises this Option, the Option Deposit shall be applied towards the purchase price of the Property. The Option Deposit is otherwise non-refundable.
a) Parties: (Seller), and and/or Assigns (Buyer), with reference to the property herein described as _____________________ (the “property”).
b) Seller grants Buyer an Option to purchase the property including any household furnishings, personal belongings, fixtures, etc. still in or on the property at the date of this signing, for a total price of $000,000.00. The duration of this Option shall be for a minimum of six (6) months and may be extended for six (6) month intervals, not to exceed five (5) years (the “Duration Period”). Exercise of this Option shall be provided from Buyer to Seller either verbally or in writing.
c) Buyer agrees to pay Seller a monthly amount equal to Seller’s mortgage until closing. All monies paid will be credits, reducing the purchase price by the total amount paid up until the closing date. Buyer and Seller agree to use a third party impound account to pay and receive funds.
d) Seller grants Buyer full rights to repair, improve, use, occupy, rent out, etc. the property in any manner Buyer deems necessary or useful.
e) Seller does not and shall not have any obligation to fund or make any repairs, replacements, corrections, improvements, additions, etc. to the property before or after closing.
f) Buyer takes full financial responsibility for any and all repairs, replacements, corrections, improvements, additions, etc. needed on property.
g) If Buyer should default, all repairs, improvements and monies paid will revert fully back to Seller.
h) The Sale Contract shall include the following terms: 1) Closing will take place within thirty (30) days after Buyer exercises this Option. 2) Seller’s sale of the Property is and shall be “As-Is”, “Where-Is” and “With All Faults”, and Seller does not make any representation or warranty regarding the physical condition of the property. 3) The Sale Contract shall contain Seller’s standard “As-Is” sale language. 4) Seller shall provide to the Buyer a Seller’s Disclosure Report 5) Buyer and Seller shall each split equally all closing costs and fees.
i) This contract represents a full and complete integration of all terms and conditions and precedents, and represents the entirely of the agreement between the parties.
j) I, ___________ (Seller), understand all the terms of this Option and agree to abide by each one of them. My signature below also declares I have received the Option Deposit money.______________________________________________/______________
(Seller) Date______________________________________________/______________
and/or Assigns (Buyer) Date
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