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Making Cash In Real Estate Using The Simple Option Strategy

Updated on March 14, 2016
Ronald Bachner profile image

Ronald Bachner has 30 years experience in building inspection, safety, and real estate experience. He enjoys local theater for relaxation.

For Those Living In The Pittsburgh Area.
For Those Living In The Pittsburgh Area.


Are you looking for a basic often used idea to make money in real estate investing. Here is a strategy that you may like. Remember that not all sellers or property owners will be agreeable. I often wrote a simple agreement of sale that operated like an option to make sellers feel like it was a bilateral agreement. My recommendation when possible is that an option to purchase form be used clearly identified as such.

Cookie Cutter Investment Strategy Number 1

THE SIMPLE OPTION

STRATEGY EXPLANATION:

The Simple Option Strategy is probably the easiest strategy to implement and offers virtually no risk. It is one of my most favorite strategies and is often utilized. For those who may not know, an Option is a right or a number of rights you may receive in exchange for consideration which you offer in return for these rights. It is a written document with certain legal obligations and is usually signed only by the giver of the rights. Consideration can be material goods, money, labor, and other items. Rights are usually rights to purchase, assign, develop, sell, and much more depending on the agreement of the parties. The agreement is for a specific period of time and may be renewed if agreed upon by the parties. An option agreement is a unilateral agreement meaning that the seller or person giving has to perform if the option is exercised by a buyer or optionee.

The Simple Option Investment Strategy involves finding a property that you believe you can make cash on. Potential cash profits come from either property being priced below market, negotiated terms in the contract that will produce cash at a certain time, or in a means that You believe cash will be produce. (For example, you believe the property will be worth more after repairs, after rezoning, after cleanup, after new marketing methods, or other ideas limited only by your own imagination).

MOST IMPORTANT PRINCIPLE TO LEARN HERE:

The most important principle to learn here is the basics of what an Option does. What it does is gives you control of an asset that offers the potential to make you cash. You can't make cash unless you control an asset which in this case is the real estate. Your method of control is the Option Agreement. Please understand that without this agreement you will not be able to make any cash profits.

STRATEGY BENEFITS:

The benefits with this Option are that you will control an asset to which you may make a potential cash profit. In addition, you will have a minimum investment in the consid­eration paid for the option rights. Your risk in the Option will be limited and under your control. Finally you will be able to get into a deal with minimum cash and the potential for a large return in cash.

While there are other benefits, they are unimportant at the moment. You will eventually realize them at a later date.

STEPS TO TAKE:

To implement The Simple Option Strategy, please follow and work within the following steps and framework. These steps are written to be brief on purpose so you will not lose sight of the important principles and concepts to learn.

  1. Locate property that you believe offers a potential for cash profit.
  2. Before contacting the owner lay out a plan on paper explaining how you can make a cash profit, the steps you need to take to make the cash profit, the terms you need from the owner in an agreement to make the cash profit, and the risks you are willing to accept including any money given for any option period.
  3. Contact the owner of the property and attempt to negotiate your terms with the owners. When you have reached agreement on the terms you believe will allow you to make the profit desired, put the terms agreed upon in a written contract or option agreement. I advise you to seek professional advice until such time you are confident in your ability to enter any agreement and understand your legal obligation. Options are usually signed by the owner only but you will still have to be aware of the agreement and your obligations there under. The option agreement only has to be signed by the seller as it is a unilateral agreement. While you the buyer are not required to exercise your option to purchase the seller is required to sell if you do exercise your purchase rights. This agreement can also be assigned for a profit.

4. After you have a signed agreement, you are now ready to test your marketing plan that you laid out in step two above. This plan if you have accurately analyzed the property conditions, will produce the CASH profit you have desired. Step 4 of this strategy requires you to take the next step in your plan which will lead you to your CASH profits. This step will mean different things to different people and prop­erties. It may mean fixing up before selling (minimum investment if any), getting the property rezoned, improving the current management of the property, assigning the option agreement, or any number of other measures. (You will learn a number of techniques as you inspect property and make offers - just keep thinking how can I make money on this particular property.)

Note: Please do not hesitate to change or revise your marketing plan to fit your particular situation. I have often had to make adjustments to keep it flowing but do not lose sight of your objective.

5. If you have insured your profit you are now ready to take the steps to collect your profit. These steps may mean assigning the contract (which I do often), or selling the property after exercising your option to purchase the property. I recommend that on your first couple of deals you try to assign your option to another party and collect your profits. It is the simpler and most quick way to profits. If you can't, and you need help, just negotiate a deal for a couple more of bucks and hire an attorney. The cost will be minimal. Your job in making profits is to see the big picture, and guide those who will help you. You do not have to understand every aspect but you need to know your objectives and what needs to be done. Step 5 includes those steps which will close the deal for you and make your profits. There are no set rules to give you at this point since it will depend on you, your objectives, and what you have negotiated.

STRATEGY ONE "THE SIMPLE OPTION" PROFIT PICTURE:

Explanation: $50,000 Market Value

$42,000 You're negotiated price for the property.

$ 8,000 Your Potential Profit After completing your Marketing Plan and Closing Requirements. (Selling or Assigning)

You can sell or assign your interest in this property for a profit from $1.00 to $8,000. You have more flexibility than most other sellers and buyers. Thus you have more chance for a profit with minimal or no risk.

POTENTIAL FINANCING PLANNING IDEAS:

One of the important and overlooked aspects of making a cash profits is the lack of financial planning that goes into a deal after a deal is completed. This segment "POTENTIAL FINANCING PLANNING IDEAS" is to inform you of a very import­ant point. That is after you take your profits do not hesitate to reinvest them into another asset that will grow in value. There are many ideas and certainly too many to cover here.

Example: Complete two deals a year with a total profit of $10,000 per year for ten years, with interest of 8.00%, compounded once per year, and in ten years you will have approximately $144,000 in the bank.

Example: If you follow the above plan, and at the ten year period quit and do nothing for the next twenty years, you will have assuming 7.00% interest, and compounded once per year, almost $561,000 in the bank.

There are many variables which financial planning but you should begin to see the necessity of financial planning. This is where your investment strategy begins to take on a deeper understanding and clearer picture which becomes alive.

Why the above examples are illustrations they are feasible if you should acquire the skills and patience to complete. The above is doable with adjustments if you are willing to apply patience and time to acquire the financial rewards. I urge you to just do one transaction per year and you will be better off than most people at the end of your working career.

I strongly recommend speaking with an attorney and learning the ins and outs of an option agreement.

This hub is Copyrighted by Ronald Bachner 1990. All rights reserved.

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    • Ronald Bachner profile image
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      Ronald Bachner 3 years ago from Pittsburgh

      Thanks Rob for your comment. It is important for readers to understand that some important decisions early in life can set you up for financial blessings in the end years of life. It is a mindset. One deal a year early in life for ten years is important as long as you don't touch the profits. They do not teach these things in school and the distractions of life can bankrupt you and cost you.

    • Rob Lattin profile image

      Rob Lattin 3 years ago from Born in Chicago, now I'm in Mostly Michigan

      Great article. I like the idea of investing your profits into another asset. The sky is the limit on this, anywhere from investing in a positive cashflow business or lending the money out as a hard money loan with a short term. Keep writing more. Thanks