Learn why Options are such a powerful tool. An Option is a purchase contract with all the terms and pricing worked out. There is a contingency clause in the contract that says something else has to happen in the future (pre-determined timeframe), before you will close on the contract. If, for some reason, that “something else” does not happen, you are under no obligation to buy the house. So, an Options is a risk free way to make a lot of money with real estate…. without getting a real estate license.
An Option can be short term, a few weeks, or it can last for several months or even years.
I think the days of traditional Real Estate Brokerage are drawing to a close. Marketing is fleeing traditional advertising and listing on the MLS and heading straight for the Internet. Craigslist.com is already drying up newspaper ad lineage and brokerage fees. You can bet that it won’t be long before some bright lad comes up with a virtual national MLS that anyone can access. One thing it can’t replace is an Option to buy or sell.
Of course, when you can Option a house at a discounted price and sell it to an end retail buyer, you get all the benefits of all of the foregoing techniques without the necessity of splitting profits or income with an investor. Nor need you do any management if you don’t want to. Options are certainly well worth the effort and expense you might incur to learn more about them.
I first started using Options in lieu of listings as a Broker almost 40 years ago when I began to realize that fees associated with sales of my traditional real estate listings had to be divided four ways; 25% to the selling salesman, 25% to the listing salesman, 25% to the selling Broker, and 25% to the listing Broker. By refusing to list properties, but optioning them instead, I could control the sale of the optioned properties until I found a buyer, and thus keep all of the profits for myself.
My business plan was to option properties at a negotiated 80% of current fair market value, net to the seller. Ten percent of the 20% discount from retail market price was dedicated to readying the property for sale and motivating other Brokers to sell it; or to give discounts to Buyers. I kept the remaining 10%. ( a lot better than the 3% I would make as a listing agent)
Let’s look at how this worked. Suppose a $300,000 house would have earned $18,000 in fees, with each of the four real estate licensees each receiving $4500; my net 10% using an Option would have been $30,000. That’s almost 7 times as much as I would have earned simply by listing the property. Doing this, I was able to retire from Brokerage and start touring the country in my motor home in 5 years.
My Options usually were bought with a $100 bill, given directly to the owner, which didn’t count against the owner’s 80% of the sale price. They lasted for 6 months. I think I got two more months than I would have with a conventional listing simply because my measly $100 bill showed that I had more confidence in my ability than any other Broker who might have merely listed the house and tossed the listing into MLS waiting for someone else to come up with a buyer.
Of course, when you can Option a house at a discounted price and sell it to an end retail buyer, you get all the benefits of all of the foregoing techniques without the necessity of splitting profits or income with an investor.
Options are certainly well worth the effort and expense you might incur to learn more about them.
I first started using Options in lieu of listings as a Broker almost 40 years ago when I began to realize that fees associated with sales of my traditional real estate listings had to be divided four ways; 25% to the selling salesman, 25% to the listing salesman, 25% to the selling Broker, and 25% to the listing Broker. By refusing to list properties, but optioning them instead, I could control the sale of the optioned properties until I found a buyer, and thus keep all of the profits for myself.
My business plan was to option properties at a negotiated 80% of current fair market value, net to the seller. Ten percent of the 20% discount from retail market price was dedicated to readying the property for sale and motivating other Brokers to sell it; or to give discounts to Buyers. I kept the remaining 10%.
Let’s look at how this worked. Suppose a $300,000 house would have earned $18,000 in fees, with each of the four real estate licensees each receiving $4500; my net 10% would have been $30,000. That’s almost 7 times as much as I would have earned simply by listing the property. Doing this, I was able to retire from Brokerage and start touring the country in my motor home in 5 years.
My Options usually were bought with a $100 bill, given directly to the owner, which didn’t count against the owner’s 80% of the sale price. They lasted for 6 months. I think I got two more months than I would have with a conventional listing simply because my measly $100 bill showed that I had more confidence in my ability than any other Broker who might have merely listed the house and tossed the listing into MLS waiting for someone else to come up with a buyer.
Working Without a License
When I started optioning houses instead of listing them, I had to teach other Brokers as well as title and escrow companies how to handle them. Just as real estate laws don’t apply to sale of Options, real estate licensing laws don’t apply to them either as a rule, unless specific State Statutes address this. When a license is required, I have found it relatively easy to get a Broker to “front” the transaction in return for a fee equal to about 1% of the sale price.
When listing houses on craigslist.com, there is no problem with listing the Option holder (which might be an individual, trust, LLC, IRA. or corporation) as “Owner/Optionee”. I also specify that all offers may be presented by any one who has one directly to me, rather than through another Broker. The Brokers like this and so do I; because I may be willing to accept a creative deal that a Broker might turn down. This way I can make my decisions on the spot as needed.
Optioning Houses to Sell to Buyers
There are two markets that you can sell into once you get a profitable Option: The first is the wholesale market. In this market, you can get paid in cash very quickly, but you have to leave most of the profit on the table. The second is the retail market in which you have to spend more time and money marketing, but reap higher rewards. I think your best course is to sell into both markets; taking cash when you can get it quickly, and holding out for bigger profits when you can afford to do so.
Getting an Option then utilizing a Highest Bidder Sale to find a buyer is the quickest and easiest way to sell for top dollar. Here’s an example of a typical deal. The house is worth $250,000. You have an option to buy it for $200,000. You do 7 days of aggressive marketing, then do a two day open house where buyers submit bids. The house is sold to the highest bidder for $245,000. (no real estate commission to pay) The whole process from the time you got your option until you found a buyer was only 9 days! You close a few weeks later and get paid. This is much better and faster than the traditional way of selling houses.
Clearly this is a real opportunity for those who are trying to sell houses; especially when combined with the historically low 30-year fixed interest rate loans.
Now, let me stretch your imagination a little:
Suppose your buyer can’t find a loan, but you are prepared to provide seller financing with a low down payment? The house could be sold with two loans on it. A first mortgage lien at market interest rates, and a 2nd mortgage lien in the amount of, say, 75% of the available credit that can easily be calculated once the house price is set.
Of course, you could cash out the house with an institutional loan. In such case, the price would need to be within the price range of comparable houses.
One more thing you might consider adding to the deal might be a First Right of Refusal Option to buy the house at or near the original price if it were ever offered for sale. This way, you could liquidate some of your pet properties and be able to buy them back at some point in the future with a new loan on it that you’d not be liable for.
Flipping Contracts vs Flipping Houses
It’s a short journey from listing house for sale, to Optioning houses to be sold, to selling my Options to buyers rather than the houses themselves. This should be particularly interesting to people in places like California where real estate sales require the buyer to come up with an extra 3.3% tax in cash up front, and where sellers have to surrender their federal ID or Social Security numbers and receive an IRS Form 1099 that reports all their profits.
There is very little difference between being a Broker who obtains listings and an entrepreneur who ties up houses on Options, then sells the Options. Admittedly, there are no guarantees that you’ll find buyers for your Options (or your listings); but the bigger your profit spread, the more buyers you’ll find. Thus, it’s incumbent upon you to be able negotiate very good deals. One person who flips Options contracts reports making $20,000 per month with only token amounts invested, so this is something you should give serious consideration to.
How does this work? Many of the laws that pertain to real estate transactions do not pertain to personal property transactions. Since an Option is merely a form of a contract, it isn’t real estate, but is personal property; not subject to restrictive real estate laws. This creates terrific benefits for all parties. The buyer gets a house that has already been discounted by the Option seller. The Option seller can create a terrific yield when the token sum given for the Option is compared to the profit realized.
Of course, Options don’t work unless they are written correctly in enforceable language.
Learn more about Options with these training materials
Options Online Recorded Seminar ( video & audio)
The Premium Member Training has a TON of education about Options
READ ABOUT THIS CREATIVE OPTION DEALS…
Crazy Option Deal – The Ranch
Sometimes you have to push it to the limit to discover what you do. Challenge yourself! Pushing the limit is a good way to describe The Ranch deal. This story is about an 18,000 acre ranch, DEA agents, new marketing strategies, rattle snakes, small planes, cat litter, big profits, and a REALLY unique adventure
