We have been discussing some creative investment tools that real estate investors might want to use the next time a property of interest turns up for sale that might help close a deal otherwise not thought worth to pursue.

1. Option to purchase
2. Sweat Equity
3. Lease/purchase
4. Secondary seller-held financing

Lease/Purchase

A long-term lease with an option to purchase is a good way to tie up a property today in anticipation of a future purchase.

EXAMPLE. The buyer (in this case, a church) has concerns that they might need to purchase an adjoining home and acreage to provided additional future parking. The homeowner still occupies the property and has no plans to sell for at least five years. Concerned that the owner might receive an unsolicited offer from someone else during that time, or that the property might appreciate out their budget, the church offers to lease the property with an option to purchase in five years. The lease/purchase agreement is drawn up by the church’s attorney and subsequently approved by the owner’s attorney.

In this case, the church benefits by securing a property at an acceptable price that it might desperately need in the future. The owner benefits from receiving rent money along with the possibility that the church might not excercise its option to purchase when the time comes.

Remember to consider ProAPOD real estate invesment software or real estate investor software whenever you are considering to sell or buy any rental income property. You can tour program screenshots at real estate investing software.

There are four creative investment tools real estate investors might consider using the next time a property of interest turns up when there’s a lack of large sums of buyer capital and it seems that the income-producing property might not otherwise be worth pursuing.

1. Option to purchase
2. Sweat Equity
3. Lease/purchase
4. Secondary seller-held financing

Sweat Equity

A sweat equity transaction is a form of option in which the buyer gives the value of his or her time and effort (or sweat) as equity against the purchase of a real estate investment property.

EXAMPLE ONE. The buyer likes a ten-unit apartment but feels that some remodeling and upgrades must be done in order to raise rents enough for the buyer to obtain the necessary financing required to close the deal. The buyer agrees to give time and effort to make the necessary repairs in exchange for a six-month option to buy the property. The seller concedes that the repairs need to be done, and given that the property has yet to generate any other offers, the seller agrees to the option. In exchange, the seller will pay for materials and the buyer will do all the work. The price is set, and the buyer starts the work.

In this case, it’s a win-win. The seller has nothing to lose except time, yet benefits from getting a lot of necessary work done. The incentive for the buyer is improving what he or she hopes will become his or her own property, increased rents and higher value, and better financing.

EXAMPLE TWO. The buyer lacks the necessary down payment to purchase a duplex of interest. Having discovered that the seller also owns a commercial property in need of renovation, the buyer agrees to make those necessary repairs in exchange for the down payment. The seller agrees to the deal on the condition that the repairs to the commercial propery will be completed before closng the duplex.

Sweat equity can work under the right set of circumstances, but care should be taken by the buyer to address issues that might otherwise prevent the buyer from closing the deal. The buyer should reserve the right to extend past the closing date in the event repairs take longer than expected. The buyer should reserve the right to approve all future rental agreements to assure satisfaction with the rent and tenant. The buyer should be sure to include firm and written protection against the possibility that the seller falls back in love with the property and trys to renege on the sale.

When you get ready to make an investment consider ProAPOD real estate invesment software or real estate investor software to run the numbers so you can be sure you purchase the rates of return you desire. You can preview sample reports at real estate investing software.

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.

1. Option to purchase
2. Sweat Equity
3. Lease/purchase
4. 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.

Ready to make a purchase? Be sure to consider ProAPOD real estate invesment software or real estate investor software to help you determine the best price and maybe prevent you from overpaying. You can preview sample reports at real estate investing software.