Real Estate Options: What They Are, How They Work, and Why You Should Use Them

 

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first want to thank you for investing your money in a copy of H__ow t__o M__ake Money with Real Estate Options. This one- of-a-kind book was written for serious, rational, reasonable, intelligent, reality- based, goal-driven, and action-oriented adults who are willing to take calculated risks in order to profit from the many money-making opportunities that real es- tate options provide today. I am a firm believer that a real how-to book should tell its readers precisely what to do while providing detailed instructions on ex- actly how to do it. I also believe that a how-to book should live up to its title. And I am very confident that this unique book will exceed your expectations on both counts! As you will soon find out, it is packed with step-by-step instructions, ready-to-use worksheets, checklists, letters and agreements, and practical, no- nonsense advice on how to use real estate options to control undervalued prop- erties with immediate resale profit potential.

 

 

Learning about Real Estate Options

When I first got interested in using real estate options in 1985, there were no pub- lications available like this book. The scant amount of information that I was about to scrounge up about real estate options told me just enough to be danger- ous, but not enough so that I really knew what I was doing. This lack of solid in- formation meant that I did not have the luxury of learning from someone else’s mistakes. I had no choice but to go it alone. So, how did I become my own real es- tate option expert? I did it the old-fashioned way. I went out on my own and learned the hard way how real estate options really work. I did a lot of research,talked to a lot of knowledgeable people, and asked a lot of questions. Then, I went out and bought some real estate options and made the inevitable mistakes, which I learned from. And while all of this was going on, I took copious notes to keep track of my trials, tribulations, numerous mistakes, and firsthand experiences as a real estate option investor. Those notes are the basis for this book.

 

 

What You Need to Know about Real Estate Options

Real estate options are a little known and seldom used investment strategy prob- ably because the only time that most people ever read or hear anything about real estate options is when they are bandied about, willy-nilly, on real estate web site message boards or discussed at real estate investment club meetings by people whose collective knowledge of the subject would not fill a thimble. However, when fully understood, properly prepared, and used correctly, real estate op- tions are an excellent way to conserve capital, create leverage, reduce risks, and gain control of properties with immediate resale profit potential. But, to avoid the potential problems and pitfalls that plague most uninformed and unsuspect- ing real estate option investors, you first need to know:

 

  1. The difference between a straight or naked real estate option and a lease- option.
  2. What a real estate option
  3. The seven elements of a real estate option transactio
  4. How a real estate option transaction wo
  5. The legal status of real estate options in your

 

 

The Difference between a Straight Real Estate Option and a Lease-Option

First things first: There is a world of difference between the straight or naked real estate options that I am writing about in this book and the rather ubiquitous lease-options that everyone and their brother has written about over the past 10 years. For starters, the real estate option agreement that I am writing about is a stand-alone document, which is not part of a lease agreement. Second, under the terms of a lease-option agreement, the lessee-optionee takes possession of the property under lease and is legally obligated to pay a monthly lease payment. The

 

 

only payment required on a real estate option is a one-time option consideration fee. And unlike real estate options, lease-options violate the loan due-on-sale clause contained in residential mortgage or deed of trust loans. In other words, in the event that a lender discovers that a property owner has entered into a lease- option agreement, the lender could call the mortgage or deed of trust loan due and foreclose if the loan was not paid off in full.

Often, people confuse a real estate option with a right of first refusal. The main difference between a straight or naked real estate option and a right of first refusal is that a right of first refusal is the right to match a bona fide pur- chase offer from a third party, whereas a real estate option is an irrevocable right to purchase property, usually at a pre-determined price, within a specified time period. For example, most commercial leases include a right of first refusal that gives the lessee the right to match any written offers that the owner may re- ceive to purchase the property under lease.

 

 

The Definition of a Real Estate Option

In general legal terms, a real estate option grants the party owning the option, the optionee, the exclusive, unrestricted, and irrevocable right to purchase prop- erty from the party selling the option, the optionor, during the specified period of time that the real estate option is in effect.

 

 

A Real Estate Option Grants Only an Irrevocable Right to Purchase Property

I want to state right from the get-go that the only thing that a straight or naked real estate option grants is an irrevocable right to purchase the property under option within the option period. Nothing more! An optionee has absolutely no beneficial or equitable interest whatsoever in a property under option. Further- more, in my professional opinion, the creation and sale of a straight or naked real estate option does not violate the due-on-sale clause contained in government- backed and conventional mortgage or deed of trust loans secured by a lien on residential property containing five or fewer units. Again, in my professional opinion, there is absolutely no way that any lender can legally exercise its option pursuant to a due-on-sale clause on discovering the creation and sale of a straight or naked real estate option. Why do I hold this opinion? Because Title 12 of the Code of Federal Regulations refers specifically to lease-option con- tracts, but makes no mention whatsoever of straight or naked real estate option to purchase contracts.

 

Furthermore, the creation and sale of a straight or naked real estate option does not transfer any legal or beneficial interest in the property under option until after the option is exercised. The transfer of the property or a beneficial in- terest in borrower is the standard loan due-on-sale covenant, which is included in all Fannie Mae and Freddie Mac conventional residential mortgage and deed of trust loan documents. It states in part:

 

“Interest in the Property” means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.

 

During the course of researching this book, I found no court cases nation- wide in which a residential lender has exercised its loan’s due-on-sale clause and declared a loan to be in default upon discovering that the borrower had created and sold a straight or naked real estate option on the property securing the mort- gage or deed of trust and promissory note.

The due-on-sale clauses included in almost all commercial mortgage or deed of trust loans do not specifically prohibit the creation and sale of a straight or naked real estate option on the property securing the mortgage or deed of trust and promissory note. The fact is that other than government- backed multifamily loans, most commercial mortgage or deed of trust loans are one-of-a-kind loan instruments written specifically for the property securing the loan and almost never contain any prohibition against creating and selling a real estate option.

 

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