It’s not uncommon for real estate investors to neglect the idea of trying to purchase certain properties because the investor has insufficient capital to close the transaction or simply deems it a waste of time to make an offer on a property that appears out of reach. Fair enough.
However, here are four creative investment tools buyers might consider using the next time a property of interest turns up, despite the lack of large sums of buyer capital or buyer enthusiasm.
- Option to purchase
- Sweat Equity
- Lease/purchase
- Secondary seller-held financing
We will devote the next four articles introducing these four basic real estate investment techniques, beginning with the Option.
The Option to Purchase
The option to purchase, when used properly, is a good technique that can produce a signed transaction and ultimately work well for both parties. Here are several examples how the option might be used:
EXAMPLE ONE. The buyer believes that a twelve-unit apartment complex can be converted into executive offices and as a result sees an opportunity to increase rents and thereby, property value, subject to a change in zoning. The buyer writes a full price offer contingent upon the buyer requesting and successfully obtaining a zone change from the city, and in turn requests a period of six months (the option) to attempt to get the zoning along with any conditions imposed by the city that are satisfactory to the buyer. The buyer reserves the right to close the transaction any time along the way, regardless of the outcome; requests that the earnest money be placed in an interest-bearing account credited to the buyer; requests a full refund of all earnest money in the event the zoning matter is not acceptable to the buyer.
EXAMPLE TWO. The buyer decides to purchase a vacant lot for future development and agrees to give the seller a non-refundable option payment if given 24 months to test the soil, have plans drawn, and to obtain a building permit. The downside, of course, is that the buyer will lose the option payment no matter what. On the other hand, if the property is something the buyer truly wants to purchase, the seller virtually pays the 24 months of carrying cost to own the lot, and the property gets a bit longer to increase in value before the buyer has to close. In this case the option payment is applied against the purchase price in full.
EXAMPLE THREE: The buyer agrees to purchase a small office complex subject to the option of purchasing a second property also owned by the seller at some future date. The price, terms and conditions of this second deal are included in the terms of the option, but the buyer is not obligated to pay anything for the option other than the acquisition of the first property.
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