This is an excerpt from Jack Miller’s CommonWealth Letter
Ask yourself how often you’ve been right as to the direction and timing of any of the recent major moves in the real estate market. Who could have predicted interest rates falling as dramatically as they have in the past 90 days? What about house prices, when are they going to start moving up or down? How fast will they go? Is the government going to subsidize single family house ownership? Will the banking system crash? Will we have a depression? Will we have war? Price controls? Rent controls? Ruinous property taxes? Changes in interest and depreciation deductions? Higher capital gains taxes?
How do you avoid risking losses of capital in the face of these uncertainties?
With OPTIONS!
All an option is is an offer made by a seller or a buyer in which the other part has purchased a given amount of time during which the offer must remain open. For instance, I might offer to sell a buyer my house at a stated price and under specific terms. Provided he paid me a consideration, I’d contract to give him one year during which he could accept my offer to sell. During that time, he’s be free to complete the purchase of my house or to sell my Option to another party who would have the same choice. Because this is an incomplete transaction, the IRS takes no notice of it until it is completed either by my closing on the sale, selling my option to another, or allowing it to be abandoned. At that time, depending upon the circumstances, a tax might be levied.
If it sounds simple, it is – provided that care is taken to structure the transactin so that it is legally binding. In one sense, buying and selling Options is a form of endeavor which is diametrically opposed to management. On the one hand, the entrepreneur offers his craft as a manager for a free or for a part of the future profits. His is an effort-centered, systems-oriented chore which relies upon his ability to work with tenants, repairmen, public employees, the courts and other managers to succeed.
In contrast, the speculator in Options has little to do once the Option has been purchased. His success relies more opon successful negotiation at the point of purchase to obtain terms and the longest period of time during which the Option might be exercised. After that he has little to do other than to await the outcome of his gamble.
Several years ago I published a booklet titled Options – Wealth Without Risks – a better way to control houses. It is available free to anyone who joins CashFlowDepot.com It goes into a little more details concerning the uses and yields on Options. Yelds are typically astronomical at he risk of tiny fractions of the price of the property, so Options are a long shot gamble which even the most meager budget can afford.
In some instances, it’s possible to obtain legally binding Options without risking anything at all. This would be true when a contingency such as “X% financing is made a part of a purchase offer. Or zoning. Or sale of another property.
Of course, a lease-option combines both management and Options to produce cash flow benefits during the Option period and speculative profits at the end. And it is the perfect vehicle for someone with spare time and little spare cash. It effectively offsets negative cash flow resulting from inversions in rent to value which we see so often.
Thus the Option is possibly the single most effective tool in all real estate!
As with any other good vehicle, creative application of Options and Lease-Options can enhance the returns to the Optionor and Optionee far beyond those normally thought to be available. It requires knowledge of the laws pertaining to contracts, title, and taxes.
Learn Creative Option Strategies at Peter Fortunato’s workshop March 8 & 9th in Costa Mesa California
LEARN MORE HERE
