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Alright Bill Cook, or anyone else who can help me!
I’m deep into the Jack Miller school of thought. Taken both Options courses so far and I have already bought several Pure Options on properties this past year… the techniques are tremendously useful. I would argue it’s the best thing I have ever learned in real estate.
Have a question for you though on procedure:
Let’s say you buy an option for a $300K purchase price from a Seller named Sam by giving him $10K consideration to count toward the purchase price, and the balance of $290K should you close in the future on a 5 year option. You then follow the Jack Miller procedure: conduct a closing and escrow all of the necessary documents, warranty deed, etc.
As Jack says in the book, “you’ve got to plant firmly in the seller’s head that HE’ S IRREVOCABLY SOLD HIS PROPERTY and that the balance of his money is the only thing that must be left to the future.”
He also says: “Have the owners sign warranty deeds and place them into escrow. Get closing statements which reflect the future price and terms – get them signed and notarized.”
So, let’s say we go through the drill… and do a closing with a title company that’s happy to insure it, prepare docs, and hold everything in escrow for the future. The goal is that we don’t have to chase down or even contact Sam the Seller/Optionor when we come back and close and pay off their $290K balance.
Let’s say two years pass. We finally find our FHA buyer, Fred, who offers $350K to us the Optionee. Great! The spread is looking good. Sam is long gone by now but the signed deed is in escrow.
My question is… how do the Settlement Statements and Contracts read in this transaction?
From what I understand, the Seller is going to “buy back” the option at closing and get paid off the $290K they are owed? And that a “payment to clear title claim” will appear in their Debit column as an expense to seller (also my profit) before closing? And that me, the Optionee, will get paid a check from title?
But this still confuses me….
1. The purchase contract that Fred the buyer signs will be for the $350K contract price…correct? He plans on using FHA financing to close. Who is the “seller” on that purchase contract, is it me the Optionee, or is it Sam the original seller? I assume it’s Sam, to avoid seasoning issues. Ok, but how could Sam sign a new contract now if he disappeared years ago, but already put the deed in escrow? How could Sam deed a property to a buyer he didn’t know at the time?
2. Seller Sam signed a settlement statement long ago, before there was a buyer, reflecting his acceptable sale price listed on the option – $300K. The “buy back” fee to clear title was not known. The $350K final contract price was not known. My profit was not known. So how could Sam sign an incomplete settlement statement years ago if the final price of the home was unknown? I know settlement statements aren’t required legally for the seller… I think… but should title send him a revised one after closing? What if Sam is not around to sign one and the title company is asking how we’re supposed to close without the seller?
3. Back when Sam signed the closing docs, should he have signed something specific that instructs Title to send me (the Optionee) all of the proceeds OVER $290K at closing? Or does Sam sign a purchase contract for a sale price of $300K OR HIGHER, TO BE DETERMINED BY OPTIONEE. Or an Amendment that allows this to change depending on the eventual buyer I find?
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These concepts sound great but in practice there’s a lot of detail that goes into the closings. The goal here is to have a smooth closing that does not involve Sam the Seller at all down the road. But I don’t understand how that happens…. especially how to explain it to my closer who is a very bright woman, but I still need help. Thank you!
Thomas,
Good questions all.
Absorbing Jack’s Options courses is the way I started with Options. After Jack passed, I learned from Pete Fortunato. Learning from these two great dealmakers, combined with making 25 written offers a week for decades (implementing), I got a good handle on what actually works and what doesn’t work.
Here are some thoughts about what works and what doesn’t work:
1. Closing in escrow in Georgia doesn’t work. If you get my Power of Options course (BillandKimCook.com) I give a detailed explanation as to why this doesn’t work. Basically, in Georgia, when transferring the Warranty Deed, fresh (less than 90 days) blue-ink signatures are required from the grantor.
2. To achieve this when I don’t want to count on the Optionor showing up at closing, when acquiring the Option the Optionor transfers title to a Title Holding Trust (Land Trust). The Optionor is the beneficiary. As beneficiary, the Optionor gives an Irrevocable Letter of Direction to the Trustee (who we both trust) directing the Trustee to transfer title from the trust to me when/if I exercise my Option to purchase. Because a trustee is used, the Title Deed (Warranty Deed is one example of a Title Deed) has a fresh, blue-ink signature…the Trustees’.
3. I secure the Option to the property via a Mortgage for Deed of Trust (depends on whether the state is a judicial or non-judicial foreclosure state). If I run into a problem with exercising my Option, my fallback position is to foreclosure via the Mortgage or Deed of Trust.
4. Thought: When Jack wrote about closing in escrow it was more than 15 years ago. Title laws have changed in many states since then. For this reason, I don’t, and have never, closed in escrow on an Option deal.
5. Kim and I just acquired an Option at the end of June 2024 from an owner who faced a July 2, 2024 foreclosure. The above is how we did it: At the closing table in my real estate attorney’s office, the owner moved the property into a trust; Owner owns 100% beneficial interest; Owner gave trustee (T. Whitlock) an Irrevocable Letter of Direction; Kim and I acquired a 30-year Option to purchase the property at a pre-agreed to price PLUS subject-to the seller’s (Optionor’s) mortgage. This Pure Option was secured to the property’s title. We agreed to not exercise our Option the first 8 years. That said, if the Optionor fails to make a mortgage payment, or pay property taxes, or pay the insurance, or maintain the property, we can immediately exercise our Option to purchase.
NOTE: This deal, and all the paperwork, will be covered at What Box 2024 in Tampa (or on Zoom) on September 14 & 15, 2024. Go to BillandKimCook.com for full information and to register.
Hope this helps.
Bill Cook
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