What are your options?
When you hear the word option in real estate, you probably think of a lease-option strategy. This is where you lease a house to a tenant buyer with bumpy credit. You call them a tenant buyer because they’re renting your house with the hope of buying it from you in the near future.
That’s where the option comes in. You sell them the option to purchase the house for a specified price in the next few years. The tenant buyer will normally pay you $3000 to $5000 for that right. This money is called an option consideration.
While renting, the tenant buyer works with a credit repair specialist and a mortgage broker. Done properly, this will get them the loan they need to exercise their option to buy your house. It’s a win-win situation. They get to live in the house they want to buy while getting qualified to buy it. You get a good price, cash up front, and a tenant who’s taking care of the property like it’s their own.
It wasn’t until I met Bill Cook that I learned there was another use for an option- actually that’s kind of misleading. Options don’t just have “another” use. Bill taught me there were unending possibilities in how you can use options to buy, sell and control property. He always said they’re the most powerful and underused tool in real estate today. And after I’ve seen what they can do, I believe him.
So let’s go back to the basic definition of an option.
An option is a contract that gives someone the right, but not the obligation, to buy or sell something for an agreed-upon price within an agreed-upon time frame.
This definition gives you a lot of flexibility. To help explain it a little further, let’s look at an example.
Earlier we looked at selling a property using a lease-option strategy; now we’re going to examine the investor benefits of using a lease option-strategy to buy.
Suppose you come across a tired landlord who’s fed up with his tenants. You agree to master lease the property from him in return for an option to buy it sometime in the next 10 years for the mortgage balance on the property. (You may remember that a master lease is when an investor leases a property from an owner with the right to sublease the property to a tenant. You can read more about how it works in A Zero Down Deal)
So what did we just do?
First off, you have the right, but not the obligation, to buy this house anytime in the next 10 years. That means that if at the end that time period, you decide not to buy it, you don’t have to. Wouldn’t you agree that locking in today’s prices, while having the next 10 years to decide if you want to close the deal, is a powerful tool? Heck yes it is.
Next, in this scenario, by setting the mortgage balance as our option purchase price, we’ve captured the paydown on the mortgage, as well as the appreciation of the property. On a $100K house, the principle paydown over 10 years could easily be $20K. And if the house appreciates four percent a year, it’d be worth $150K. That means this deal made you $70,000.
Is that a sweet deal or what?!
Pete Fortunato is the greatest creative deal structure of our time. He and Bill Cook have teamed up and will be teaching a class in Atlanta Sept. 17-18 on the variety of strategies you can use with options to buy, sell and control property. This information-packed two-day class will require your thinking cap and plenty of paper to take notes. The cost is $497. Call Kim Cook to sign up today at 770-815-8728. I’ll see you there.
Joe and Ashley English invest in real estate in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com