By being creative, you can play the game of real estate investing by using what is called Option’s investing.
This is just one technique of the Option’s strategy of investing but can be a power tool in your investors toolbox to help you control more real estate and build wealth.
An option is an agreement to you from the seller that gives you the exclusive right to buy a property during a specified time and at a predetermined price but does not obligate you to make the purchase – This is why it’s called the Option agreement.
You option to buy – You option not to buy.
Option investing works when you want to control more real estate with limited out of pocket cash or credit and works if you:
Have no credit!
Can’t pay cash!
Can’t get a loan!
I call this the “SWEAT OPTION”.
The sweat option works well if you have the ability to do the repairs yourself.
Your key’s in making a deal like this are:
You need to know the basics of real estate investing
You need the forms to make this happen
You need to know the market area
You need to know the laws in your state
You need to know how to determine the value of the subject property
You need to know how to do a title search
Most importantly you need to know how to find sellers that are motivated enough to work with you on this strategy of investing.
I recommend that you farm out your market area looking for properties that are what we call in the industry FSBO’s (For Sale by Owner).
Go to your local library and start your research by looking at old newspapers starting with newspapers that are 90 days old and work your way through the FSBO’s section making a list of possible deals. Working on a list of 30 or so.
Call and see if the property is still on the market, if so make an appointment to see the property! You will find that none owner occupied properties work the best and you are looking for properties that can not compete well with other homes do to repairs that need to be done.
Let’s say the seller has a property that is worth $100,000 after the repairs.
I like using a 5% rule for repairs – If the value of the property is $100,000 after repairs, I do not want to spend more than $5,000 or 5% in repairs.
I would negotiate say an option purchase price of $80,000 for a period of 6 months or more and in the option agreement to perform the repairs at my cost to be my consideration for the option of purchase or should I say the $5,000 in repairs, materials cost and labor to be considered as credit towards the purchase of the property (My down payment) and what ever monthly payment we agree to and credit amount of that monthly payment. So let’s say we agree to pay $600 a month with $100 a month credit towards the purchase.
You start you’re repairs and complete them in 30 days or less and let’s say you purchased $1,500 in materials.
Now you place the property on the market because you have the option to purchase “You have taken control of the property with your option”.
Let’s say this deal has taken you 90 days from the beginning to the end.
You find your buyer let’s say at a great deal of $95,000 – $5,000 below market value at this point you would simply exercise your right to the purchase option and do a simultaneous close.
Now let’s run the numbers
Your option purchase was $80,000
Your option credit of $5,300 (Repairs, materials cost, labor & monthly credit)
Your purchase price after credits $74,700
Your buyer purchase price of $95,000
Leaving you a gross profit of $20,300
You had out of pocket material cost of $1,500
You had 3 payments of $600 each with $100 for the credit purchase with an out of pocket of $1,500
Carrying cost of $600, (Real estate taxes $300 &$300 Utilities)
Advertising cost $300
Closing cost $1,300
Your net profit $15,100
You simply took control of a $100,000 property for $3,900 (payments, materials, utilities, and advertising) and turned a profit of $15,100 in 90 days!
Look at it this way you can make it a cash purchase at $80,000 and take control of one property or be a little creative and take control of the same property for less than $4,000. Both conservative and creative deals work in the world of real estate investing.
Good luck and I hope this will help some of you!
Copyright 2005 JMichael Investments
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