Options are probably the least understood yet the most useful and versatile real estate technique you can (and should) use.
On option is basically a purchase contract with a contingency clause. A contingency clause means that something else has to happen sometime in the future before you will actually make the purchase or exercise the Option.
Options are safe too! If that “something else” does not happen in the future, you can get out of your Option with no obligation to buy the property.
Options can be used to control current or future equities. There are many other uses for options.
Using Options, you can control properties in to all price ranges.. even multi-million dollar houses, commercial properties, mobile homes, mobile home parks, and land.
Over the next couple of months, to help you wrap your head around options, I’ll give you some examples of how an option can be used. Hopefully, this will get those creative juices flowing and train your brain to identify many more uses for options.
Options are not just for run down, wholesale type properties. The following example will show you how you can get an Option on a nice house for a little below retail but still make a great profit.
Mr. Chase had contracted to sell his free and clear unlisted house on FHA terms. Following the usual harassment by FHA, he had met all contingencies out of his cash savings and purchased a replacement house for all cash only to find the Buyer didn't qualify. Chase suffered a heart attack! His wife forbade his reselling on FHA/or VA terms. No conventional financing was available.
Sanborn, an investor, saw an opportunity. He offered Chase a wholesale price on a 2 year lease/Option with monthly payments equal to 10% annual interest on Chase's equity. The Option could be exercised at any time during its term. Chase accepted readily, and all closing documents were filed in the title company.
In 2 months, Sanborn located a qualified FHA Buyer and set up a closing. The Option was sold back to Chase at closing where he effectively made the simultaneous sale to the Buyer. Thus FHA loan commitments remained valid and in force, seasoning issues were bypassed, and the Investor made a profit.
By assuming Chase's risk and relieving his mental and emotional strain, Sanborn used an Option to avoid violation of loan requirements while controlling the property.
NOTE: Sanborn profited because of his ability to solve the problem with an option.
APPRAISED PRICE $136,900
OPTION PRICE $102,000
GROSS OPTION EQUITY $ 34,900
LESS: .833% rents X 2 X $136,900 = $ 2,266
LESS: 3% CLOSING COSTS $ 4,100
NET PROFIT $ 28,534
The seller’s problem was solved! The Investor made a huge profit! The buyer got a great house! Win-Win-Win
These kind of opportunities are readily available. You do not need to “buy” the house. An Option is a safe way to control a property while you solve the seller's real estate problem… and you make a huge profit too.
Can you think of other ways Sanborn could have done this deal? Let’s talk about it in the Forum at CashFlowDepot.com
Best of Success…. and Freedom.
Jackie
P.S. You can learn many more CREATIVE OPTION STRATEGIES at Peter Fortunato’s workshop in Costa Mesa California March 8 & 9th.
P.P.S. An Option Contract has been posted in the Member's Section under the FILE VAULT
