Property Options

So I've taken advice from a thread I started a long time ago and I've been doing MASS amounts of homework. In my readings I've come across the topic of property options a couple of times.

My understanding on the matter is you purchase an option to sell the property in the future, ie; 12 - 24 months. Over that time, you do not need to pay for the property, so you don't need to take out a loan. In essence, you have control over the property for things like DA's, and at the end of the option period you on sell the revalued property (The value has gone up due to the DA) to another buyer for a profit.

A tight option contract will usually cost about $10,000 to have written up. To put the option in place you usually have to put down a 1 - 3 % option deposit, paid to the seller.

To persuade the seller to agree, you pay an extra 5 - 15% on the purchase price and split some of the profits of the final sale with them.

So if I have this correct...
1. You find someone willing to sell on a block that is easily subdivide 'able'
2. You negotiate the terms with them, they agree to a specified term of the option contract for an increased purchase price + some profits from the final product
3. You put the DA into motion, have it approved
4. Have your property revalued
5. Find a seller within the option contract's period
6. Sell the property with DA approval, ready for construction.

The seller wins
I win,
The developer wins, on account of not having to take out a loan and pay interest on that loan whilst waiting for the DA's approval

Is this actually possible? The way I'm looking at it, you can create assets with nothing..

Seems very appropriate for someone in my position- cash rich income poor, I'm a uni student with some inheritance.

Hi Alex

Yes it is possible and there are a few people out there that run courses on exactly what you've outlined. Also, if you go to a specialist solicitor, you should be able to get the option document for much less than $10,000.

Cheers, Paul

Thanks for the reply, I have a couple of follow up questions.

1. Do people actually go for this?

2. How do I sell a DA approved site, any specific websites or retailers? and what sort of figure can I expect on say a 300k home with approvals for 3 townhouses? As in what will the site sell for with DA approval

Hi Alex

Yes people do this all the time. Sorry I don't, so I'm unable to answer your second question.

Cheers, Paul

Not a day goes by that I don't get asked about Property Options or Lease Options or Rent to Buy (all very similar)

The concept is great and there are people making money out of it. However, there are a few things which I would like to draw your attention to (not to deter you, but to simply paint a picture):

1) The amount of work / rejection you will need to do before you find a willing prospect. You need to factor the dollar cost of this work into the deal and often to setup a business like this it is almost a full time venture or a second job.

2) Who will pay the cost of the site works to get the DA approval and before you on sell it. This is a risk, because if the deal falls over you will potentially wear these costs ($5~10k).

3) Learning your pitch, educating people will be a huge challenge. It sounds good to you, but all vendors are suspicious with such an agreement – even if you can prove they make more money.

4) Need to stay motivated for a long tail payoff – this is more of a mind game.

Options aren’t bad or good, ethical or unethical; they suit a certain type of investor that like all other ways of making money – you have to do the footwork. I often recommend options when they compliment a full time trader (if you’re already renovating or developing property) this could help secure a pipeline of properties in the future. Now this means that you don’t have to make as much profit from the option and the payoff is higher because you’ll be developing the property anyway.

To Your Success,
Kent

Kent Cliffe said:

Not a day goes by that I don't get asked about Property Options or Lease Options or Rent to Buy (all very similar)

The concept is great and there are people making money out of it. However, there are a few things which I would like to draw your attention to (not to deter you, but to simply paint a picture):

1) The amount of work / rejection you will need to do before you find a willing prospect. You need to factor the dollar cost of this work into the deal and often to setup a business like this it is almost a full time venture or a second job.

2) Who will pay the cost of the site works to get the DA approval and before you on sell it. This is a risk, because if the deal falls over you will potentially wear these costs ($5~10k).

3) Learning your pitch, educating people will be a huge challenge. It sounds good to you, but all vendors are suspicious with such an agreement – even if you can prove they make more money.

4) Need to stay motivated for a long tail payoff – this is more of a mind game.

Options aren’t bad or good, ethical or unethical; they suit a certain type of investor that like all other ways of making money – you have to do the footwork. I often recommend options when they compliment a full time trader (if you’re already renovating or developing property) this could help secure a pipeline of properties in the future. Now this means that you don’t have to make as much profit from the option and the payoff is higher because you’ll be developing the property anyway.

To Your Success,
Kent

Click to expand...

Tyvm for the reply Kent,


Just wondering about the risk of the deal not going through, by what are you referring to? How do these deals fail when they do? Is it from not finding a suitable buyer come completion, or the seller deciding not to go through with it? Are there ways to reduce this from happening?

I was assuming that I would front the cost of the DA. Is there actual demand to on-sell with the approval? Do you have any websites where I can view such deals?

I guess the reason it appealed to me was because once you find a willing participant there is only a small amount of work to do. Finding the seller is the hard part - The rest is easy because all you have to do is wait.

A lot of the questions you have asked tie together. The main risk of options is if you have put capital into the site and you can’t on sell the option. The other risk is legal risk; make sure you have a water tight contract and explain all the implications to the vendor.

In large commercial deals options are quite familiar (so the people you’ll be working with are a little more sophisticated). However, when we are talking about a duplex or triplex site, these are often purchased by mum and dad developers. To on sell an option to this group can be a little complicated as you have to educate them on how it is structured, also you may have to take a bit of a hit on price for them to want to on buy the option (cutting into your margins).

The problem with on selling the option is most R/E agents wouldn’t want to touch it, and there are no websites for an option contract. Therefore, you’ll often have to do the selling yourself.

Your assumption about it being easy after you have a seller is not totally true, albeit before I really looked into them I thought that too. You will then also have to work hard to find a buyer and be willing to discount your profit a little.

if you are going to purchase the site, use a standard purchase contract with a due diligence clause, then look to offload it with a back-to-back settlement to avoid the finance requirement (but you'll still pay SD on the purchase and/or SD on the value of the option). SD would work out about the same as the price of your lawyers, option contract, sales costs and settlement fees anyway.

much less scary for both you and the vendor as everything is "off the shelf".

sometimes the easiet way is the best way - just depends what side of the equation you're looking from. some people will try to sell you information about what's on the other side, but trust me, it ain't that great and there are easier ways to get there.