Business Strategy : Pure Optiion

[MichaelGibson 0]

In the NI manual, one of the business strategies is to use a "Pure Option".

 

Since we are looking for motivated SELLERS, my idea is to NOT mention LP or rent-to-own, initially. My plan is to use a simple, one-page non-exclusive, non-binding option to purchase their property within 60 days (or however long I can negotiate) for a $10 option fee. They would have nothing to lose since it is non-binding and non-exclusive. If I can find someone to flip the option to, GREAT! This would be simple for the homeowner to understand...without getting into a rent-to-own discussion...at least, initially.

 

During the option period, I would be in contact with the seller, keeping them abreast of the progress...or even the lack thereof. This contact would help build rapport with the seller.

 

At any time prior to the expiration of the option, I could go to the seller and tell them that I have a client who is interested in leasing the property for 12-24 months, with an option to buy it at during that time period. My profit, of course, would come from doing either a CA and receiving an assignment fee...or receiving a consultation fee, as per the manual.

 

In addition, in the initial Option to Purchase, I would have discovered, with proper questioning, what the seller's "bottom dollar" was...and if we ended up doing a CA or a consultation on a LP, I could negotiate with the seller to receive 50% of the increase between what they would have taken on the option and the increased amount in the LP Agreement if they exercise their purchase option. (i.e. Pure Option selling price = $100,000. LP Option Price = $120,000. My 50% = $10,000. And maybe even $50 to $100 of the monthly lease payment.)

 

Any potential pitfalls, suggestions or comments about this strategy?

[MichaelC 160]

MG, I think it's a unique twist and approach. I like it. It's risk free for both you and the homeowner. Meaning he shouldn't be reluctant to give you the go ahead and you have little to lose other than your time and whatever your marketing expenses might be.

I think you hit on one key to making this approach work. That is, staying in touch with the homeowner during the process and let them know what you're doing and the feedback you're receiving. Building a trust and a relationship of sorts will go a long way towards getting the Pure Option to become a CA.

I hope you give it a try. I'd be interested in hearing your results. Hell, I might give this a spin myself. Who says an old dog can't learn new tricks??

[MichaelGibson 0]

Thanks for the "thumbs up". I am going to pursue this strategy and will keep you posted.

[blaklabrat 0]

MG,

Did you try it out? How did it work? I haven't even looked into how the Pure Option works. Is it just a contract saying that you might buy the house? Do you let the homeowner know that you will be using that time to market to an end buyer? So they think of you as working for them as a marketer, but they do not have to pay you themselves.... I like this idea. I am a little confused on how to approach the homeowner with the Pure Option, though.

[MichaelC 160]

Ayse, a Pure Option is the height of simplicity. You may want to try it when a homeowner is flat out opposed to any kind of lease arrangement but needs to sell. This agreement gives you the right to purchase the property for an agreed to price during an agreed to time period. It'll cost you a dollar or five in option consideration to secure the deal. So it's virtually risk free.

Once the deal with the homeowner is in place you will need to find your end user. That's the key, of course. Your profit comes either from assigning the deal to your buyer, or by working out a double close where your profit is the difference between your price with the homeowner and your price with your buyer. I'm hitting on the highlights here, but I think you get the idea.

[blaklabrat 0]

Yep, I got MC. Thanks for clearing that up. So it is kind of like a regular assignment of a contract to purchase, but much less risky for both homeowner and investor.

[MichaelC 160]

Yep, I got MC. Thanks for clearing that up. So it is kind of like a regular assignment of a contract to purchase, but much less risky for both homeowner and investor.

That's a good way of looking at it.

[pilot76180 51]

I think the pure option is a good tool for where a CA may not normally fit.

I think a few things to suggest are not to mention the $10 option consideration until the contract signing, as the seller will shoot you if they think you are "taking" their house for $10...

(I do $10, but I don't discuss it till we are signing) It's actually something to see how happy $10 can make someone!

 

You can mention how you have a network of investors around the country that you market to and work with (let's face it, here on NI you have a network of investors...right?)

 

By working with the owner, you are able to "bring all offers" if you will, and a CA is going to be an offer that comes across the table.

 

So, what markets could this work in?

Markets where the equity of the seller is up to ..say...-10% or so...

MArkets where you could at least get enough on the monthly that the seller can make up the difference..

I think that condos in FL MIGHT be an area of possibility...(Lynn) if you can structure a 3 yr LO.

[blaklabrat 0]

Ok. I am in correspondence (hehe) with a homeowner that has been posting the same house of clist for the past couple weeks. I finally emailed him and he bit. I sent the flyer with the second email and he responded by saying that he was offered the same deal by "one of my competitors" (i think that's awesome, that I have competitors), but his goal is to sell in 2011. If I can find a way to close on the property this year then "we can talk". Do tenant/buyers even do 6 month leases? That seems too short. This guy probably wouldn't even agree to that since there'd be no way to guarantee the tenant/buyer would buy. Anyway would this be a Pure Option deal?

[MichaelC 160]

6 month lease option deals hold very little appeal to t/b's. Everyone wants the luxury of time on their side.

As for this being a Pure Option deal, it all depends upon the numbers. The question is whether or not you can get an attractive enough option price that will allow you to attract interest from other prospective buyers.

[speedingpenguin 19]

Ok. I am in correspondence (hehe) with a homeowner that has been posting the same house of clist for the past couple weeks. I finally emailed him and he bit. I sent the flyer with the second email and he responded by saying that he was offered the same deal by "one of my competitors" (i think that's awesome, that I have competitors), but his goal is to sell in 2011. If I can find a way to close on the property this year then "we can talk". Do tenant/buyers even do 6 month leases? That seems too short. This guy probably wouldn't even agree to that since there'd be no way to guarantee the tenant/buyer would buy. Anyway would this be a Pure Option deal?

 

He's been posting the ad for several weeks, has he had any serious interest or any offers? Probably isn't that sweet of a deal if it's still sitting there and there isn't any activity, I'm presuming he hasn't come down in his asking price for you, has he?

 

Sounds like he might be difficult to work with, if theres no flexibility whatsoever, he looks at you as someone who's "competing" (Hmm...), and he's asking you to find someone that will BUY the house in less than a year.... and then you can talk?

I dunno, I'd rather be looking for the seller who's going to be grateful for you helping to solve their problem, and who's willing to work WITH you, not fight you!

 

That's just my approach though

[EQUITY NOTES 0]

Hi Michael

 

Interesting as i think we sometimes get so focused on a way of working a deal, we forget our other tools.

 

You did not mention how much of a spread you are willing to work with on the pure option

 

Can you discuss what spread you look for to do a pure option?

 

Thanks

Tom

[lhenley 8]

So, what markets could this work in?

Markets where the equity of the seller is up to ..say...-10% or so...

MArkets where you could at least get enough on the monthly that the seller can make up the difference..

I think that condos in FL MIGHT be an area of possibility...(Lynn) if you can structure a 3 yr LO.

 

 

John,

 

So, are you saying, I should try and get an option on every condo I can get my hands on?

 

Lynn (FL)

[pilot76180 51]

HA! I don't know about that! But if it looked like the numbers worked, a pure option is, in my opinion, a good tactic to stick the toes into the water with.

BTW- I didn't reserve the house in Dune Allen this year for the 4th of July, so we may not go to Destin for the first time in 18 years!

[MichaelC 160]

Hi Michael

 

Interesting as i think we sometimes get so focused on a way of working a deal, we forget our other tools.

 

You did not mention how much of a spread you are willing to work with on the pure option

 

Can you discuss what spread you look for to do a pure option?

 

Thanks

Tom

Tom, too many variables to have a set formula. The local market is a big factor. How quickly are houses selling, or not? Why amount of discount is needed to move a property in a reasonable amount of time? I think it comes down to knowing the market where the property is located. The safety net, however, is if you misjudged the property and can't find a buyer, your option expires and you're out only whatever option consideration you put down. . .which shouldn't be more than $10 or so.