Thursday, December 26, 2019

Options:The Swiss Army Knife of Investing (Seller Financing Part 2)

Have you ever seen that red little pocket knife that has everything you could think of including a knife?  I used to love those little knives. 

Consider options your swiss army knife of solutions for a real estate transaction.  If there is every a time challenge, think option.  Remember time issue = options.

The funny thing about Options is no realtor knows how to use them.  I've yet to meet a realtor who knows how to describe an option or has ever used one, but they are right infront of you every day.  If you've ever filled out a purchase agreement, it can be quickly modified to be an option.  Using the liquidated damages clause, or "no penalty for not buying", the purchase agreement can quickly become an option agreement.

An option is simply a unilateral agreement (instead of a bilateral agreement, two, it's unilateral, one) that states the seller must sell for this price and within this period of time, and the buyer doesn't need to buy.  The seller must sell, but the buyer doesn't need to buy.

This becomes powerful in locking up various pieces of property for a period of time with the goal of putting together a big deal.  It's also a good tool to use for getting in the way of the path of progress.  For instance, a farmer owns a bunch of land, and there's a freeway coming through.  The investor can leverage an option from the farmer for a very low amount down (usually 1% of the strike price or less), for the right to buy the property some time down the road.     It's so simple but yet so powerful.  So if you can imagine if you did this on a grand scale, for a small amount invested you have control over a large amount of real property.  No other place in the world in any type of market, can you get this type of leverage.  (1:99).   Options are very powerful.

 Why do we mention it here?  Because it is a form of seller financing.  The seller is allowing the investor to tie up the property and market it, while the seller still owns the property.  In the next post, I will show you how to use options combined with a lease to make it a home-run technique.

Also, a side note, you can exchange options as well.  Using a 1031 since it's a piece of real property, you can actually trade them, sell them, exchange them, leverage against them (borrow against), or exercise them.

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