Quick question Craig

[rpoissa 0]

Craig, On your pure options. Has the money paid by the buyer for your option ever counted towards the down payment for the property? Or is the money paid JUST for your option fee. We discussed this awhile back but I don't think we came to any concensus. Personally, I don't see why the money paid can count towards Down payment when it is an option and a lease (CA), but it can't when it is just an option, as yours are. Can you clarify for us? Rob

[MichaelC 160]

Rob, an assignment fee on a Pure Option is not applied to the purchase price. It is not option consideration. You negotiated an acceptable purchase price with the homeowner. Then you have gone a found a buyer who has agreed to pay a higher price. If you apply that difference to your purchase price, how will you profit?

[rpoissa 0]

MC, I didn't get it last time we talked and I still don't. Let's compare a CA and a pure option

 

CA- you have an option and a lease on a property. you assign the option (and the lease) for a fee, and you, the seller, and the buyer all "agree" that the money paid to you goes towards the DP.

 

OK, now a pure option- you have an option on a property but no lease. you assign the option for a fee, and you, the seller, and the buyer all "agree" that the money paid to you goes towards the DP.

 

Now, am I crazy or is the only thing different between these two situations that there is a lease involved in situation 1. Why would a lease involved make it "OK" for the money to go towards DP, but it is not OK in situation 2. I must be missing something!!!!

 

MC, you asked, how do I profit? The same way I would in a CA, I sell (assign) the option to someone and collect the money. Help!

[Doug Pretorius (ON) 9]

Hate to disagree with MC, but I think you're right Rob.

 

With one exception: You, the seller, and the buyer CANNOT agree that the money paid to you will be applied to the Down Payment. That's because the lender is the one who decides what is and is not a down payment according to their own policies, over which we have no control (other than to go to another lender).

 

What the 3 of you do agree to is that the money paid to you will be applied to the Purchase Price.

 

In essense the seller is agreeing to lower their price by the amount that is paid to you, similar to what happens when an agent sells a house. Your profit comes out of the proceeds which would have gone to the seller. The main difference between the way you get paid and the way an agent gets paid (and BTW this has NOTHING to do with brokerage or representation) is that the buyer pays you now, whereas an agent gets paid at closing. Of course, you can get paid at closing too, but if your profit is relatively small and the buyer is paying it in cash anyway they might as well pay you now.

[rpoissa 0]

Doug, I am aware of that technicality, and I was only using the phrase "DP" to make a point. I understand the lender could say no to that. I'll reword it to "credited towards the purchase of the house" or something like that.

[Craig 0]

Doug, I am aware of that technicality, and I was only using the phrase "DP" to make a point. I understand the lender could say no to that. I'll reword it to "credited towards the purchase of the house" or something like that.

 

All my options have not be applied to the down payments.

 

Maybe the lender did apply the amount at his end. My lessons learned, is the closer this gets to close I slide out as much as possible. Otherwise you might become a negotiator between buyer and seller for little things. They bought the option. Cash the check and move on.

 

I do recall reading somewhere that while doing a lease option the option can be applied as part of the down payment but the 50% credits can't be. But the rents credits are a deduction from the sale price of the home but not applicable to the down payment. This might vary from lender to lender.

[MichaelC 160]

MC, I didn't get it last time we talked and I still don't. Let's compare a CA and a pure option

 

CA- you have an option and a lease on a property. you assign the option (and the lease) for a fee, and you, the seller, and the buyer all "agree" that the money paid to you goes towards the DP.

 

OK, now a pure option- you have an option on a property but no lease. you assign the option for a fee, and you, the seller, and the buyer all "agree" that the money paid to you goes towards the DP.

 

Now, am I crazy or is the only thing different between these two situations that there is a lease involved in situation 1. Why would a lease involved make it "OK" for the money to go towards DP, but it is not OK in situation 2. I must be missing something!!!!

 

MC, you asked, how do I profit? The same way I would in a CA, I sell (assign) the option to someone and collect the money. Help!

The difference between the two types of deals should be clear. In a CA, you and the homeowner are working together, cooperating, to get the homeowner the best terms possible. The option consideration, your profit, is built in to the price. We can do this and get the seller a higher price because, generally speaking, if you offer terms to a buyer you can expect to receive a higher price. One hand washes the other.

With a Pure Option, you and the seller are on opposite sides of the table. There is no cooperation. He is the seller, you are the buyer, and both of you are looking out for number one. So you negotiate the best, (lowest), purchase price you can, and have, say, a 45 day option period. Now you begin to look for a buyer and you are successful. This buyer agrees your option for $250K is a deal because his due diligence indicates the property is worth $270K. You both agree to a $5K assignment fee. You get your $5K and hand over the Option Agreement you negotiated with the seller. This new buyer now has that option with the very same terms you negotiated. So, tell me, how does that $5K assignment fee become a part of the purchase price? If it does, the homeowner doesn't really have a $250K option price. It's $245K, but that isn't the price he agreed to.

[Jason (AL) 1]

Nice clarification, Michael.

 

 

However, there's one question that I just have to ask after

reading your post:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Do you ever sleep?

 

 

Such a dedicated forum master, I must say!

[MichaelC 160]

Nice clarification, Michael.

 

 

However, there's one question that I just have to ask after

reading your post:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Do you ever sleep?

Sometimes while driving. Otherwise, no.

[Doug Pretorius (ON) 9]

I think it can be done either way. You can set the size of your profit upfront and wrap it into the purchase price, so that you can work WITH the seller instead of against them.

 

Otherwise you can do it as MC described and negotiate the lowest price possible with the seller and pass that deal along to the buyer, with the understanding that the fee they pay you is just that, a fee. You have no control over whether it is applied to their down payment and it doesn't apply toward the purchase price.

[puls1234 0]

I look at it this way. Lets say I have a pure option on a home for $200,000 with the homeowner. I decide that I will market this home in the paper for $215,000. I will assign the house to the buyer for $15,000 and then the buyer will do a buy sell agreement with the seller for the previously agreed option price of $200,000. It is that simple.

 

Pete

[rpoissa 0]

I look at it this way. Lets say I have a pure option on a home for $200,000 with the homeowner. I decide that I will market this home in the paper for $215,000. I will assign the house to the buyer for $15,000 and then the buyer will do a buy sell agreement with the seller for the previously agreed option price of $200,000. It is that simple.

 

Pete

 

Puls, I understand what you are saying. And now I see both sides of the argument. If you are working against the seller, then yes, it does not make any sense for the money to be applied. I was talking from a purely TECHNICAL point of view, and I was trying to point out that theoritically, it could work the same as a CA, because they are essentially the same thing (except there is a lease involved in a CA).

Back to your basic example puls. Alright let's say that happens, the buyer gives you 15K assignment. Now, my question is, if the buyer gives you 15K, where are they getting the down payment from? I'm not saying this doesn't work, because obviously it does. But I want to start using pure options and I just don't understand where these buyers are getting all their money from. So they pay you 15K, then they need another 15K to close, say a 200K house, not many people have 30K these days. Thoughts? Rob

[rpoissa 0]

I think it can be done either way. You can set the size of your profit upfront and wrap it into the purchase price, so that you can work WITH the seller instead of against them.

 

Otherwise you can do it as MC described and negotiate the lowest price possible with the seller and pass that deal along to the buyer, with the understanding that the fee they pay you is just that, a fee. You have no control over whether it is applied to their down payment and it doesn't apply toward the purchase price.

 

 

Doug, I "think" I agree with you. Where I was originally going with this is I am wondering about the financing the buyer would get. Particularly here in Canada. If you handed a lender an option, with the assignment signed by all three parties involved (I am talking either a CA or a pure option here), do you think they would honestly use that money towards DP? Doug, have any of your buyers successfully had their assignment fee applied towards the DP for one of your CA's? Because I am on my third "CA" now but none of them have involved all the paperwork, we just had an oral agreement and it has always worked out. I'm afraid to venture over into the real world of CA's because I'm worried about this financing issue. The one lender I asked about this said they weren't sure if it would work or not, and that the only way to know would be to put the paperwork through and see what happens (thanks, by then it would be way too late). Rob

[MichaelC 160]

. . .Alright let's say that happens, the buyer gives you 15K assignment. Now, my question is, if the buyer gives you 15K, where are they getting the down payment from? I'm not saying this doesn't work, because obviously it does. But I want to start using pure options and I just don't understand where these buyers are getting all their money from. So they pay you 15K, then they need another 15K to close, say a 200K house, not many people have 30K these days. Thoughts? Rob

Rob, first, don't prejudge a person's financial abilities. While some may not have thirty or more grand laying around, there are others who do. After all, if someone is serious about buying a $350K property, they are fully aware of the financial requirements.

Also, these days there are mortgage programs like never before. Zero down, 2% down, etc. Where there's a will, there is often a way.

Another possibility is that the seller may help the transaction by offering financing and taking back a second to make up any shortfall the buyer may be facing.

Yet another possibility is you taking back a note. For example, while we all prefer cash in hand, to make the deal fly you can accept, say, $3K now, and finance the balance. Whatever terms are agreeable are fine. $10K assignment fee can work like this: $3K cash now; $7K financed at 8% APR interest only; with a balloon in 36 months. These techniques free up needed cash that may enable a deal to close.

Etc. . . The only thing limiting us is our imagination and creativity, Rob. Again, don't prejudge a deal or a seller or a buyer.

[Adam King (MI) 1]

MC,

I love your last post.

 

First off. Everyone is arguing either the same argument or an irrelevant argument. You can have a seller "cooperate" on anything unless it is intended otherwise. You can have a cooperative purchase agreement, a cooperative assignment agreement or even a cooperative promissory note. The points you have all made are simple though; use your imagination and make sure everyone gets what they are intending to get. End of story.

 

I have done everything everyone has posted on this thread. I have cooperatively sold straight options, lease options, land contracts and even subject tos. And for the beautiful end of this tread as MC puts it, I am now doing one of the coolest things I have ever done in REI. I am using a pure option to control, act as a transaction coordinator to create a seller second and then finally assuming that second and holding a note from the seller's equity. As MC puts it, this allows me to walk into a mortgage company, ask the loan officers to give me their clients that need seller involvement and I'll find the house. I do not get paid any fees whatsoever for bringing anyone together. I only get paid for creating the note in which I hold as the bank.

Your imagination is the only thing that will limit you!

Adam