How can real estate Options secure loans?
I was recently approached by someone who had a quick deal that promised to make him $50,000 in just a few months. He already had a potential buyer lined up to lease the house on a five year lease. At the last minute, his lender had dropped a bomb on him at the last moment, and refused to lend him the wherewithal to buy the house. Now he needed a quick loan to finance the house or he’d lose it. The problem was that there wasn’t enough time round up another loan, nor was there enough time for me to do all the credit checks of him and his buyer to see whether or not he was creditworthy. (Unfortunately, this seems to always be the case when people need money.)
Of course I could have simply walked away, but I’ve discovered over the years that I lose more money walking away from deals than I lose by taking reasonable chances on people. In this case, with some questioning, it discovered that he had other free and clear assets that he had owned for some time. Among them was an Option to buy an interest in an attractive free and clear home.
Here’s what I did: I offered to lend him money secured by a collateral assignment of his recorded Option for the money he needed to buy his target house. He had already obtained title insurance on it, and the house was still appreciating even in the current slow sale market. Look what this accomplished: First of all, I didn’t have to concern myself with doing due-diligence on the house he was trying to buy, nor do multiple credit checks, pay for recording and transfer fees, nor intangible tax on any mortgage I might have created. Nor did I have to worry about being paid on a loan I might have made him; the leverage provided by his Option would provide a high enough yield on the appreciating home it was on. When he paid off the loan, I would re-assign the Option back to him. If he failed to repay the loan, there would be no need for a messy foreclosure; and I would be just as happy continuing to own the Option long term.
From his standpoint, he gave up virtually no benefits other than the appreciation of the Option. He made no payments nor incurred any additional debt on the house being purchased, so all the payments made to him by his buyer would not need to be used to make loan payments. Instead, he could keep it to add to his monthly cash flow.
When he sold the house, the repurchase price of the Option would be half of the profit made on the house. So, with nothing down and very little risk, he’d be able to make profit from payments and from the eventual sale.
Is there any reason why you couldn’t do this in your area?
