Calculating option fees?

16 Replies

Hi guys, I was reading 

http://www.biggerpockets.com/forums/83/topics/1930... and came across:

Originally posted by @Bill G.:

an option price can be computed legally and it's a pain, why residential options take the easy way, 1%, 2%, or whatever some of these guys think they can get away with. Options have a measurable value, not some arbitrary number cooked up as something you can get some unsophisticated buyer to agree to.

This is the first time I've heard of an option fee being anything other than an arbitrary number.  Does this mean it should be calculated, If so based on what. Is this a legal requirement in the post Dodd-Frank/ safe act world?

@Bill Smith

I use 3% of value, and I use that fee as an option release fee.

I use $100 as an option to purchase fee from the seller, record the option, set the price at comps, set the rent as market rent.

Seller Concessions can be used from seller to assist tenant buyer.

PM me if I can help.

Originally posted by @Brian Gibbons :

@Bill Smith

I use 3% of value, and I use that fee as an option release fee.

I use $100 as an option to purchase fee from the seller, record the option, set the price at comps, set the rent as market rent.

Seller Concessions can be used from seller to assist tenant buyer.

PM me if I can help.

 Hi Brian, 

Just wondering about when u say, you record the option... I realize is to "cloud title", BUT how will this stop the seller from selling the property? I mean isn't there a "Time Gap" in California for the recording to show? ( a few months or so). Just trying to capish.

Also, I've read a lot of posts here saying that they assign, sale, flip, release their contract/option for a fee, BUT my confusion is, if I assign/sale, etc my contract/option, wouldn't my name and information stay all over the contract/option regardless? If this is correct,  how do you explain this to your prospect tenant / buyers or seller for that matter?

I'm learning a lot in this forum, thanks Brian.

@Bri R.  

1. you enter into an agreement with seller

2. sell your option to a new buyer on an option release fee

3, seller and new buyer create new agreement

Assignments are not easy in some states re agency laws.

@Josh Caldwell may want to add.

@Brian Gibbons

is correct it is getting harder to do an assignement in a bunch of states, so how the trick is to register your option. this places a cloud on the title that must be cleared to transfer the property, and you can get paid for releaseing your option. You can even show a release fee on the HUD 1

to your success

Josh

Thanks josh, Can you explain what you mean by "it is getting harder to do an assignment" . What is different now?

Some states, @Bill Smith are not liking assigning agreements, so the option release is a workaround.

Florida and Ohio especially.

Being licensed helps this issue.

If you are on title, such as sub2 or wrap, and resell that is less of an issue, as you are an owner, not an assignor.

If you are in MASS, look at getting licensed and get on title before you resell.

@Shaun Reilly is a great investor - agent in MASS.

Go Red Sox Nation!

Originally posted by @Brian Gibbons ibbons:

Some states, @Bill Smith are not liking assigning agreements, so the option release is a workaround.

Florida and Ohio especially.

Being licensed helps this issue.

If you are on title, such as sub2 or wrap, and resell that is less of an issue, as you are an owner, not an assignor.

If you are in MASS, look at getting licensed and get on title before you resell.

@Shaun Reilly is a great investor - agent in MASS.

Go Red Sox Nation!

Thanks for the ShoutOut Brian.

Bill I would say that Brian's advice about getting a licence is a good idea.  You get a lot more leeway it seems by having one, with the only disadvantage being you have to have everyone sign a bunch of extra disclosures that you aren't doing anything remotely acting as an agent.  :)

That being said I have known people that have done LO assignments without any issues and you see vanilla wholesale assignments of non bank owned places all the time here.  As amazing as it might seem MA doesn't seem to be all that into going that extra mile some states are to increase regulation of this stuff. 

@Josh Caldwell You have a way with words, thanks :)

So am I to understand that I would register my option at the county? Are we talking about a straight option or the option to buy agreement form that needs to be registered? So the option release fee will be given to me directly by the buyer when they exercise the option or at the time of assignment?

Thanks

@Bri R.

what gets recoreded at the county is the Notice of Option form.  It is just a legal doc that says that I have an option on the property.  It doesnt disclose the amount of my purchase price or the length of my option.  All it does is it puts the breaks on any closing that doesnt clear it with me first.  this keeps your seller from stealing your buyer at the same time it works like a lein that you can get paid to clear. 

I hope that clears things up

Josh

Originally posted by @Josh Caldwell :

@Bri R.

what gets recoreded at the county is the Notice of Option form.  It is just a legal doc that says that I have an option on the property.  It doesnt disclose the amount of my purchase price or the length of my option.  All it does is it puts the breaks on any closing that doesnt clear it with me first.  this keeps your seller from stealing your buyer at the same time it works like a lein that you can get paid to clear. 

I hope that clears things up

Josh

 Fantastic! This helps a lot. 

Feels like  coming out of a heavy fog.

Very much appreciated :)

Ok, so I sent my first email to a FSBO on CL. (Just to test the waters), Owner called me immediately, we talked for less than 10 minutes, and even though they are not motivated to sale their house any time soon, him and his wife agreed to do the LOA. Go figure.

So far so good ;)

Where is Bill G.? I've learned so much from reading his posts.

@Brian Gibbons   @Josh Caldwell

Could you clarify how you structure your assignment and release?

I would think that you assign your option to the new buyer, sign a separate agreement for release at closing, list the option release fee on the HUD 1 & receive payment for release at settlement?

@Patrick Sweeting   you are probably correct but your question is sort of state specific. I dont know the answer in CA. In my state you release and don't dare assign, but my state is weird. the way you spelled it out is "probably" correct for your state, but you will need to ask your closing attorney to be 100% sure.

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