I’d say we’re on the same page…but you’re going to have difficulty using a financing contingency on a PacTrust offer. Matter of fact, if you qualify for financing using a financing contingency in my mind is a poor choice of contingency.
My preference would be to use an inspection clause…subject to inspection and approval thereof.
You also want to limit your liability under the contract to the earnest money deposit.
So what you have at this point is an agreement that you could conceivably walk away from based on the results of an inspection…and under which your maximum exposure is the earnest money, the amount of which might be comparable to option consideration.
Isn’t this in essence what an option gives you…the right to buy but the right to walk away? But in this case it’s in the format that the seller is accustomed to.
Posted by Jim LaVerdi on January 16, 2000 at 24:05:34:
In a reply to a question posted by me yesterday Bill Gatten suggested that I get the property on an “OPTION” for 30 to 60 days. What exactly is this now? Is this something different than a Lease Option? Bill if you read this I would appreciate your help as well as Bassman, or anyone else who can help. “One day I will finally get this”
Posted by Bassman on January 16, 2000 at 15:08:40:
A straight Option is best used on a property you think in the long term , may grow in value , such as a vacant piece of land in a growth path. An Option is also good to use on high dollar property, say in the 500k-2,3,10mil type where you think you could sell it within a year for a fair price , and make 50k in the process( or more).Since I am not sure what deal you were referring to as far as Bill is concerned , I wont try to speculate what he was thinking.options are good to use, but like Jim pointed out , you have to be able to show the seller- wiifm ( whats in it for me).If you can get a fair price , and you can unload the property quickly, and the seller has has no problem, then an Option is ok to use. You just need to learn more about straight options and their benefits to the seller ( and you of course). In my honest opinion, Options are good long term investment tools, 2 or more yrs.Say you have a chance to find out that a piece of vacant land is in a growth path, and you can get it 10% under current value , and set that price for 3 or more yrs, then all the equity you may build up when you exercise your option wiil be yours.
hope this helps.
Scott Cooper
The day you fill out an OPTION agreement and take it to the seller for his signature…is the day that you’ve got your work cut out for you to explain just exactly what you’re doing and how it benefits the seller in any respect.
I think using an option is a poor idea in terms of most retail home sellers.
What is preferable is a standard purchase agreement with a contingency. The effect is similar to an option…but the typical seller will much more easily understand it.
An option always gives you the right, but not the obligation to do something. The difference between a lease option and a purchase option will become apparent if you go to the form example I have provided.
To sum it up with a purchase option you will not be leasing. You give the seller option consideration in exchange for this right to purchase. You are not obligated to purchase. However, the seller will have to sell if you decide to exercise your option prior to expiration.
My understanding of an option is that you have the right but not the obligation to purchase a property at a specific price within a limited period. The owner is obligated to sell the property if you execute the option. You pay an option consideration which can be cash or something else of value. If you choose or are not able to execute your option in the specified period then the option expires and you either try to extend the option or the deal is over. During the option you do not have possetion of the property.
A lease option is a rental agreement where you receive possetion of the property without ownership. Frequently you will have the right to sublet the property and create a spread between the rent you are paying and the rent you are receiving. A seperate agreement also is drawn up giving you the option to purchase the property.
The option gives you the opportunity to make money by selling your option or simply tying up the property until permanent financing can be arranged. There is only one payday but your only risk is the option consideration… A lease option allows you several paydays but you are on the hook for making the monthly payments in addition to having your option consideration at risk.
Posted by Dave_AZ on January 16, 2000 at 10:31:28:
JPiper, can you expound on this type of agreement?
By the way, I am calling an owner of a 4-plex advertising for 97k in the paper. Can you give me a few things I should ask/look for on the property and what “due diligence” I should conduct?
Re: Lease Option vs “OPTION” - Posted by Jim LaVerdi
Posted by Jim LaVerdi on January 16, 2000 at 10:30:41:
Jim,
So in other words you are saying to make an offer with say a contingency that says, subject to the buyer obtaining financing at an interest rate acceptable to the buyer, which by the way if I don’t find someone to take this property, I can always say I couldn’t get financing that satisfied my budget and I’m free to walk. Am I on the same page here?
On a 4-plex in your initial approach you would want to know all the typical things that you would always want to know on any property…condition, what type of financing, clues as to motivation etc. On top of these items though you will want to know information regarding the rent. You might also want to know certain information regarding the leases…like whether there are leases, when they expire, how much the security deposits are, etc.
Understand that this is all just preliminary information to give you an idea of what you’re looking at. Naturally if the deal passes your initial screening, you’ll want to determine it’s value based on comps.
If you get to the point where you make an offer…you’ll want to make it conditioned on your review and approval of leases and all tenant history forms to include application. You might want it conditioned on execution by the tenant of an estoppel form verifying the essential terms of the lease like the amount of rent, amount of deposit, and expiration date of the lease. A copy of the lease should be attach to this form.
You would want language in your offer that turned over all security deposits to you on closing, and prorated rents as of the closing date.