Option Agreements: The Most Powerful Documents in Real EstatePosted on September 27, 2011 by
Most investors have heard the phrase Lease Option. A few have even used a Lease Option when trying to rent a property to a tenant/buyer. But practically no one understands what the Option part of a Lease Option is, or realizes that Options are the safest way to create HUGE bundles of real estate profits!
I learned about the power of Options from Jack Miller (God rest his wise soul!) starting back in 1999. Jack was the King of Options. His knowledge was nothing short of amazing!!!
For the first time, I’m going to share a few of the things I’ve learned from Jack over the years. The Option techniques he taught were gamechangers for Kim and me and have allowed us to rake in solid real estate profits during this down market.
Example: In 2008, a homeowner was $3,200 in arrears on his mortgage because of a job loss. He found a new job, but was struggling to catch up his mortgage. The lender was threatening to foreclose. Because of his bad credit, the bank wouldn’t lend him any money. He only owed $68,000 on a home that was conservatively worth $155,000, and didn’t want to sell or move. How would you work this deal?
Here’s how we structured a creative and profitable win-win deal with the homeowner: For $3,200 – which we sent to the lender – we bought a seven-year Option to Purchase from the owner and recorded it against the property with a Security Deed. Within seven years, we had the right to buy the property at an amount equal to the owner’s mortgage balance at the time we purchased – an amount that would be (because of amortization) something less than $68,000.
So the owner wouldn’t have to immediately move – something he greatly valued – we agreed to not exercise our Option for at least three years so long as he kept his mortgage current. In addition, we agreed that if we exercised our option, we’d give the owner 50% of our net profit when we sold the property.
In early 2011, the homeowner called. He was back on his feet and doing well. He wanted to refinance his property and get a low-interest mortgage…plus he wanted to buy back our Option. He agreed to pay us $18,200 in exchange for our Option to Purchase Agreement.
This was a true win-win deal. The homeowner was able to remain in his house and save it from foreclosure, and we turned $3,200 into $18,200 with very little effort.
Could we have refused to sell back our Option to the homeowner and exercised it instead? Absolutely! But he was a good guy with a great family. Kim and I felt that making a $15,000 profit on a $3,200 investment for only two hours of work was more than a good enough return on our investment.
Are you beginning to understand the power of Options? And this is only scratching the surface of all the ways you can use Options to control real estate!