[William Salas]

William Salas

Hi everyone! I’m beginning to get more into flipping land.

I’ve been wholesaling houses for a few years but find the competition intense now in S. Florida.

I am venturing into land in other parts of Florida and already have a lot of leads.

I was thinking, does it make sense to buy myself 4-6 months by putting down a few hundred bucks and securing my price on the land with an Option?

“Mr Seller, here’s $500. Can you give me an Option for 5 months to buy this land for $15k? I need to get some answers from the city regarding permitting and secure my financing partner.”

I then use that time to find my buyer and flip them the Option for $25k. I make $10k.

Thoughts? Thanks!

[Bill Cook]

Bill Cook

William,

Yes, you can do this.

Two ways to exit this:

One, you can assign your option to your option buyer and then your option buyer exercises the option and buys the land.

Two, you exercise the option and buy the land, then sell the land to your buyer.

Bill Cook
770-815-8727

[Jonathan Asbell]

Jonathan Asbell

If closing was delayed for a year would you novate the option? I ask because there would be a non-performance/abandonment risk for the investor if the option buyer did not close.

[William Salas]

William Salas

Thanks Bill. Any additional tax considerations if I close on it, instead of assign the Option?

[Bill Cook]

Bill Cook

Johnathan,

Our options are secured to properties via a Deed of Trust or Mortgage. The option gives me (or my assigns) the right to exercise the option and buy the property within a specified period of time.

Kim and I just bought a 50-year option on a trailer park. Anytime within the next 50 years we (or our assigns) have the right to buy a 10% interest in the property. If/When we decided to exercise, we notified the Optionor and schedule closing.

Pretty straight forward.

Bill Cook
770-815-8727

[Jonathan Asbell]

Jonathan Asbell

Thank Bill. Thats a good case study. What did they get in exchange for the 50-year option, and how did you come to this offer? What did they want? What were they facing?

[Bill Cook]

Bill Cook

Jonathan,

The Optionor needed $129,000 to buy a trailer park in Rome, Georgia.

We loaned him $128,000, 15% & 5 points with points rolled into the note. We then paid $1,000 to buy an Option on the park that can be exercised anytime in the next 50 years where we will receive 10% interest in the property. Strike price is $1,000.

Bill Cook
770-815-8727

[Bill Cook]

Bill Cook

William,

I’m not a CPA.

Both would be considered earned income and taxed appropriately.

I’ve heard of some investors doing this structure inside their self-directed retirement accounts.

Bill Cook
770-815-8727

[Jonathan Asbell]

Jonathan Asbell

thanks. so dissecting is a little further, You said:

1) we lent him $128,000, 15% & 5 points with points rolled into the note. does that mean you piggybacked $6400 to the end of the $128,000 loan? or are you saying that you made the loan a 20% rate? or did you mean something else? I’m not understanding exactly how this was done.

2) we paid $1,000 to buy an Option on the park that can be exercised anytime in the next 50 years. just to be clear that option was purchased from the individual who you lent the money to correct? if so, and if that person stopped paying, what would you do?

[Jonathan Asbell]

Jonathan Asbell

also in your case study, was it you that actually loaned the $128,000? or did you partner with a lender and agree for example to split the proceeds in exchange for lending the $128,000 at a lower rate, like 10% and then arbitrage the difference?

[Bill Cook]

Bill Cook

Jonathan,

I’ll be covering this deal in detail, along with the paperwork (note, security deed, option, security deed, HUD, warranty deed, and page one of the paper trust.

Will not go into detail on this board as to the mechanics of this structure. Way too much to type.

Basics:

Borrower needs $129,000. Willing to pay 15% and 4 points, with points rolled in. Buyer agreed to sell us option for 10% ownership interest or $1,000 strike price, with $1,000 consideration applied.

128,000 / 0.96 = $133,333.33 note amount.

1,000 option consideration.

$128,000 + $1,000 = $129,000

So, full loan face amount of Note is $164,000 / 0.96 = $170,833.33. So, $6,833.33 is the amount of financed points.

[Jonathan Asbell]

Jonathan Asbell

How did you get from:

-> $128,000 + $1,000 = $129,000
TO
-> full loan face amount of Note is $164,000

[DON WEDE]

DON WEDE

Bill,
Interesting. With a 10 % ownership interest in the real property would give you the right to protect your interest in any defaulted note, once you exercise your option. Am I on to something here?

[DON WEDE]

DON WEDE

Bill,
Hope to see you on zoom on June 24th and 25th.

[DON WEDE]

DON WEDE

Duh,
You do not even have to exercise your option. The language is in the option agreement for you to protect your interest in the property. Been awhile since I looked at that kind of option.

[DON WEDE]

DON WEDE

The option is a security out for you in a defaulted note, if I am reading this correct.

[DON WEDE]

DON WEDE

My guess all needed documents are held in escrow.

[Bill Cook]

Bill Cook

Don,

Our Option docs are not held in escrow., My attorney said the signatures on the Warranty Deed would be considered (in Georgia) to be a “stale” deed.

I know Jack talks a lot about escrow closings that may take several years to close. We can’t do this in Georgia. I do not know about anywhere else.

We do secure our Options via Security Deeds in Georgia. This allows me to foreclose on the property (and take any senior liens over S2) if Optionor refuses to honor Option. NOTE: We’ve never had to foreclose on one of our Options.

[Bill Cook]

Bill Cook

Johnathan,

The buyer of the trailer park needed $129,000.

Here’s the accord we reached that allowed him to received this $129,000.

We loaned him $128,000, 15%, 5 points rolled in.

He sold us an Option to buy 10% interest in the property for $1,000. Option Consideration = $1,000. Full Option Consideration applies to Strike Price.

$128,000 + $1,000 = $129,000 buyer needed to buy.

Bill Cook
770-815-8727

[Jonathan Asbell]

Jonathan Asbell

Thanks Bill. You say “This allows me to foreclose on the property (and take any senior liens over S2) if Optionor refuses to honor Option”. Is there language in your contract that states that the seller/property owner who gave you the option gives you a limited POA and authorizations that allow you to take over their debt subto? What if they call their mortgagees/lenders?