REISkills - Uses of an Option to Purchase Contract

Uses of an Option in Real Estate Investing

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REISkills - Uses of an Option to Purchase Contract por Mind Map: REISkills - Uses of an Option to Purchase Contract

1. Uses of an Option Part 2

1.1. Allows you to benefit from any appreciation without committing yourself in advance.

1.2. Tie up property while exploring re-zoning to put property

1.3. Trade Some Equity for an Option - Upon agreement with the seller, you can use the increased or appreciated value you have in other property to pay for the option. You might exchange equity in an unwanted property for an option to purchase a more desirable property. For example, you might have a rental property you want to get rid of. You may have owned it for a while and built up considerable equity. But, how do you get that equity out of the property? You could sell it, but then you have to pay taxes and you lose the benefit of any future appreciation. Instead, why not offer to trade some of that equity for an option on another property?

1.4. Pay Interest - If seller objects to the time delay before he gets the purchase price because he could be earning interest on the money, you can offer to pay him an amount equal to the interest he would have received and at the times he would receive the interest. Try to peg the rate to the lowest rate paid by institutions for savings accounts. In other words, you are optioning a $40,000 property for five years. The seller's equity in the property is $20,000 and he could be getting six percent interest if he sold the property right away and put the money in the bank, so you pay him that amount.

1.5. Allow time to form a syndicate

1.6. Allow time for definitive analysis

1.7. Allow time to see if you can get wanted financing

1.8. Exchange or Trade a Property - If you find a more desirable property (after you have earlier obtained an option on another property) you can agree to exchange the optioned property for the property you want. You can then exercise your option and exchange that property for the one you want. For example, you option a single-family house and then, a week later, find a lovely little duplex that you like a lot better, you cannot buy both of them. But you talk to the owner of the duplex anyway. It turns out that he is tired of having two units to take care of. He wants a single-family house. You take him to look at the house you have optioned, and he likes it. You arrange to trade as soon as you have exercised your option on the house.

1.9. Graduated Sales Price - an option which provides for payment of a greater purchase price as a function of time. In times when real estate is appreciating, sellers may demand such a provision. The longer you wait to exercise the option, the more you pay. For example, you might agree to pay a seller $100 to option his property for five years. If you bought the property after one year, you would pay $50,000. Each year after that, the price goes up by five percent.

1.10. Letter of Credit with a Bank can pay for an Option - Your bank can furnish you with a letter of credit which can be used to pay for an option. If you default, the seller can collect any monies due - from the bank. In the meantime, you put up no cash and you pay no interest unless the letter of credit is actually used. The seller is reassured, and you have little or no risk or expense. This also makes you look important. The seller knows you must have a good relationship with the banker. Therefore, you are no lightweight.

1.11. Increase Your Income - If you hold a valuable option and you need money, trade it for monthly cash to you for a specified period or for a share of future profits. For example, you may have an option to buy a certain piece of property for $50,000, but the property may already be worth more than that amount. It may be worth $60,000 and going up in value all the time. If you need money, you can sell that option to someone in exchange for monthly payments of $100 or more.

2. Option to Purchase Contract

2.1. Full Contract Download

3. Uses of an Option Part 1

3.1. Allow time to find another buyer to buy at a higher price

3.2. Gain Equity - If the income-producing property you've just obtained an option on is truly a good investment property, your option has a value in itself. Realize the option's value by forming a syndicate and by assigning your option.to the group in exchange for an equity position in the property. You can even get back any money you may have paid for the option - request it in your proposed agreement. This is an excellent way to raise cash without entirely giving up your interest in the property. The procedure would be just about the same as it would be if you were forming a syndicate to buy the property itself. Check AEC regulations to be safe.

3.3. "Rolling Option" Because of market conditions, or due to the lack of sufficient funds, a developer will frequently develop a large parcel of vacant land a step at a time. A progressive or #rolling" option provides for exercise of options of portions of the property as the developer specifies in the option agreement. Usually, options for the portions are sequential; that is, the developer cannot exercise his option on Portion No. Four unless he has exercised his options on Portion Nos. One, Two and Three and is current on his terms of payment. This is an excellent way to leverage your way to a fortune. This way, you can tie up the maximum amount of land with the minimum amount of cash. It is the only way many builders survive.

3.4. Tax Free Exchange Clause - If you decide not to purchase a particular property, ask the owner to agree to a tax-free exchange option clause which requires him to exchange his property for property which you select. The first seller will then get what he was seeking, and the second seller may qualify for tax-deferred treatment. You would be in a better position to negotiate with owners of properties which you want to acquire. Everyone wants tax benefits. The seller you are dealing with probably wants them too. Show him how your idea will benefit him as well as you.

3.5. Get an Option for an Option - If an owner has more than one property which he wishes to sell, you might offer an option agreement which stipulates that, when you exercise an option on one of his specified properties, you automatically get an option on another of his properties. This is known as a rolling or movable option. It can enable you to tie up vast amounts of property without biting off more than you can chew all at once. For example, let's say you find a parcel of land suitable for 300 or 400 single family homes, but you don't want to build more than 30 at a time. You divide the land into parcels and then option one parcel at a time. As each group of houses is built and sold, you take over another parcel of land.

3.6. Pay expenses on Vacant Investment Property for an Option - Owners frequently find that payments for expenses on non-income producing property are a heavy burden. You may be able to get a desirable option by merely agreeing to pay these onerous payments for the owner for a specified time. If an owner does not use his vacation property very often, the expenses can be particularly annoying. The owners might be thinking of getting rid of the property just to get rid of the expense, but giving you an option, instead, is a more desirable alternative. That way the owners get to keep the property and use it during the option period while you pay the expenses.

3.7. Require Buyer to Exchange - Exchanging, and the consequent tax advantages, are limited only by your creativity. For example., if a buyer wants to purchase your optioned property, require him to locate a property suitable to you and exchange it for your optioned property. This will save you money in taxes and it will cost the buyer nothing. If he refuses to cooperate, either find another buyer or raise the price and use the extra money to pay the tax. For example, let's say you are selling a four-unit building and want to trade up to something a little bigger. But, instead of selling your fourplex outright, you give a prospective buyer an option. Put in a condition stating that the buyer must find a suitable exchange property before he can exercise his option.

3.8. Extendable Option - Sellers try for options with a relatively short time for exercise of the option. If you believe you may want or need to extend the option, negotiate a provision which will allow you to do so upon payment of an additional charge for this right. This way, you won't miss out on any sudden bursts of appreciation which come along just after your option has run out.

3.9. Periodic Payments - Another way to avoid a large initial payment for an option is to assign the income you have from your income-producing assets. For example, you can assign your quarterly dividends from stock or the payments from a second mortgage you own. Such an assignment should be in conformance with your plans for making a profit on the optioned property. You should start by setting a limit on the total amount you will pay for the option. In other words, you are buying it on the installment plan. Rather than paying the seller $1,000 or $2,000 in one lump sum; to option his property, you give him periodic payments.

4. Residential Lease Plus Option – Used for Rent to Own Transactions