Using Option to Purchase

From: Always Learning


Dear All<p>

(Please excuse me for asking dumb questions)<p>

I have been pondering upon the question of maximizing the gains and minimizing the risks of a "hold for growth IP strategy". That is to say looking at different ways to hold the typical negative geared property. Would it not be better in most cases (if possible) to purchase such properties after a long term "3~7 year" purchase option?

<ol>

<li> Within locations that I believe should see exception capital gains. I need to locate owners (advertise, letter drop etc) who have some sort of problems that can be solved with money. (Should be easy shouldn't it?, which leads to the question, why are options not used more frequently?)<p>

<li> In the case of pensioners, who are cashflow poor but asset rich. Offer them a per week payment eg $50 PW in exchange for an option to purchase their property within in the next 3~7 years at a specified dollar amount eg $600,000.In this case what are the pension ramifications?<p>


<li> In the case of people looking for a chunk of cash now. A standard option of xx,xxx now for the option to purchase in 3~7 years at eg. $600,000<p>

<li> In cases if the property has a small mortgage, can an option be used? Could marketing like "I will pay off your mortgage! - if you give me the option to by at todays market rate in 7 years" work (for cash poor with with small mortgages on large equity holdings). I suppose this is just a lease option in a different perspective.<p>
</ol>

I suppose I am just thinking since my thoughts will not be original ideas, thus why are such strategies being used more frequently?

The positive aspects for me are:
<ol>
<li> I know now what it is going to cost me in the future! I can budget! I dont need to worry about interest rates rises as much.
<li> I can control a much much larger value of IP with my cash. Which is the idea behind "hold for growth".
<li> If it all goes south, I just walk from the option at the end of the agreed period.
<hr width="50%">
</ol>

<p>

<ul>



<li> Unless you change how you are, you'll always have what you've got.

<li>

To have more than you've got, become more than you are.



</ul>
 
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Reply: 1
From: Tibor Bode


AL,

The idea is good, for the lack of use of it, I would relate to the followings;

1) Legal framework required for this kind of option as well as potential legal challenges
of a contract like that on the "usual" basis
(I did not understand, don't speak English,
I was pushed into it, unconscionable contract, and whatever some smart legal person can come up with)
2) Well meaning friends and family who either provide "free" advice and might be afraid of "losing out" on inheritance, etc, but not willing to help the person sufficiently or do the same you are offering
3) Not fully exploited lease/option market, meaning not many people would go down on this way (lack of knowledge and understanding, its in the too hard basket, too time consuming to set up a deal, etc)
4) Insufficient number of properties availability which might can be attributed to lack of real interest on behalf of investors and proper explanation to elderly people that it might be in THEIR best interest.

I only wrote about the 'negative" aspects of it, I am aware that it is done in OZ and also believe that it will be a growing market in the future due to the fact that a big part of the boomer generation will outlive their savings and will not like the idea of cutting back on their lifestyle. I know it is a brave call, but I am basing it on this group's consumer behaviour over the past 30 years "I want it and I want it now", which is rather hard to change in a more mature age.

Just the 2c, hope it adds some value to it.

Tibor
 
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Reply: 1.1
From: Tibor Bode


Me again,

I just re-read your posting and one more thing came into my mind. You mentioned clearly why it is beneficial for you.

Now, look at from the other side and the marketing should be done using the "Whats In It for ME" from the other party's point of view. If it is articulated clearly and the benefits explained / sold well to the owners (whatever pitch is used) and they are happy with the outcome, that is the winning formula.

Tibor
 
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Reply: 1.1.1
From: Always Learning


Naturally this posting was from the WIFM viewpoint.<p>

Naturally I the marketing would be from the WIFY view point.<p>
Basically people who are cashflow poor, own the property and want some extra cash each week, or have a small mortgage and want to remove that burden.
So the marketing would be <p>
<ol>
<li> I will buy your property at current market value, get your own fair market valuation.
<li> I will pay you a weekly fixed dollar amount (for pensioners they can continue to live in their family home).
<li> Alternatively I will pay out their mortgage, thus they raise todays cashflow.
</ol>
It's all about getting money today, at the cost of your capital gains in the future.
<p>
To be honest I posted just to open up some debate on the subject of options. For pensioners I would think it is a good idea, win-win, nothing tricky! Money in the pocket now, now if the pensioners/optionor thinking was like my fathers it would be "I will be dead in 7 years then so i'll take the money now!"

<ul>
<li> Unless you change how you are, you'll always have what you've got.
<li>
To have more than you've got, become more than you are.
</ul>
 
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Reply: 1.1.1.1
From: Andrew D


eNTERED
 
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Reply: 1.1.1.1.1
From: Andrew D


AL,
A friend of mine at work has just entered into a similar deal. He has bought a property from an elderly gentleman and is leasing back to him for a guaranteed seven years. (I'm guessing the following exact numbers but will update when I see him next). He pays $100K now and then $130K in 7 years. The property is worth about $230-240K so it is at value but in a good growth area (Caloundra - Sunshine Coast Qld) The rent is market rent with CPI (I think). I will try to get my hands on the contract to see a little more....
The WIFY is that the person gets to stay home with some money. In this case it seems to be a real win win.
Hope this helps.
Enjoy
AD
 
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Reply: 1.1.1.1.1.1
From: Rick Kirk


I've had similar thoughts, I know several areas that will be re-developed in years to come and was thinking about how I could help them and me at the same time via a similar process to what you describe above.

My only concern is that those people, whilst they have equity in their house, probably live on the pension. i.e. They are no good with money. What is going to happen when they run out of cash and have spent the money you paid them for your option and they can no longer afford the weekly fee? Are you really going to excercise your muscles and kick out an elderly person with no money?

My other concern is that you will affect their pension by giving them any sort of money, thereby making the situation worse.

Cheers,
Rick
 
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Reply: 1.1.1.1.1.1.1
From: Always Learning


I suppose this is a potential problem. Maybe legally I could turf them out onto the street, but its not a call I could actually make.
<p> This problem must also occur in general renting, tenants falling on hard times, getting sick/cancer, cannot work, cannot pay the bills etc. What do you do? move them from their sick beds onto the street during a forced eviction....not really something I could do.
<p>

<ul>
<li> Unless you change how you are, you'll always have what you've got.
<li>
To have more than you've got, become more than you are.
</ul>
 
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