By Jack Miller
This small office building story illustrates how critically important Option terms can be to the ultimate profitability of a deal. My Option gave me 24 months to raise the money for the down payment and for rehabilitation of the building. I didn't wait until the last minute to start setting aside money from my earnings. The certain knowledge that I'd need money to close my Option gave me the incentive to work a lot harder to earn and save more. I also started seeking out tenants who would do their own improvements in return for lower rents. I closed the Option with the building fully rented. My annual net operating cash flow was $7000 more than the loan payments.
The success of this venture was due more to all the previous years I'd spent learning about real estate than to any tricky cookie-cutter technique. Had I not had the experience to negotiate owner-financing as a condition of the Option when the vacant building owner was highly motivated, it's doubtful that I'd have been able to obtain it once the building had begun producing positive cash flow rents. And if I hadn't already attained management skills and known how to plan the building layout to attract potential tenants, I wouldn't have been able to fill the building up with tenants who would pay for their improvements so as to give me the cash flow to make my own payments.
Hopefully I've made a couple of points thus far. First of all, Just learning Option techniques isn't enough. You've also got to learn the fundamentals of real estate to make them pay off. I'd been in the real estate business for a long time, learning from very expensive, long time experience rather than from seminars that would have been a lot cheaper and which would have saved me many years of effort.
Many people rush out to obtain Options without negotiating feasible down payment and financing terms from the start. That's like playing poker with 'table stakes'. If you don't have the necessary cash when it comes time to exercise the Option, you can't play your hand no matter how good it is. It's important to always structure terms that you can meet, and hopefully, that can be met by others in the market. Here's why:
An Option gives the holder the right to buy or sell a property. The more feasible the terms of the Option, the more it will appeal to the market. You'll soon discover that you can make as much money selling a well constructed Option as you can in exercising it to buy a property. Once I realized this fact, even though I was a Broker, I stopped taking listings on property at all. Instead, I began to negotiate relatively short term Options of from 6 months to 1 year on houses.
My objective was to pay roughly 80% of true retail value. Next, I'd list the property, as owner/Optionee, for sale in the Multiple Listing Service, offering higher commissions than Brokers could earn selling their own listings. To motivate agents to generate quick sales to pin down especially lucrative Option profits, I offered bonuses. These included cash, trips, a year's lease payments on a Mercedes Benz, etc. for anyone bringing in an all cash buyer. All of this generated a constant flow of sales income with little effort on my part, and it gave me a chance to focus on obtaining more Options. Using Options paid a lot more than listings.
