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Are you looking to make a speculative real estate investment, but lack the capital needed to purchase the complete investment? Then you can benefit from Options.
The strategy known as Derivative Investing utilizing a financial instrument, option, first arose in the 1970’s. Options are misunderstood, but when they are fully understood, properly prepared, and used correctly, real estate options are an excellent way to conserve capital, create leverage, reduce risks, and gain control of properties with immediate resale profit potential.
Real Estate Option?
A real estate option is an agreement that grants the optionee, the exclusive, unrestricted, and irrevocable right to purchase property from the party selling the option, the optionor, within a specified period of time.
Option need to have four key elements to make it legal:
1. Optionee: Party buying a real estate option.
2. Optionor: Party selling a real estate option.
3. Option consideration: the amount of money paid by an optionee to buy the right of time or terms from an optionor.
4. Option period: the specific period of time stated in the real estate option agreement.
Best Types of Properties?
Options are a great strategy to utilize on assets that are in demand or are going to be in demand through creative repurposing or unfilled demand from potential space users. Below are a few key types of assets that can be targeted for options strategy:
– Properties that can be upzoned for a better highest and best use.
– Mismanaged rental properties that can be turned around.
– Properties with functional obsolesce that can be put to other uses.
Finding Option Assets?
You need to develop a multipronged attack to find sellers of assets that would consider option strategy. The best technique that I would recommend is as follows:
– Direct Mail
I prefer direct mail geared towards to out-of-town owners of abandoned properties. Most out-of-town or absentee property owners become that way because they either inherited a property or, for whatever reason, were forced to relocate and failed to sell their property before they left town. Hence they are usually highly motivated, and are looking for a solution to their problems.
How can you reach them and know when they are reaching you? You need to take two simple steps to make that happen:
1. Get a free Google Voice number that is specifically going to be used in your out of town marketing mailers/materials.
2. Compile a list of out of town owners from tax records or through a list broker. Send them a letter or a postcard, which should state that you are an investor and looking to solve their problems associated with the property located in your state and/or city.
Making a Profit from your Option!
Lets assume that you reached out, negotiated and tied up an option. Here are the Four Steps you need to make and secure your profit:
Step 1: Make sure that your option agreement is assignable, and record an Option Memorandum at the county records so that your option position is noted within the chain of title, and secured properly.
Step 2: Calculate option resale value. Always try to sell real estate options for at least 5 to 10 percent of the property’s market value with the option buyers end position in mind. For example, on a property with a fair market value of $100,000 that you have an option to buy for $60,000, in such a situation I would price my option at $10,000. This way, I would be fairly compensated for the time and effort that it took me to get the property under option while the option buyer got a $30,000 discount from the fair market value.
Step 3: Marketing the option. To effectively market and sell your option, you need to create an information packet that provides the following pieces of information:
1. The year the property was built, along with the type of construction and architectural style.
2. The property’s geographical location, to include any special features or benefits about the area.
3. A brief description of the building’s interior including, but not limited to square footage and geometrical shape of the building, spacing between interior support columns, ceiling and overhead door heights, type of heating and cooling system, and the size and shape of the lot.
Market the property, not option. What you are really selling is the real estate asset that underlies the real estate option agreement itself.
Step 4: Work with a local real estate attorney who knows how real estate options work so that they can help you assign your option properly and legally to protect yourself, and your Option Buyer.
Real Estate Options can be an amazing tool to utilize in your arsenal of investment strategies to make bigger and better profits from real estate investing.