Ten Reasons to Use an Option Contract

1. Maintain Privacy If it was good enough for Walt Disney, its good enough for us. As we have said, when you close escrow on a property, the grant deed or warranty deed is recorded. This deed becomes part of the public record. This means anyone in the world can get on the Internet and find out who owns that property. Why? Because the deed names the grantor, the seller, and the grantee, the buyer-thats you.

2. Protect Your Cash Just like with the stock market, where you can protect your cash by using a stock option, using a real estate option protects the amount of cash you have in any single investment. Rather than buying property with 100 percent of your cash, by using an option you control 100 percent of the property with only a small percentage of the cash.

3. Limited Risk/High Return Using an option contract limits your risk as an investor and gives you a high return. Leverage has always been one of the benefits of real estate investing. If you think the investment return is good using the leverage available in a standard real estate transaction, how good do you think the investment return is using an option?

What would the return on our investment be if we used a $20,000 option to tie up a $200,000 property for one year? Lets assume a 5 percent appreciation on the value of the property.

Leverage

Option Fee (10%) Purchase Price

$ 20,000 $200,000

Appreciation

Purchase Price Annual Appreciation Value Increase

$200,000 X 5% $ 10,000

Return on Investment

Value Increase Amount Invested Investment Return

$10,000 $20,000 50%

4. Control Property The name of the game in real estate investing is control. Donald Trump controls more real estate than he owns. When you have control of something, you are oftentimes in a better position than when you own something. Our Quick Cash investment strategy is based on controlling property, not owning property. We take this one step further by controlling property with the paperwork of real estate. By using an option contract you can control lots of property without owning any of it.

Briefly, the advantages of controlling property without owning it include Quick Cash, no landlording, no monthly mortgage payments, no property taxes, no hazard insurance, no maintenance costs, no homeowner association dues, no lawsuits, no extensive record keeping, and no income tax problems.

The advantages of controlling property with an option contract are the same as the advantages to flipping property. Except it is better with the option contract because you can flip the contract rather than flipping the property. In other words, with an option contract you control the property without owning it.

Lets add some numbers to this controlling-property-with-options scenario. How much property could you control using $2.4 million as option fees? Some of you can do the numbers in your head. $2.4 million is 10 percent of what number? Thats right-$2.4 million is 10 percent of $24 million. No wonder Donald Trump likes to use real estate options.

5. Buy Time By using an option contract you can buy time. You may need time to bring in a money partner. You may need time to get your financing together. You may need time to find a new buyer.

Now is a good time to talk about money partners. There is a ton of money out there looking for a good real estate investment. Our experience as investors has been that finding the right property and/or the right seller is much harder than finding a money partner.

If youre the kind of person who has a lot of money to invest in real estate, congratulations! We wish you good luck in finding a good deal. Unless you find someone like us in your area, you will wind up paying too much for your properties. Of course, you could always contact us. We do business anywhere!

Leverage

Option Fee (10%) Purchase Price

$ 2,400,000 $24,000,000

As we told you throughout Chapter 14, buy the property first, then get the financing. Most people think of a money partner as someone who puts up the down payment or can pay all cash for the property. Sometimes finding a money partner is finding someone who will put up his or her credit or ability to get a real estate loan.

During the time we were writing this book, we found an ad for a property that was advertised $1 million under market. We wrote an offer on the property in the form of a real estate option contract. This is a property we are thinking about keeping for ourselves.

We will use the option period to find a money partner who will qualify for and obtain a loan to be used to purchase the property. We plan on assigning the option to purchase the property if we decide we are not going to keep the property.

6. Assemble Partners We use an option contract when we need to assemble partners to go in on a real estate transaction. Sometimes these partners are money partners. Sometimes they are developers. Sometimes they are home builders. Sometimes they are your real estate team for your area.

You may need to find a real estate attorney. You may need an escrow company or closing agent. What about a title insurance company or even a termite company? You may need to find a real estate agent.

Whatever the partnership needs are to put together a successful transaction, by using a real estate option, you will give yourself the necessary time to form the partnership(s).

7. Watch the Direction of the Market You can use an option to tie up a property and watch the direction of the market. Everyone has 20/20 hindsight with regard to the turning points of the real estate market. The trick is to have 20/20 foresight with regard to these turning points. When things are going well, that is easy to recognize. When things are going not so well, that is easy to recognize.

As we already noted, the economic cycle is one of expansion, prosperity, recession, and depression. Then it repeats itself. Real estate value is greatly influenced by the economic cycle. Typically, real estate is said to do well in the expansion and prosperity phases and poorly in the recession and depression phases.

8. Handle Contingencies We use an option contract when we know there are going to be contingencies that need to be handled as part of