using options to purchase...

As you go up the real estate pole of sophistications, you’ll find astute investors that use options to purchase real estate. An option can give you a secured interest in a property for purchase under whatever terms you can agree upon with sellers. You don’t have to buy it. You can buy it under the terms you agree to or can assign your position to another buyer or cancel your option- for free! I love options and have been using them for over 20 years. I use them to buy and I sometimes use them to sell. In today’s market I use them a lot more frequently to buy property as a result of the strict seasoning requirements of the FHA as well as some conventional lenders. Let me explain. Seasoning is the word used to describe how long a person holds title to a property. If I buy a property and close it on August 8th, 2008 and I find a buyer that wants to purchase it for $30,000 profit and close on August 28th, 2008 then I’ve only held title to the property for 20 days. This has become more problematic with lenders in our current real estate market as the FHA wants a property seasoned a maximum of 90 days and in some cases for 180 days. So, if I take title to the property and attempt to turn around and sell it fast- it’s a problem. There is an old expression, “when they build a better trap, build a better mouse.” Here’s how I solve this problem: I don’t take the title. I leave the title in the seller’s name and I get an option to purchase instead. That is, I draft an agreement that allows me to buy the property at a certain price with certain terms and record the paperwork to protect my interest. By doing this, I’m able to negotiate the purchase of a home, make repairs, and have the seller deed it directly to my new buyer that I find. At closing, the seller gets what they’re supposed to get and I get everything above that. On the settlement statement there will be a line that states, “ release of option” or “mortgage satisfaction” and that amount goes to me. By doing the paperwork this way, everyone gets their needs met. The seller gets what they’ve agreed to, I sell the property fast and avoid any potential seasoning issues and the buyer gets a good house. Here’s one example I’m dong right now. I put a property under option for a total purchase price of $55,000. As part of the option, I agreed to pay the seller’s mortgage, maintain the property, and allowed to repair. The seller moved out as agreed and basically I paid her mortgage. This is actually a lease-option but I don’t use those words because it could scare the seller. It’s easier to explain by just calling it an agreement. Any ways, I remodeled the house for about $11,000. I only had to give the seller $1,200 up front to make this work. I then modified the property and sold it for $89,900 within 2 weeks of completion and it closes September 12th. By structuring your transactions thoughtfully, you can avoid many of the pitfalls in the new world of real estate and finance.