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Options, Lease-Options, And Seller Financing Agreements, Part 2

Feb 23, 2008
Technique #2, Options:

Whereas Lease-options are a way for a buyer to take control of a property with very little risk on his part, Options present a way for the buyer to take control of a property with absolutely no risk on his part. An Option agreement is a sales agreement with one difference: while a sales agreement states that the buyer "will" buy the property for a certain price and terms, an Option agreement states that the buyer "may" buy the property for a certain price and terms. This gives the buyer the Option to buy or not buy the property within the timeframe specified in the contract. I try to do my Options for 90 days, but if the seller isn't in agreement with me tying up the property for that long, I'll go as short as 60 days - but no shorter. I need at least 60 days because I want time to market and sell the property.

With Options, taking control of a property that is in good condition isn't of paramount concern as it is with Lease-options because you won't be making payments to the seller. You might pay the seller an option fee up front, but if you're smart it will be a very small fee. In most cases I don't put more than one dollar down when I do an Option. You may be wondering why a seller would be willing to let me tie up their property for 60 to 90 days while all I have to lose is one dollar and some time. One reason would be that the property is in poor condition and the seller has been unable to sell it either through or a RealtorŪ or by themselves. Most RealtorsŪ (with good reason) don't want to deal with junker properties. Selling them is too much a hassle, and the paychecks are too small.

When you do an Option on a junker property, however - provided that it's the right type of property in the right area - you can build in a nice profit margin for yourself. I've done many Options where I've made between five and ten thousand dollars a deal without ever taking deed. Often a simple classified newspaper or Internet ad will attract a buyer for the property - an investor intending to renovate and resell it - and I assign the contract to him at the closing table in return for a healthy assignment fee. Oftentimes I'm also arranging a hard money loan for the buyer to cover 100% of the purchase and renovation costs - for an additional fee, of course.

Another reason a seller would be willing to let you Option their property is if they're going into foreclosure. They're losing the property anyway. They have nothing more to lose if you're unable to sell it. If you are able to sell it, they can salvage their credit and move on. Preforeclosure deals are tricky, though. They're a science in and of themselves. You have to make sure you have enough time before the sheriff's sale to get the deal done. There must also be enough room between what's owed on the property in mortgages and assessments, and the price you can sell it for in order for you to make money.

If too much money is owed on the property for a simple Option to make sense, perhaps you can negotiate a reduced payoff on the mortgage with the bank. When I do this, I prefer to take deed to the property beforehand. This puts me in a position of strength when dealing with the bank. A lot of times they won't even talk to me if all I have is a simple Option agreement. If I've taken ownership of the property through a Quit Claim Deed, however, and I present the bank with a copy of the deed and a release from the seller allowing them to discuss the details of the seller's finances, the bank looks at me in a whole new light. (I've developed nuances to this technique which allow me to eliminate the risks associated with taking deed to the property when done in the traditional sense that are too detailed to go into here.) Suffice it to say that taking deed to the property before contacting the bank is a very effective strategy to get them to take you seriously.

In short, Options are a very effective technique for taking control of properties while eliminating your risk. When done correctly, they're very lucrative. They're also a great way for the beginning investor - especially someone with bad credit, no money, or both - to get his feet wet in the Real Estate Investing game. They're an awesome way to learn while at the same time making money.

I was broke when I started out as an investor. I had no choice other than to do Options and got quite good at them. After I had done a few, I had amassed enough knowledge and built up a large enough bankroll to broaden my horizons as an investor. I branched out into Hard Money Lending, lending out my own money to other Real Estate Investors as well as arranging loans between investors and other Hard Money Lenders in return for a fee paid by the borrower. But if I hadn't started with Options, I wouldn't have progressed into those other areas. For this reason, as well as the absence of risk, Options are my favorite Real Estate Investing technique.
About the Author
Frank Lawson is the Editor of The Profit Blog, the Online Education Resource for Real Estate Investors and Hard Money Lenders. With 10 plus years of experience in Real Estate Investing and Hard Money Lending, Frank has an expert perspective on today's volatile real estate market.
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