Real Estate Investments - Making Money By Selling Options And Assigning Contracts
You can make money with options and contracts but be careful!
I have previously written about making money in the Real Estate business through buying and holding property to produce long term income or buying property on a speculative basis for immediate resale or flipping a property. Both of these methods can be effective when used properly but often involve the use of credit and or the funds of an investor/partner in order to acquire the property, make any necessary repairs and hold it until it can be resold. Without the use of a credit line or a partner who has one, these two methods can become virtually impossible.
There are a few other methods however that can provide income fairly quickly and while these, in all probability, will not produce the kind of revenue as those mentioned above, they can provide funds that re-invested properly can put you on your way to becoming a success in real estate. While neither of these methods are used very often anymore, they are still a very viable option and can be very effective.
To begin you have to understand one very key principle. Any instrument that places the future of a piece or real property under your control is a marketable asset and when worded properly gives the holder of that instrument all the rights and privileges of ownership. That said, it should be understood that while there are as many variations as there are properties and people that have an effect on the way any given document is worded thus making it peculiar to that deal, there are only two basic instruments, a contract and an option.
First, lets examine the contract. I can understand that this might be somewhat confusing because a contract is also used to acquire a property to hold or to flip right? Absolutely. What makes it unique in this situation is that there is a clause inserted into the wording of the document giving you, as the holder of the contract, the clear right to sell your interest in the document and thus the property. I used the following language specifically " Purchaser reserves the right to sell, assign or otherwise bargain for his interest in this contract. It is understood by the parties hereto that this action may be for financial purposes". These few simple words put the seller on notice that not only might you sell your interest in this contract but that you are also, in all probability, doing it for financial gain.
There are some who might argue that this clause or the simple knowledge that you might sell you contract will likely send the seller packing as they will be made to feel as if they are being taken advantage of or that there is something they don't know about the transaction. This simply has not been the case in my experience. While I cannot and will not tell you that a circumstance of this nature will not crop up. If your luck is like mine so often is it probably will on the very first deal, but day in and day out I can assure you of a couple of things, the clause can be inserted and the seller will still sign the contract giving you the needed authority and most sellers who want to sell don't really care who ends up with the property as long as they get their price.
The second method is more blatant and essentially removes all the guesswork from the equation. The option contract is a document specifically prepared for the purpose of taking a property under control for a fee and for a specific period of time in order to investigate the likelihood of selling that contract for a profit. Although it might not seem so, in many ways this method can be more effective than a standard contract in that all parties are fully informed going in to the deal and the seller knows up front that they are selling "the right to investigate the possibilities" which should at least reduce the conservation surrounding that aspect to a minimum, allowing you to move on to the negotiation of the finer points of the deal.
The terms and conditions of an option agreement can vary broadly from the amount paid for the option, (please note there does have to be an exchange of money for the document to be legal and binding) to the length of time you will be granted for the fee paid. It is usually a good idea to include language in the agreement giving you the right to extend the term in exchange for payment of an added fee should that additional time be needed to close the deal with your purchaser on the other end.
Some investors who use options, even go as far as advertising that they are in the option business which goes one step further to eliminating any confusion on the sellers part as to what is transpiring. Simply put they know going in that they are looking at an option.
Once you have either a contract with a right to assign clause or an option in place, the next step is to market the asset. As you progress in the business, hopefully you will build a network of people to whom you market, once this is done it will be much easier to market your product but when just getting started, the sale of an option or assignment of a contract can be tricky.
Do not fall into the trap of dealing with an unscrupulous investor whose game might be simply to lure you into a deal to learn what you might have available and at what price and then merely sit back and wait for your contract to expire in order to step in and buy directly from your customer, thereby eliminating the payment of your fee. Sadly, there are those kinds of people who operate under the auspices of being a "good businessman" in my opinion they are Jackass crooks who should be avoided at all cost and exposed at every opportunity to legitimate business people.
In any case, those people avoided, the goal is to begin to build a client list and sell your control of these properties. There are a couple ways this can be done. First run an ad, advertise the property as if you owned it, you do control it after all, and wait until you have met the potential customer and shown them the property before getting into the finite details of how the deal must be done.
Secondly, word of mouth or what I like to call eye to eye contact can be very effective. Put together a written flyer outlining the aspects of the property that you deem most marketable and take those to Realtors and builders offices as well as home improvement stores and lumber yards. Those places all usually have a bulletin board near a coffee pot somewhere that you can use to post the information.
Finally talk it up. Tell your friends, neighbors and even acquaintances about the deal, you never know who might or might know some one who has an interest. Remember marketing real estate is more of a process and you can never really be sure where your buyer will come from so put out as many feelers as possible.
Last, you will need to determine your price. This process will be the same in both cases. You will in essence be selling your interest for a specific amount or fee. The best way to determine this is to start with what you are actually paying for the property should you exercise your option or contract versus the actual value of the property. The difference in those two numbers hopefully to the good on your side should be your starting point. Remember you always make your money buying real estate not selling, the property will sell for what it's worth, how much you buy it below that number establishes your profit.
Be careful not to price yourself out of the market, these methods are designed to be more suited to a quick in and out and it is better to make $5000 today and move on another deal than to wait on $10000 or $20000 and make nothing.
Once your and your purchaser have settled on a deal, the closing will take place pretty much as any deal, you will be paid your fee and the seller and new buyer will close the transaction using either a real estate attorney or escrow agent. Once you have been paid you are essentially out of the deal and ready to move on to the next.
Hopefully, you will walk away from the deal with a happy seller, a happy buyer as well as a possible repeat client, (building that list is very important), and money in your pocket. At the end of the day, that's not a bad thing.