How to Make Risk-Free Money with Option AgreementsPosted on June 5, 2011 by
It’s amazing all the ways you, as a real estate investor, can make money in this market. The problem is, real estate investors – including me – get stuck in a rut using the same old deal-structuring technique over and over.
The real estate market is continually changing. This means the deal-structuring techniques you use must change with it. Think of it this way: You would be foolish to only have a big, dang hammer in your deal-structuring toolbox. True, sometimes the job calls for a big dang hammer, but often as not, another tool suits the job better.
Let’s talk about a technique that is working well for us in this market. It’s called the Option Agreement technique. To better describe this technique, here’s an example of one of our real-world deals.
A while back, we got a call from a homeowner who lived on Nicklesville Road in Resaca, Georgia. The owner was desperate to sell. He called wanting to know if we would buy his home. The problem is, we mainly invest in Bartow County. This property was well north of Bartow.
The seller’s property was beautiful! It was a four-bedroom, two-bath home on five fenced acres, with a four-stall horse barn and a stocked pond. It had recently been appraised at $137,000.
Because it was outside of our area, we decided not to purchase the property. Instead, we advised the seller to hire a local realtor.
About a month later, the seller called again. He hadn’t hired a realtor, told us he was moving, and just wanted to be done with his property.
Here’s how we structured this into a win-win, zero-risk, no-headache deal. First, we verified that the seller’s mortgage balance was $86,000, and that the seller owed $1,200 in back property taxes. Next, the owner agreed that as long as he got $2,000 at closing, he would be happy.
We bought an Option Agreement from the seller for $10. Our agreed-to purchase price was $90,000. We included the following Special Stipulation in the Agreement: Purchaser reserves the right to transfer or assign the Option Agreement. (Remember, we did NOT want to buy this property.)
After the owner moved out, we put our For Sale sign and flier box in the yard. Our advertised sale price was $98,000 – well below the appraised value! The calls and offers came pouring in.
At closing – remember, we never owned the property, we just had an option on it – the property sold for $98,000. The seller’s mortgage and back property taxes were paid. The seller received $2,289.81. And $2,108 of the buyer’s closing costs were paid by the seller.
How did Kim and I get paid? On line 517 of the HUD-1 (the main closing document) it reads: Option Assignment Fee to North Georgia Real Estate, Inc. – $5,997.00. That’s right, for about three hours of work – mainly sticking a sign in the yard and answering the phone – we earned an option fee of almost $6,000!
Hope this inspires you to get out there and talk to some sellers and structure some deals!