By being creative, you can play the game of real estate investing by using what is called Option's investing.
This is just one technique of the Option's strategy of investing but can be a power tool in your investors toolbox to help you control more real estate and build wealth.
An option is an agreement to you from the seller that gives you the exclusive right to buy a property during a specified time and at a predetermined price but does not obligate you to make the purchase - This is why it's called the Option agreement.
You option to buy - You option not to buy.
Option investing works when you want to control more real estate with limited out of pocket cash or credit and works if you:
Have no credit!
Can't pay cash!
Can't get a loan!
I call this the "SWEAT OPTION".
The sweat option works well if you have the ability to do the repairs yourself.
Your key's in making a deal like this are:
You need to know the basics of real estate investing
You need the forms to make this happen
You need to know the market area
You need to know the laws in your state
You need to know how to determine the value of the subject property
You need to know how to do a title search
Most importantly you need to know how to find sellers that are motivated enough to work with you on this strategy of investing.
I recommend that you farm out your market area looking for properties that are what we call in the industry FSBO's (For Sale by Owner).
Go to your local library and start your research by looking at old newspapers starting with newspapers that are 90 days old and work your way through the FSBO's section making a list of possible deals. Working on a list of 30 or so.
Call and see if the property is still on the market, if so make an appointment to see the property! You will find that none owner occupied properties work the best and you are looking for properties that can not compete well with other homes do to repairs that need to be done.
Let's say the seller has a property that is worth $100,000 after the repairs.
I like using a 5% rule for repairs - If the value of the property is $100,000 after repairs, I do not want to spend more than $5,000 or 5% in repairs.
I would negotiate say an option purchase price of $80,000 for a period of 6 months or more and in the option agreement to perform the repairs at my cost to be my consideration for the option of purchase or should I say the $5,000 in repairs, materials cost and labor to be considered as credit towards the purchase of the property (My down payment) and what ever monthly payment we agree to and credit amount of that monthly payment. So let's say we agree to pay $600 a month with $100 a month credit towards the purchase.
You start you're repairs and complete them in 30 days or less and let's say you purchased $1,500 in materials.
Now you place the property on the market because you have the option to purchase "You have taken control of the property with your option".
Let's say this deal has taken you 90 days from the beginning to the end.
You find your buyer let's say at a great deal of $95,000 - $5,000 below market value at this point you would simply exercise your right to the purchase option and do a simultaneous close.
Now let's run the numbers
Your option purchase was $80,000
Your option credit of $5,300 (Repairs, materials cost, labor & monthly credit)
Your purchase price after credits $74,700
Your buyer purchase price of $95,000
Leaving you a gross profit of $20,300
You had out of pocket material cost of $1,500
You had 3 payments of $600 each with $100 for the credit purchase with an out of pocket of $1,500
Carrying cost of $600, (Real estate taxes $300 &$300 Utilities)
Advertising cost $300
Closing cost $1,300
Your net profit $15,100
You simply took control of a $100,000 property for $3,900 (payments, materials, utilities, and advertising) and turned a profit of $15,100 in 90 days!
Look at it this way you can make it a cash purchase at $80,000 and take control of one property or be a little creative and take control of the same property for less than $4,000. Both conservative and creative deals work in the world of real estate investing.
Another great lesson for everyone. Can you give more examples of option deals you've seen or done for everone to see?
Example of being creative:
13 unit complex - Market Value 185K - Asking Price 200K
12 Units rented @ 315 ea. (rents due on the 1st) & 1 unit to manager
He owed 50k @ 7% @ 333 mo.
Now the story:
Conv loan would be at 80% for 148K @ 6 1/8 @ 899 mo. & I would have an out of pocket of 52K
Not a bad deal if I wanted to tie up a credit line and come up with 52K
So I did a Sub 2/Lease option deal
I helped my customer find his pain and solved his need for cash. He had no plans to make another purchase just cash out but if he did based upon his income level he would face a capital gain of 111K from the cash sale (see I helped him find his pain)
All said and done he would have to pay out to the state and the fed's 67K cash money at the end of the year (Pain again) So this is what we worked out together.
I did a lease option purchase with him for 10 years based upon a 30 year term payment plan @ $1,468 with 5K down.
He agreed to credit the 5K towards the purchase and $468 of the $1,468 monthly payment towards the purchase.
So he gets a loan for 148K for 30 years @ 6 1/8 with a monthly payment of $899 pay's off his 1st and gets him mad money of 98k
So I pay $1,468 per month - my rents are $3,780 - so I get $2,312
This gets better!
At closing, I got $3,250 in security deposits
The next day I got $3,780 in rents as he agreed to
That's a total of $7,030
Less $5,000 down
I pocketed $2,030
This is what is called a no money down purchase under a lease option purchase under a sub 2 creative strategy.
I paid him more than it was worth - WHY? The lease option purchase credit.
So in 10 years what would be my pay off be?
Purchase price $200,000
Down payment credit $5,000
Payment Credit $51,160
My pay off would be $138,840
Now the average appreciation value for this area has averaged 3.8% yearly. I also increase rents $10 per unit every year.
Paid above market value and still walked away with cash in hand.
In 10 years collected $290,840 in income (that includes the current rent plus your $10 a year rent increase for the 12 rented apts). Property will have appreciated to $268,624.28 and with a payoff of $138,840 that leaves $129,784.28 in equity.
That's very interesting. Do you have any other ideas?
So who pays the expenses of the rental
Repairs & Maintenance
HOA dues if any
Legal & Accounting
What about the cost of vacancies or renovations that will come up.
Seems to me that this could be profitable, but not everything is being considered in order to evaluate how profitable it might be .
Great idea about options. In what States is it legal to do the options?
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