Fix and Flip using and OPTION to buy real estate, possible?

24 Replies

Option - In legal language, a real estate option is an agreement that grants the party owning the option, the optionee, the exclusive, unrestricted, and irrevocable right to purchase property from the party selling the option, the optionor, during the specified period of time that the option is in effect.

I'm wondering if it is possible to control a house using an option to purchase in order to renovate the property (fix and flip) without actually buying the assett with a HML. Obviously the title doesn't change hands, and I do not believe there is any equitable interest in such a scenario (which also means one cannot market the property). However, as it seems most things concerning contracts are negotiable, is it possible to theoretically construct a deal like this, assuming the sellers agrees to it and it is written within the contract. Can the owner in this case, deed equitable interest or some other legal instrument to allow myself to actually not only make repairs on the property but only pay the owner after the house is repaired and the house is actually sold? Technically with an option, I would have the legal right to purchase the property at any moment. However, it all comes down to how much control I actually have in the property. Would I be allowed to perform repairs on the property? Would I be able to acquire a loan to cover the repairs on a such a property? If so, that would be quite powerful in that case.

Interesting question.  Could you?  Probably, sure.  Do you really want to do it that way?  Maybe, maybe not.

If you do get an option to purchase, be sure to record a memorandum of option (or some such 'cloud' document for your state) so that nothing can be done with the title of the property without addressing you and your option.  Do not record the actual option.

To finalize the deal, as you describe, you would need a simultaneous closing with the seller giving title to you, and then you to the end buyer.

But remember, Just because you have an option to purchase at a set price for a set term, does not make you the owner of the property.  

Consider:  who collects on insurance if the place burns down 95% through your rehab?  Who gets to pull permits?  Who deals with a lien or judgment the seller acquires on the property during your fix up time?  What if the seller refuses to close with you once the work is done?  What if he dies during that time?  What if you are not or cannot finished with the reno and the option expires?

Personally, I wouldn't do what you are suggesting with just an option.  Lots of other ways to hack that house.  But if it gets too complicated and too slick, you might just get slicked out of your $$$.

Good luck.

@Marc Winter

I would say, I would kind of need to structure the deal is such a way, or atleast, considering my financial situation, it would make the most sense and have potentially less risk than using a HML, insofar as the concerns you mentioned can somehow be addressed within the contract.

The house in question has an ARV around 225K, around 25K in repairs and I would offer to buy at no more than 140K.

The 10K I have to work with would not cover the downpayment on a 140K loan at 10% with a HML, unless I structure the deal with partial seller carryback on a note for 50K payable after the sale is complete, in which case I would need a loan only of 90K which would leave me 1K to cover interest payments, assuming points are rolled into the loan and a bullet loan is not an option.

She is my neighbor and I'm on very good terms with her. I think we can structure as creatively as I can. If the offer of 140K is too low, I was also thinking of adding a stipulation that if I sell the house above 225k, we would split the profit. I'm being conservative with my ARV estimate, especially since there are few comparables, but it could potentially sell for 252K. I'm being extra cautious here since it's my first deal.

To address your other points, I was planning on doing a double close in this case, having the seller put the deed in escrow which would trigger the sale on the B to C transaction, paying her off. I could also use transactional funding if necessary.

Personally, I wouldn't do what you are suggesting with just an option. Lots of other ways to hack that house. But if it gets too complicated and too slick, you might just get slicked out of your $$$.

May I ask why you would not structure it this way, specifically when you say "with just an option"?  How else could you approach it? Would you perhaps approach it with a lease option, thereby giving you equitable interest? I also considered that but would ask to defer payments until it is sold. In which case, how is that different than a standard option, lol, aside from the equitable interest? Now that I think about it, this might be a better option indeed. Is this what you were referring to?

Also, please, help me avoid making any mistakes and getting slicked out of my $$$$, what should I look out for or what are you referring to?

Apologies for the rather long reply, but I'm particularly interested in this scenario to structure my first deal. Cheers.

@Tim Ivory Hey Tim, good to see you working on your first deal! As @Marc Winter has already pointed out, it is unwise to sink a bunch of money into rehabbing a property you don't own, not to mention the various other problems Marc mentioned such as insurance and permits.

A better way to do this is to take title subject to any existing financing and give the seller a note for the balance due in 1 year or upon resale of the property, no interest, no payments. Then once the rehab is complete you have 2 options: 1) You can sell it and pay the seller out, or 2) You can refinance it, pay the seller, and keep it as a rental.

Out of curiousity, if you need $25k to rehab and you only have $10k to work with, where you are planning on getting the other $15k to do the work?

@doug gave you some good advice taking subject to existing financing.  I would have an attorney create a wrap-around on that so that if things go south, the seller can foreclose the loan.  If you do a straight subject to, they won't have any standing.

That being said, a lease does give a tenant some rights, however the "equitable interest' I believe you are referring to will not give you much standing in court if the deal goes bad, no matter how much in repairs you did.  Get the title or contract for title:  NOTE--I am not an attorney and am not giving legal advice.  

But from personal experience, I'd might do a land contract in which the seller becomes the bank for a time, until  you satisfy the contract, and the deed is held in escrow by a title company.

Another scenario is to have the seller form an intervivos revocable trust, put the property into the trust, and assign certain beneficiary rights to you, along with a resignation of trustee (assuming the seller becomes his own trustee) and a quit-claim of any beneficiary interest to you, all of which is held in escrow by your title company.

Remember, you and your neighbor can be as friendly now as front porch cousins, but when you throw real estate and money into the mix, ya never know how it might end up.  Keep digging, you seem resourceful, I'm sure you'll find a solution. Hope it works out for you.

@Doug Pretorius I love your idea about refinancing, paying the seller, and keeping it as a rental! Such good advice. I only wish I was confident I would be able to refinance since I'm self employed without the W2 income verification conforming banks require. I wasn't legally obligate to pay taxes since my net income didn't reach their threshold. This year I will need to file taxes and look forward to doing it to have something to show banks for income verification. I will certainly try to refinance it when it is completed, perhaps a portfolio credit union would be open to refinancing, if not, then I'd simply sell it.

One caveat however, she owns the property free and clear. In fact she bought it at an auction 3 years ago and never got around to finishing the repairs! In this case, should I simply approach this as a purchase with a note payable upon completion of sale, or one year, with no interest and no lease payments. As security for the seller, I would then of course put her in 1st position lien holder with a mortgage. I live in a deed of trust state, so in effect, upon signing the contract, she deeds me the title in my name, which I in turn hand over to a title company putting her in 1st lien position, receiving a mortgage from her via owner financed through a note payable on sale, which in then would be held until sale is completed. Does that sound about right?

You bring up a good point about coming up with the additional 15k that I don't have a solid answer for at the moment. This amount would be too little for a HML, so I would think I would need to get a personal loan. However, this is giving me pause since I'm sure W2's as income verification would be required, hence the same position as not being able to refinance. Some lenders may verify, with no income verification, but with a higher interest rate, but this is something I need to do more research on and very much welcome any suggestions on any reputable companies I could work with.

On that note, I am roughly familiar with a federally insured Title 1 loan that would even be applicable to properties one does not own! Which could theoritically even work if I took lease or even option out on the property. Coincidentally, it is also good for 25k. However, again, the caveat, those W2's!!! lol Not to mention probably even more loops to jump through conforming to government criteria.

Responding to Marc's earlier post, does the seller need to sign the memorandum of option? May I ask why I should not record the option the actual option?

Consider: who collects on insurance if the place burns down 95% through your rehab? Who gets to pull permits? Who deals with a lien or judgment the seller acquires on the property during your fix up time? What if the seller refuses to close with you once the work is done? What if he dies during that time? What if you are not or cannot finished with the reno and the option expires?

I am in agreement that perhaps getting title to property would make things easier and is less risky.

@Marc Winter

I would have an attorney create a wrap-around on that so that if things go south, the seller can foreclose the loan. If you do a straight subject to, they won't have any standing.

Good point and I believe I understand what you are saying, except the wrap-around part. Is this another terminology for putting her in 1st lien position with a note. In this case, can the note be considered a mortgage?

Get the title or contract for title:

Okay! I am excited to give this a try. May I ask what you mean by "contract for title", and how is that different than simply getting the title? The later, I assume means I am added to the title and the sellers name then moves to 1st lien position on the note, off the title.

But from personal experience, I'd might do a land contract in which the seller becomes the bank for a time, until you satisfy the contract, and the deed is held in escrow by a title company.

Another scenario is to have the seller form an intervivos revocable trust, put the property into the trust, and assign certain beneficiary rights to you, along with a resignation of trustee (assuming the seller becomes his own trustee) and a quit-claim of any beneficiary interest to you, all of which is held in escrow by your title company.

This is why I love biggerpockets. Even more options to consider, excellent! I have roughly familiar with them but will explore each of these scenarios with a bit of study and see which one is frankly the easiest to do, while also being the easiest to explain.

On second read, I also really like the land contract idea as that seems pretty close to what I had in mind since she owns the property outright. The deed is held in escrow, she becomes the bank (though deferring payments), and released at sale. Is this the exact same thing as simply signing a regular purchase and sales agreement with a note being the payment method upon sale, and again, moving her to 1st lien position?

Cheers, and thanks so much guys. You have both already been very helpful.

@Tim Ivory Her owning it free and clear makes it simple. She gives you the deed, you give her a mortgage, the title company should be able to put all of that together no problem.

Yet another way to do it is to Joint Venture with the seller where you split the profit above a certain amount.

There should be several options for borrowing the money for the rehab. Any family or friends who would be interested in getting a nice return on $25k? If not there must be HMLs that will lend smaller amounts. You could also look into contractor financing from Home Depot. I've even heard of some people just buying all the materials on their credit card. The interest is almost irrelevant on such a short loan cycle.

I'm working out each of the possibilites one by one. So far, I like the land contract idea since it means the seller and I will save on closing costs and the cost of getting the loan itself, around 16K, which can then be split evenly between us. However, I still want to present the HML idea with her since having 20-30K at closing and an additional 105K after the sell, might appeal more to her.

I wonder though how she would respond to be placed in second lien position with a note for 105, which is higher than the HML of 59K. I can't picture the hard money lender taking second lien position. Perhaps, indeed, the best course would be a land contract after all?

She gives you the deed, you give her a mortgage, the title company should be able to put all of that together no problem.

Awesome. I like it when its simple. To be clear, this simple mortgage exchange is in fact not a land contract, correct, since the title would not be held in escrow, this right?

I'm piecing it together bit by bit. It's quite fun actually. When I'm down breaking down the numbers, I'd like to share it here for a second set of eyes. Cheers

@Doug Pretorius @Marc Winter Thanks again guys.

Yet another thing also occurred to me while breaking down the numbers, the Selling cost after the repairs are done, specifically, the realtor commissions. I'll likely list on the mls with an agent. It would be worthwhile to develop a relationship I think. However, 7 percent of 225K is still $15,575! I'm asking myself if it is possible to save this amount too. Couldn't I list it myself somehow, paying a small fee, or even simply sale as a FSBO, utilizing a 2000 marketing budget or what not? I could save 14K. What are your guys thought on the subject, the logistics of selling oneself? I know there are many awesome realtors here and I've compiled a list with dozens of entries of the benefits of working one a good realtor. Alas, I gotta ask the question.

The seller and I could either pocket 34K each, or 41K each, depending on whether or not we go with a realtor. I'm leaning to go with a Realtor to be on the safe side, regardless. Furthermore, there is also always the chance the property will sell higher than my, hopefully, conservative ARV estimate which could offset the cost.

That said, at the end of the day 34K with 10K down seems pretty decent, especially if I don't have to get a HML (less risk). However, I'm asking myself if this is the best use of my money and time. I could be patient and wait to find a deal not unlike how this one first began.

For instance, she bought the property at auction for 80K. I could technically afford that amount now with a HML, with a 10 percent downpayment. 225K - 40K (in repairs) - 80K (loan) -25K (Holding, closing costs) = 80K profit. This is particularly true if I end up getting a HML for 59K in the deal scenario I'm structuring now using hard money, which isn't that much less than the 80K I'd have required at the start if I'd managed to find the deal sooner as she had done. Not to mention, this project could take 6 months of time.

However, this is assuming I could buy an auction property or even REO with a HML. I know some banks will even finance their own REO's and I spoke with someone recently who got a loan for an auction in the same county as I. So, it seems possible.

There are some angles I still need to explore here. Namely, whether refinancing is an option after the rehab is done, the other options mentioned here, and finally,  I feel I need to explore the worst case situations a bit closer. 

Finally, and a bit off tangent, I found the Fix and Flip calculator on bp a little lacking. It doesn't take into account any financing. Furthermore, I've yet to find a calculator where I could explore financing with additional seller carry back (say a note for 50K after the sale) using a fix and flip strategy. I might have to look into, at some point, in possibly hiring a developer to create my own proprietary calculator. They seem fine, but just not how I'd structure the scenarios. I kind of just want more options and flexibility but maybe I'm overlooking something. Thanks again guys. Cheers.

May I ask a rather fundamental question? When using a hard money loan that includes 100% of the rehab costs, are we in fact dealing with 2 loans?

Say the purchase price is 100K, needing 25K in repairs, with an ARV of 155K,

Assuming they loan with a Max ARV of 75%, would they loan me 90K assuming I put in 10K, in addition to an extra 25K dispersed periodically? Totaling 125K altogether, which is above 75% of the ARV.

Or, as they say, the rehab is blended with the purchase, both cannot exceed the maximum LTV of 75%?

If they are separate, is the rehab loan somehow different in interest rate and/or points?

Originally posted by @Tim Ivory :

She gives you the deed, you give her a mortgage, the title company should be able to put all of that together no problem.

Awesome. I like it when its simple. To be clear, this simple mortgage exchange is in fact not a land contract, correct, since the title would not be held in escrow, this right?

That's right, what I described is just a normal sale except that the seller is financing the sale instead of a bank.

@Tim Ivory

When obtaining a loan both on acquisition and rehab, it's one loan amount. The initial funding is on the purchase price (80%-90% of purchase) and then your 100% of rehab costs is held in escrow. It's released to you in draws. You do the work, submit a draw request, lender sends out an inspector to verify the work has been completed, and they release that portion of the funds from escrow into your account. 

Purchase 1% ownership and you have all rights to market the property and not run afoul of brokerage laws. Obviously, you would need a good contract stipulating your ownership and how proceeds would be divided upon sale. 

@George Despotopoulos

Thanks! So it sounds like the full loan amount for both acquisition and rehab could be higher than the advertised max LTV, is this correct? I need this to be as clear as possible to structure my first deal.

So, 80-90% of purchase price (not exceeding max LTV) + any repair costs (which are held in escro, dispersed in draws), both rolled into one loan. Or, is the combined loan capped at the maximum loan to value amount?

@Tim Ivory

You have a property you want to purchase. The purchase price is $150,000, you think it needs $40,000 in rehab, and you'll be able to flip it for $220,000. 

You go to a lender that has the following loan parameters for fix & flips: 90%LTC (90% of purchase, 100% of rehab costs), capped at 70% ARV.

You submit your numbers to this lender. Assuming the property and the numbers are deemed acceptable, the lender here would do $135,000 on $150,000 (90% LTC) and then the $40,000 for the rehab. Total loan amount in this scenario is $190,000. The ARV you provided is $220,000 and 70% of that is $154,000. So this wouldn't work. The lender would have to reduce the amount they fund on acquisition by $36,000. You would only qualify for $114,000 on $150,000, which is 76% LTC.

In the above, if your projected ARV was $280,000 (70% of ARV = $196,000) and the total loan amount of $190,000 would work.

I hope that clarified things. If not, I'm happy to get on a call to explain/answer any questions. I saw you pm'ed me, we can set up a time to speak that works on your end.  

@George Despotopoulos

Thanks for answering my question. I am ecstatic about the answer. I've been structuring the deal with a cap of 75% on both the purchase and rennovation costs, now it seems I could potentially offer the seller 25K more in the offer, making it much more likely she will go for it.

Alas, the more I consider, a HML may not be the best way to approach this deal, but I will offer it to her just in case she want money in her pocket before any title work is done.

George thank you! Bare with me, I need to do as much research and comparisons on my own for now before reaching out to HML to not waste there or my time. Cheers.

The deal goes as follows

Purchase Price around 130-140K with an ARV of 225K needing 25K in repairs. I have 10K to financing this deal, thus capping a Hard Money loan at 65K with a $6500 downpayment (assuming 90% of purchase cost) plus 2800 in reserves. She will carry back a note for the rest, payable after sale.

This is the structure of the loan with the repair cost embedded within the loan, which I can now modify.

Fix N Flip - HML @ 65K - 6 Months (Worst case 12 months)

Expenses

  • Buying Costs (2350)
    • Appraisal (450)
    • Home Inspection (500)
    • Title Insurance (600)
    • Title Company (800)
  • Holding Costs (3000)
    • Taxes (477)
    • Insurance (500)
    • Utilities (1800)
  • Financing Costs on 65K Loan, eats up my 10K (5000 Cost - 10K tied up)
    • 6500 DP (Equity I get back at closing)
    • 3900 in interest (closing fees)
    • 1000 misc (at closing)
    • 2600 in reserve
  • Selling Costs - (16800)
    • Realtor (15.500)
    • Title Company (800)
    • Appraisal (500)
    • Attorney (500)
  • Repair Costs - 25K (lumped into loan, deducted from .75 percent ARV)

Total Expenses = BC (2300) + HC (3000) + FC (15000) +SC (17K) + RC (25K) = 62300

Loan Cost - 10K available for DP and Reserves = Max HML Loan of 65K 

Loan @ 65K - 6.5K DP = 58.5K - 34250 = 24250 as Down payment to Glenda

  • Loan Interest (3900) (Points embedded into interest)
  • 10% Down Payment (6500)
  • Holding Costs (3000)
  • Buying Costs (2350)
  • Repair Costs (25K)
  • Downpayment to Seller (24250) Owner Finance the rest

Loan @ 65K - 3900 - 6500 - 3000 - 2350 - 25K - 24250 = 0

Scenario 1 - Even Split of Profit,  Loan with Realtor Expenses

Total Expenses = 127K Purchase Price + (BC (2300) + HC (3000) + FC (15000) +SC (17K) + RC (25K) = 62300 DP) = 189,000

Net Profit = 225,000 - 189,000 = 36K - 10K* = 26K

Seller Profit = 127,000 - 100,000 - 26K

*My cost out of pocket needs to be deducted from Sale to reach profit!.

Scenario 2 - Even Split of Profit, Land Contract or Mortgage Note, No Realtor (Add 30K to table)

Total Expenses = 142K Purchase Price + (BC (2300) + HC (3000) + FC (15000) +SC (17K 2K) + RC (25K) = 30000) = 174,000

Net Profit = 225,000 - 174,000 = 51K - 10K = 41K

Seller Profit = 142,000 - 100,000 - 42K

Same but With Realtor Fee (Higher chance of selling faster) (Winning scenario so far)

Total Expenses = 134K Purchase Price + (BC (2300) + HC (3000) + FC (15000) +SC (17K) + RC (25K) = 30000) = 181,000

Net Profit = 225,000 - 181,000 = 44K - 10K = 34K

Seller Profit = 134,000 - 100,000 - 34K

*I calculate seller net profit by the following. 80K purchase and 20K already paid in repairs, thus reaching 100K.

It all depends on what she is willing to accept. If her lowest if 142K, then I'd pursue with LC or Mortgage Note with No Realtor, etc. If she needs more, than at most I could try to wholesale it.

@Marc Winter After learning a bit more about land contracts, I learned that title does not change hands this method. She holds onto the contract while I get equitable title (not legal title). The key point that I don't understand, however, is how putting the contract "held in escrow" until I sell the property would somehow be less risky for me. Also would this also address insurance and other issues you mentioned?

@Tim Ivory You don't put the land contract into escrow you file it on title. The seller signs a new deed with your name on it and that is put into escrow with the title company/lawyer. Once the terms of the land contract are satisfied the title company files the new deed, transferring ownership to you. This is to protect you in case the seller becomes unwilling or unable to execute the deed after the fact.

Usually insurance is the responsibility of the seller in a land contract.

@Doug Pretorius Wow, I would understand how that would be much more secure. So, in a land contract, contract for deed where I'm from, I would record the contract with the county, clouding title, in addition to her creating a new deed with my name on it, which an escrow company holds until I complete the sell. We are both protected this way.

May I ask what happens to the old title if a new one gets made. What if something happens and some title work needs done? It sounds like its kind of in limbo, its in my name but held in escrow...

One more general question if I may, an investor named Joe Crump talks about Multiple Mortgages and I'm wondering if this is the same thing as a wrap around mortgage that I come across more often.

The structure of the deal is identical to a subject to, however the seller has significant equity that he would like to take out, in which case a second mortgage is created to the seller in the amount of the equity. If the house is worth 150, but only 100K is owned, then to complete the deal, the seller deeds me the house and a second mortgage is placed on the property for 40K, payable to the seller.

@Tim Ivory Nothing happens to the old title, it stays on file forever as part of the history of ownership of that piece of land. Same thing when your new title is filed and ownership is passed to you, that new title becomes part of the history of the property as well.

You can do a search of any property to educate yourself. If you get a full report you'll see the entire history of every owner, including dates and amounts paid, along with any changes that occurred like easements(? not sure if that's what they're called in TN).

A land contract, subject to and wraparound mortgage are 3 different things.

Both the land contract and subject to are purchase agreements. With a land contract the buyer agrees to fulfill certain obligations (like pay a certain amount of money) by a certain date before the seller will transfer title to them. A subject to is an agreement to transfer title without the buyer assuming or the seller paying off any existing loans.

A wraparound mortgage is security for a promissory note for an amount that includes both the seller's underlying mortgage and their equity. So let's say the seller has a mortgage for $80,000 and the buyer agrees to buy the house for $100,000 with $10,000 down. A wraparound mortgage is created for $90,000 (not just the $10,000 equity). If the 2nd mortgage was created for only the $10,000 equity it would simply be called a 2nd mortgage. What makes it a wraparound mortgage is that it 'wraps around' the existing loan.

The wraparound mortgage is security for the seller. If the buyer doesn't pay, the seller can foreclose to reclaim title, just like a bank would.

Thank you!! That clears it up. They are indeed separate structures, especially if a downpayment is usually required for a wrap around mortgage. 

With a wrap, title does in fact change hands in that case, but the seller is secured with a mortgage on the promissary note for both the equity and remaining mortgage (atleast).

  • A note that is secured through real estate is a mortgage.
  • A note that  is not secured is a note.
  • A mortgage that wraps around, encompassing, the existing mortgage is a 'wrap around' mortgage.
  • A note that is secured through real estate that does not included the existing mortgage (assuming there is one), is just a regular mortgage in lien position. Ie, asking a seller to carry back some financing, secured with a lien, is simply a mortgage note.

About the title, got it, that makes complete sense to me. I've been to the county deeds office myself and had a look at there system.  I will have a closer look next time I go. 

While the new deed is held in escrow, and a memorandum has been filed for the contract,  this ensures no further liens can taken out of the property in the meantime, in addition to securing the sell. Once I pay the escrow money the amount stated in the contract, the title is automatically released? I wouldn't need any further signatures from the seller, I presume. 

*Edit, one more question about comparing lease options with wrap around mortgages. Besides the option to buy with no obligation, is the only difference between a wrap and lease option the fact that title changes hands only in a wrap and not in a lease option? Are there any major differences?

@Tim Ivory Pretty much yeah. Just a couple of clarifications:

1. Recording the land contract itself or a memorandum won't prevent things like construction liens or fines for code violations from attaching to the title. It will (or should at least) prevent the seller from refinancing an existing lien or taking out a new one. Land contracts usually have wording included in them that specify that the seller will be in breach of contract if they further encumber the property without the written consent of the buyer. Don't forget to do another title search and get title insurance when you're about to close on the land contract to make sure everything is as you expect.

2. Yes, the whole idea of having a transfer title held in escrow with instructions regarding its release, is so that you don't need any further steps to be taken by the seller when you're ready to close. When I first started doing these kinds of deals my real estate attorney gave me a real world example of why this is so important. He told me the story of a client who bought a property on a land contract. After several years the seller went back to their native country for a visit and died while they were there. The seller's heirs challenged the land contract in court (because there was a lot of equity between the buyer's contract price and the current market value). Fortunately the contract had been recorded so the heirs weren't able to get it thrown out. But they still refused to sign the transfer deed. The judge ruled that the heirs had to sell, but that the buyer had to pay current market value, to the tune of $100k over their contract price.

So in the end the buyer was able to close (barely) but it cost them far more, both in price and in legal fees than it should have.

3. Lease options are an entirely different beast. Traditionally lease options do not create equitable title, while a land contract does. And with a wraparound mortgage the buyer has full legal title. Both a wrap and a land contract require foreclosure. Lease options normally only require an eviction. However, a lot of that has changed in many states and provinces in recent years. Many jurisdictions have ruled that lease options do create an equitable interest especially if they are written a certain way. Here in Ontario the Landlord Tenant Board ruled that they do not have jurisdiction to evict a tenant who also has an option to purchase. Which means that lease options require foreclosure here, which takes about a year, compared to around 90-120 days for an eviction.

Originally posted by @Tim Ivory :

Option - In legal language, a real estate option is an agreement that grants the party owning the option, the optionee, the exclusive, unrestricted, and irrevocable right to purchase property from the party selling the option, the optionor, during the specified period of time that the option is in effect.

I'm wondering if it is possible to control a house using an option to purchase in order to renovate the property (fix and flip) without actually buying the assett with a HML. Obviously the title doesn't change hands, and I do not believe there is any equitable interest in such a scenario (which also means one cannot market the property). However, as it seems most things concerning contracts are negotiable, is it possible to theoretically construct a deal like this, assuming the sellers agrees to it and it is written within the contract. Can the owner in this case, deed equitable interest or some other legal instrument to allow myself to actually not only make repairs on the property but only pay the owner after the house is repaired and the house is actually sold? Technically with an option, I would have the legal right to purchase the property at any moment. However, it all comes down to how much control I actually have in the property. Would I be allowed to perform repairs on the property? Would I be able to acquire a loan to cover the repairs on a such a property? If so, that would be quite powerful in that case.

 There are several techniques but ones related to your question:

1) Doing a Lease Option with the seller gives you equitable interest in the property and you can market the property for sale or for a Lease Option for a period of time shorter than your Option. You must exercise your Option before or when the person you sell to exercises their Option or pays you off. As an example, you could take a 5 year Lease Option, spend a year fixing up the property and then Lease Option to a buyer for a date that is less than what remains on your Option. When your buyer exercises their Option, you exercise your Option and pay off the Option from the funds you receive at closing from your buyer. Very risky for a variety of reasons but can be done. Also, you have to have written into the Option and into the Lease that the seller will allow you or your assigns to make modifications to the property and what happens if those modifications are not completed or faulty. Also very risky.

2) You can buy a fractional amount of the property and record the transaction. You then have an ownership interest. Then make the repairs as agreed with the seller (now, you have become the co-owner with them) and then sell the property for market value with a predetermined split with the seller. What if the seller decides the upgrades are so nice they don't want to sell? You can't force them to sell. The tax implications have to be considered. The vesting of title has to be considered. What if the house doesn't sell when expected? What if the quality of rehab is inferior and has to be redone or won't pass inspection for the buyer? What if one of you passes away in the middle of the project? (The whole thing goes into probate unless other contingencies are in the agreement.) What if someone changes their mind along the way and thinks they got a raw deal? So many problems, so little time.

Can it be done? YES! But, I don't think it SHOULD be done by anyone who has to ask the question. If you have to ask THAT kind of question, you either are a thrill seeker with serious issues or you should team up with someone that has the experience to pull it off.