Unusual Real Estate Options
By Steve Gillman
Before we look at some of the more unusual real estate options,
lets quickly review what a normal one looks like. One way they
are used is to "tie up" a property while trying to
arrange financing. For example, a developer might want a 40-acre
parcel to develop into a small subdivision with 30 houses, but
it will take as long as a year to get investors or banks to help
him finance the project. So he pays $10,000 to the owner for
a one-year option to buy the property at $750,000. If he can
find his financing within a year he has the right to buy, but
if not, he loses his $10,000. Meanwhile he doesn't have to worry
about someone else buying the land.
That's an example of a more typical real estate option. They
can get more creative and complex though. For example, this option,
if written the right way, should be transferable, so if two months
after buying it the developer sees that he won't be able to complete
the deal, he could sell the option. If he finds another developer
who recognizes the value of the land, he might even sell the
option for $20,000, and make more than his money back. That buyer
will then pay $750,000 for the 40 acres.
Another way to use options is to control land that may soon
increase in value, in order to sell the land or the option for
a profit. For example, suppose you see that the growth in a town
is going south, and commercial land is selling for $200,000 per
acre at the edge of town. A bit further out you can buy land
for $100,000 per acre, but who wants to risk buying and holding?
Instead, you go to the owners of some parcels and offer to buy
an option on the land for two years for $4,000. You also set
the purchase price at more than the current value. So if a lot
is worth $100,000, you pay $4,000 for the right to buy it within
two years at $110,000. The owner gets $10,000 more than he expected
if the option is exercised, and keeps the $4,000 if it isn't.
Meanwhile, if you're right about what's happening, and the
lot is worth $150,000 eighteen months later, you can buy it for
$110,000 and resell it for a profit. Better yet, to avoid the
trouble and expense, you just sell the option for $30,000, which
means the buyer gets the property for a total of $140,000--paying
$10,000 less than current value. You turned your $4,000 into
$30,000 in less than two years.
An Odd Real Estate Option Plan
Now we get to the stranger ways to use options. There was
a man who used options to control hill tops. Why? Because radio
towers need hills, and the land on top can be leased for that
purpose.
Here's how he worked his plan. He went to the owners of high
hills and asked then what they would sell the acre or two at
the top for. Whatever price they wanted he agreed to, but he
said he needed time, so he paid for a six-month option. He paid
perhaps 1% of the value, which was okay with owners who may have
just been sitting on the property in any case, and either kept
a few hundred dollars or sold for the full price they wanted
If the man was looking at a property that was $40,000, for
example, he would pay $400 for the real estate option that gave
him the right to buy it for that within six months. Then he contacted
every radio station, police department, and cell phone company
in the area that might need a hill for a radio tower. These properties
are often leased for ten-years or longer. Buying ties up too
much capital. If he found the right customer, the signed lease
made it easy to get a loan from a bank. The towers are built
by the lessee, so our investors only expenses once the deal is
in place are the loan payment and property taxes. As long as
the lease payments are a few hundred dollars more per month than
these, he has a good return. What if he doesn't find an interested
party? He loses the $400 option fee. You could lose a few of
those on the way to finding deals that pay thousands in annual
profits.
By the way, there are free real estate options available too.
They are not called options, but that's effectively what they
are. Make an offer on a fixer-upper house, for example, and in
the offer, after your name, add "or assigns," which
means anyone you assign the contract to can take your place.
Then put the words, "contingent on the approval of the buyers
partner within 30 days," Some sellers won't accept this
unless you make it seven days, but some will say yes. You now
have a 30 day option to buy the house. Find a partner with money
who will either go into the deal with you or sell the contract
to him for $3,000 if he wants the deal to himself. Your risk
is nothing since you can have any "partner" disapprove
and so cancel the contract.
Now that we have opened our minds to unusual ways to use options,
you might want to look for some opportunities others miss. For
example, finding a renter can be done before you even buy, if
you first lock up the property with an option. In the north land
might be rented to a Christmas tree grower for the necessary
five to eight years. In farming areas, land is regularly leased
for growing annual crops. An option allows you to be sure you
have the income before you buy the real estate.
Here's a more creative plan that comes to mind: For a few
hundred dollars, buy a 30-day option on a piece of wooded land
that can be used for homes. Then have a lumber company look at
it and tell you what they'll pay to select cut the trees. A friend
of mine was paid thousands of dollars for half the trees on his
little lot, and it looked the same when they were done. If you
can get enough for the trees and perhaps any other resources
(gravel, clay), buy the land, sell the resources, and then sell
the land for the same price you paid, since the value was based
on the residential nature of it and not the resources. You might
even split the land into smaller parcels to get more out of it.
You risk a few hundred dollars up front and then see if it will
be profitable before you risk more.
Here's another idea for a creative use of a real estate option.
This one assumes you have money to invest. A lot is for sale
between two houses for $30,000, and you have heard that one or
both of the residents on either side would like to buy it, but
the seller wants cash only. You have $30,000, but you don't want
to speculate and end up with a lot you can't sell. So you offer
the seller $200 for a 30-day option to buy the lot for $26,000,
and he agrees. Now you go to both adjacent neighbors and offer
the land for $34,000. Why would they pay that much? Because you
offer to sell it for no down payment and $350 per month at 10%
annual interest. In other words, you make it easy for them to
buy it. Your real return on the investment is much higher than
10% of course, because you sell for $8,000 more than you paid
and collect that interest on your investment and your
gain. If they say no, you lose $200.
Using low-priced options you can also effectively become a
real estate agent without meeting the legal requirements. How?
Tie up properties at good prices using transferable cheap options
that last for a few months, and then find buyers that will pay
more than the price your option specifies. The difference (minus
expenses) is your profit, the equivalent of a real estate commission.
You can even present it that way to the seller to get a lower
price if you like, since he knows that if he used an agent he
would have to pay anyhow.
How Much Can You Make?
Every deal is different, and there is no good data on what
investors make using real estate options. There is certainly
a lot of potential though, and many examples of people making
big money using similar strategies.
First Steps
Read up on real estate options and then go write one.
Resources
How to Make Money With Real Estate Options: Low-Cost, Low-Risk,
High-Profit Strategies for Controlling Undervalued Property....Without
the Burdens of Ownership!, by Thomas J. Lucier - Wiley 2005
http://www.totalrealestatesolutions.com/realestateforms/index.cfm
- Free forms you can download and print.
Flipping
or Wholesaling Real Estate - About assigning contracts, which
is essentially like creating short-term options.
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