Are Options a waste of time? - Posted by LeonNC

Posted by SScotty on May 21, 2000 at 21:54:00:

Not offended in the least. Sometimes I get a little passionate about some of the advice bandied around here that I feel is reckless or not in most folks best interest. Probably one of the reasons I choose not to post here very often. Not everybody who reads here is a full time investor, and in fact I’d venture that most aren’t. Such deals may not meet your parameters, but that doesn’t mean the correct advice is not to do the deal. I don’t recommend you go out looking for skinny deals as a rule by any means, but why walk away if there is money to be made…especially if you are not doing this as your main source of income and you don’t have deals falling out your ears? The key is the deals are profitable, and that doesn’t mean the cash has to be up front. I don’t believe in feeding deals as a general rule, though.

Always remember you put dollars in the bank, not percentages. I learned that lesson the hard way. In my immediate market the median price of a home is approaching $400,000. Would it be your advice if I couldn’t make 10% up front cash which nets 6-7% I should walk? Heaven forbid I walk on a deal that only makes me $30,000 because I won’t work that cheaply. I guess that is the day I will truly have arrived. We aren’t digging ditches here so I don’t really look at this as work per se, so I’m not sure I’m with you on the whole not worth going through the trouble so I ought to walk away. Again, for a lot of people out there trying to get started this $5K could well represent 2 months or more of their regular salary. That may be the kind of windfall that changes their life and gets them to realize they don’t have to be a slave to a paycheck. I guess if they wanted to leave their current job and become a real estate agent or loan officer they would have that option. You and I both know there is more to it than sitting at a desk taking listings and making loans. They still have their hassle factor…and then some.

Are Options a waste of time? - Posted by LeonNC

Posted by LeonNC on May 20, 2000 at 17:37:06:

I like the idea of optioning property and selling it with owner financing (create a note sell at close). But, I do not want to waste my time with this technique if for some reason it’s just not worth the time. This is not something that is being taught in all the courses and I don’t see many people on this board doing it. WHY?

I have found people to be very responsive to the option. After determining that I can’t buy low or lease option I have been talking to sellers about optioning. I have two now and possibly three more. I’m trying very hard to stay focused on what I’m doing but this just seemed to work its way in.

So, please enlighten me and help me with my learning curve. What am I missing in this equation. I hear the note brokers talk about buying the notes but it doesn’t seem they’re doing much of what I’ve been talking about. Maybe I’m wrong.

I’m getting too old to waste anymore time or money. Unfortunately I’ve spent much more in this business then I’ve made so far but I am sticking like glue. I’m here to stay and believe me you all will know it when I feel like I’ve accomplished something.

As a side note, I’d just like to say THANK-YOU VERY MUCH to those of you who have helped me so much already. I believe you guys know who you are (hint: Scott, Jim, Mark). I have very little time to respond to your answers but just know that they mean the world to me right now.

Talk with you later


Re: Are Options a waste of time?What about this case? - Posted by MelFL

Posted by MelFL on May 22, 2000 at 19:57:17:

Heres a case that I have recently encountered. What about using a option to owner finance on this deal?

A seller called me with a house in preforecloser thats worth about 80K. She owes about 61K and about 4K in back Pmts. What I initially offered was to take the house “subject to”, but when I told her that I wouldnt pay the 4K unless I found a buyer she said “I dont think so” so I told her that that was fine but if she changed her mind give me a call.

Now Im still pretty new at REI but it seems to come pretty natural to me, I think W/ the right note buyer maybe I could make this thing fly. Id be happy to make 2-4K to learn one more technique.

I would love some advice on this tech. or any others. Or on any coarses that would help.

One thing that I WILL NOT do is lie to, or conceal the truth from any seller. (not to say that I will tell them every thing that I know, I paid alot for my education, and am welled paid for it.)

Thanks again.

Re: Are Options a waste of time? - Posted by Bill K.- FL

Posted by Bill K.- FL on May 22, 2000 at 06:54:56:

Just one last note. A lot of good points have been made about note creating/selling as a vehicle for REI. I think it is obvious that there is a much higher degree of risk and complexity in these types of deals than say a typical sandwich l/o. When you combine that with the fact you need to find a seller who will part with his property at 80-85% FMV I believe anyone would be better off concentrating on L/Os which is what I recommended in the first place. I have found it is better to take the KISS approach and do those deals that are easier and more available instead of looking for the needle in the haystack. Nothing will stop you quicker than little or no results in your first 30 days. With L/Os you will get results and that is the name of the game in this business. Good luck.

Re: Are Options a waste of time? - Posted by JohnBoy

Posted by JohnBoy on May 21, 2000 at 20:42:03:


One other thing to be careful on when creating a note and selling it at closing is to make sure the buyer of that note has no problem with you making that note a non-recourse note. My understanding is that if the note that was created by the seller and sold at closing to a note buyer isn’t a non-recourse note then the buyer of that note can come back to the seller to collect on it if the buyer of the property ever defaulted later. So check this out before creating any notes to sell.


Not at all - Posted by B.L.Renfrowbre

Posted by B.L.Renfrowbre on May 20, 2000 at 22:07:55:

They are very useful in the right circumstances. I use them primarily as a back-up offer. If I am unable to get a subject-to or L/O offer accepted, or if the underlying financing makes those options unattractive, or when I am not 100% sure I can find a buyer, I will simply offer to take an option on the property and then market it to a retail cash buyer or as an owner-financed note sale deal.

Of course, to make the best use of an option, you need to be able to get the property under contract for less than FMV.

I think they are utilized more than you may realize. However, some sellers simply won’t go for it…although there is certainly little to no risk on their part. If they are concerned about taking the property off the market during your option period, you can offer an open option, where essentially, the first one to find a buyer wins.

Brian (NY)

Re: Are Options a waste of time? - Posted by Bill k. - FL

Posted by Bill k. - FL on May 20, 2000 at 20:17:29:

When it comes to flipping via note selling be prepared to hold paper yourself (in the form of a second mtg) and know approx. what the discount will be on the first. You are talking about an unseasoned note and credit worthiness of the borrower is very important. Get the scoop from several notebuyers concerning their requirements and LTVs. You are still going to have to create a decent spread (approx. 20%) between your buy and sell prices. This could be a problem for you because most sellers won’t go for it. If you are in a strong rental market I would advise cont. with L/Os especially if money is a factor.

Re: Are Options a waste of time?What about this case? - Posted by Craig

Posted by Craig on May 22, 2000 at 22:20:23:

That’s pretty common with a lot of sellers. People tend to see something wrong with you not coming up with “your own money”, even though it really ought not matter to them. What does matter is her expecting something and you possibly not performing. I would tell her that you will be able to sell the home much easier than her because you will be offering owner financing. Tell her that you have investors willing to purchase the note you create right after you sell and that is where you are going to get the cash to pay her. Offer a non-exclusive option where if she finds a buyer before you exercise your option then you just walk away. That way her expectations aren’t raised and she can’t really gripe if you can’t close the deal, when she had the opportunity to sell it herself at the same time. Otherwise try and borrow the $4,000 if you really want the deal.

Risk Question - Posted by Drew

Posted by Drew on May 23, 2000 at 14:13:02:


You’ve made some good points and I have a question for you. Above you stated: “I think it is obvious that there is a much higher degree of risk and complexity in these types of deals than say a typical sandwich l/o.”

Where is the “much higher degree of risk” in just getting an option? The only risk I can identify is spending some money on a title search and marketing for a buyer. If you don’t find a buyer I don’t see that you have anything else to lose.

Maybe I’m missing something or maybe we just have different definitions of “risk”. Could you please elaborate for me?


Re: Are Options a waste of time? - Posted by Craig

Posted by Craig on May 22, 2000 at 09:16:37:

I hate to disagree, well not really but it is just as easy to find a seller willing to part for 80% to 85% cash for their home as it is to find a seller willing to take very little down and pay them enough to cover their mortgage payment each month for 2 or 3 yrs. Not to mention if you are going to sandwhich lease you have to offer the seller 90-95% or get a tremendous amount of your monthly payment applied to principle or find a buyer willing to put up a decent chunk of cash up front so that you aren’t concerned about the back end of the deal. I might go as far as to say it’s easier to find a seller willing to part for 80%-85% cash.

It really depends on the sellers and what position they’re in though, and it helps to know how to structure deals a few different ways. Let’s say you run into a seller who won’t or can’t lease option to you but will take 80% cash. How are you going to come up with that cash? Or let’s say you’re seller is just dead set on taking full price, how are you going to give it to him?

Re: Are Options a waste of time? - Posted by LeonNC

Posted by LeonNC on May 20, 2000 at 23:22:16:

Hi Bill,

You made a point that concerns me. You said the buyers credit worthiness is very important. Isn’t the whole idea of this technique to be able to work with less than credit worthy people? From what I’ve learned a MIMIMUM credit score of say 580 would be required. Couldn’t a person with a score like this (I know that’s pretty bad) that had any kind of downpayment get a loan from a subprime lender? If so then am I not relying on the greater fool theory? AND, isn’t the advantage of this technique being able to work with less than credit worthy people?

Also, you mentioned a spread of 20%. I’m definetely not an expert at these but isn’t that a little on the high side? I don’t know maybe that’s just what you consider a minimum that will make it worth your time.

Thanks for your help Bill!


Bill, Good Call - Posted by Scott (AK)

Posted by Scott (AK) on May 20, 2000 at 22:12:24:

I got started using Lease Options and have recently started expanding into the Subject To areas (CFD, Land Contracts, Waraparounds).

I had a very sucessful investor tell me when i first started…“If i could start all over again, I would start with L/O’s”

That statement meant a LOT to me since that person had ben in the business for about 14 years at that time. To this day i only work those two areas and using the techniques I have learned ahve managed to stay quite busy considering I still only do it part time.

I think the Option/create note and sell at close is a lot of work for the money. The same money, or often less, then I can make on a L/O. But I also think Bill gives some VERY good advice I would most likely follow if i was to work that area. I’d find my own notebuyers and work my notes towards their criteria. I’d most likely look for private investors who simply want a good return on their money and are too busy to hadle that themselves and have other JOBS that keep them from being too sophisticated in REI.

No notebrokers for me.

Just my thoughts if I was to work that area.


Re: Risk Question - Posted by Bill K. _ FL

Posted by Bill K. _ FL on May 23, 2000 at 16:29:53:

We had been talking about flipping properties by creating a seller financed note which would be sold ata simultaneous closing and not specifically just about options. You are correct, if you can find a seller willing to let you tie up his property with an option and then find a buyer who can get his own financing with or without your help there is indeed very little risk to you except for the option consideration. If you read the other posts you will see we digressed to mainly talking about creating and selling notes and what kind of price you would have to buy at to make those deals sensible.

Bill K.

Re: Are Options a waste of time? - Posted by Bill K. - FL

Posted by Bill K. - FL on May 22, 2000 at 09:33:32:

Well different strokes for different folks. In my area like most it is a sellers market and it is much easier to find people willing to do an L/O than take 80-85%of FMV. In your senario, however, by buying at 85% your gross cash is 4K before your closing costs. Not to mention tax consequenses. I guess if you can do enough of them, its a good deal. I’ll stick to L/Os.

Re: Are Options a waste of time? - Posted by Craig

Posted by Craig on May 21, 2000 at 14:27:47:

You are absolutely right. There are subprime lenders that will make loans to people that are equivalent to what a notebuyer will buy. However your numbers after the deal will end up being about the same in most cases.

For example: You are selling a home for $100,000, you find a buyer with a 560 credit score and 5% down payment. You send him to a mortgage broker who can get him an 85% LTV 1st mortgage at lets say 13.5%. You will hold a 10% 2nd mortgage. If the buyer only has 5% cash period to close, then you will end up paying closing costs which will include that mortgage brokers fee which will be from 3 to 6%. So that is 3 to 6% less you will receive in cash at closing. The same as if you took back a note and sold it at a 3-6% discount.

The advantage to carrying the note and selling it has more to do with marketing and controlling the sale than anything else. You get to advertise seller financing, which will draw buyers out who won’t go to a mortgage company for some reason. When you have buyers that “know” they will qualify with a mortgage company they get very very picky about what they’re buying and will look and look and not be able to make up their mind. So with owner financing you are in control, they are forced to make a decision much faster, because someone else might come along and buy if they don’t, and where else can they find a good home with owner financing. You can use it as your default excuse when they start nitpicking about minor problems with the home. “Since we’re offering owner financing we decided not to paint or replace the carpet or patch up those nail holes”. You have the upper hand on buyers who are looking at your home mainly because of the financing offered.

Here’s an example. (Long) - Posted by Bill K. - FL

Posted by Bill K. - FL on May 21, 2000 at 08:29:00:

Hi Leon,
When you start talking to note buyers you have to think in terms of what is the bottom line for you in the deal. Sure a note buyer will by a note with a borrower who has a 580 score ,however the factors that come into play are, LTV (probably no more than 80-85% of purchase price), and the discount could run anywhere from 5% or more off that 80-85%% depending on the interest rate, the term of the note, balloon payments etc. All things being equal, the higher the rate, the shorter the term, including a balloon ,the larger the down payment, and the higher the credit score, will result in a smaller discount. Lets take an example:
$100,000 selling price.
580 credit score
$5000 down (realistic, because someone with that credit score usually doesn’t have much money, that’s why they have that credit score)
Most note buyers will purchase a note with a maximum of 85% LTV. or $85000 face value. Lets say you created the note so there is a 5% discount. They will buy for
$80750. This is why I said you need a 20% spread at a minimum. You receive 5% from buyer ($5000) and take a note back for 10% or $10000. A note buyer would pay from 20-30% of its face value which you could arrange to have bought at closing, however I don’t rely on that. So lets analyze the deal:
What’s your gross?
$5000 down payment from the buyer
750 difference in your purchase price of property
and selling price of note.
10000 in the form of a second mortgage to you. (2-3K
if you could sell.

$5750 cash to you before closing costs.

This is why I don’t consider anything I couldn’t buy for 80 cents on the dollar or less. I would prefer to hold the second instead of taking such a large discount. These are not easy deals to do and require a lot of time and maybe a few sleepless nights. That’s why I said stick with L/Os. Those sellers are out there and are much easier to find than one who would sell at 80% of FMV. Hope this helps.

Bill K.

Re: Are Options a waste of time? - Posted by Justin-IL

Posted by Justin-IL on May 20, 2000 at 23:48:13:

One advantage to selling with a note is there’s less required documentation. The buyer won’t need to show their tax returns, pay stubs, etc. They don’t have to prove income. So it’s good for self-employed people.

Another selling point of flipping a note, is an escrow account for taxes and insurance isn’t required. Some buyers would prefer paying the taxes in one lump sum.

Good luck,


Re: Bill, Good Call - Posted by ScottE

Posted by ScottE on May 21, 2000 at 11:17:58:

How do you find your sellers?

Re: Are Options a waste of time? - Posted by Craig

Posted by Craig on May 22, 2000 at 10:05:06:

Now hold on, I didn’t say I would pay 85% cash only that it’s easier to find a seller willing to accept it. What I offer is based on making some assumptions about the easiest way to sell. My assumption is that I won’t find a buyer with more than 5% down, and they won’t have any money to pay closing costs, and won’t qualify for better than an 85% 1st which will be discounted to 97% of it’s face value. So on a $100,000 house the cash left after I pay closing costs and take the note discount is about $85,000 plus there is 10% which myself or the original seller will end up holding depending on him. I want to walk out of this deal with $7,000 so I have to offer the seller $78,000 cash and that 10% 2nd which brings my purchase price up to 88%. Now if I’ve got a buyer already qualified before I make the offer and the seller wants more cash then the max I’ll go is 80% leaving me with a 5% profit after note discount and closing costs. Of course I wouldn’t do this deal on a home valued at less than $100,000 because I want to make $5,000 minimum. I won’t do a deal like this at all on a home valued at less than $70,000. Which in my area there a very few for sale in that range that don’t need to have some fixup done in order to sell. I don’t want to bother with doing fix ups even though I could have someone else do it and I could probably do more deals. Plus that’s what all the other guys in my area area are doing, and it’s a small area. The rest of the guys are doing L/O’s or looking for assumable or subject to deals. I have a niche here and I even get deals from some of those other guys.

Good point - Posted by Mark-NC

Posted by Mark-NC on May 21, 2000 at 16:27:34:

Your absolutly right. Thats part of the advantage of the Note selling. As soon as your buyer finds out they can get a mortgage there is a good chance you will loose them because they figure they don’t need you anymore.I very rarely do anybody with less than a 600 score myself. Besides the Note side is so flexible and easier to control.