This article is a follow up to my post a few days ago entitled “Wholesaling”. Reading the comments there you’ll find the story of Zack and Jane. Zack used a purchased contract with MR. Owner and things just didn’t turn out well at all for Zack. Now, let’s see how Jane operates using an Option To Buy contract avoiding all of Zack’s problems.
See Jane talking to a For Sale By Owner (FSBO) ? The owner’s name is Bob, his wife’s name is Carol. It’s a nice house with very little needed to be done to rent it. They all talk for a while and Jane goes through the house with Carol. Two rooms are full of boxes. Jane asks Carol, are you moving already? Carol says no, they had friends Ted and Alice who lived with them and they are still moving out.
Jane is still trying to figure out the seller’s motivation, so she asks, why are your friends moving did they buy another house? Carol then says no, they are moving because Bob and Ted are going into business together as counselors in another state. Ted and Alice are moving first to set things up and we will be following them as soon as we sell the house.
Jane says, I understand, that sounds great! You mean as soon as you get out from under trying to sell your house you’ll be moving to start your new business? Yes, says Carol. Jane says, I bet you’d love to sell today and be on your way. Carol says, laughingly, oh yes, but we know that can’t happen, but we would like to get out there as soon as we can.
Jane just found the seller’s motivation, time is of the essence. At this point, Jane doesn’t know how to buy under the “TIC method”, she doesn’t have a lender to fund her purchase, here attorney told her not to use a sale contract unless she was going to buy a house. Jane doesn’t have a business entity, all she knows is how to use an Option Contract.
Bob, Carol and Jane are all sitting at the dinning room table, let’s listen in…….
Jane: Bob, Carol tell me you’re opening a counseling business with you friends after you take care of your house, that’s really something!
Bob: Yes, we teach people how to get in touch with their feelings for a more enjoyable life and I just finished the certification course. Ted has been counseling for several years now and we are going to work together.
Jane: That sounds very interesting. So, that means time is really money to you, is that right?
Bob: Well, yes it is.
Jane: Let’s get to the house then and let me tell you what I am interested in.
I’m looking for properties for very nice rentals. Sometimes I find properties that need repair and they are improved and sold. Since retail sales are slowing, I think the best use in the market is for this house to be held as a rental, that’s my first consideration. Many people prefer to rent than to own.
Carol: Oh, yes, we will be renting ourselves with Ted and Alice, they already rented a nice home for us.
Jane: Well, that changes things a bit, you already have a place to move into!
Bob: Yes, as soon as we get this house sold we are ready to go!
Jane: Time is money for me too, just as it is for you two. If we can reach an agreed price today, would that help you?
Bob: Oh yes, if we agree on a price that we could begin planning and get things started.
Carol: Oh Yes, we talked about Bob going on out there and me having to stay here to take care of the house, we understand we will close in escrow so that would let Bob get to work much sooner.
Let me tell you more about what I do. While I’m always looking for a property to rent myself, I also work with other investors that I know and trust. Real estate investors often work together, it’s not all about competition.
Besides just looking at a house, buyers must have them inspected and often a home buyer will need financing, that can really slow down the purchase process. Sometimes a buyer thinks they can buy but they don’t qualify, that can set you back selling your house for months.
Bob: Yes, we are aware of that, we had a heck of a time buying this one for almost three months, the seller had to fix some things for the appraisal and that took two more weeks!
Jane: yes, buying or selling can be a nightmare sometimes, but dealing with investors, they already have financing set up or they simply pay cash, it’s a much quicker process than dealing with the public.
Bob: Yes, I can see that.
Jane: We just talked about time being money. I have already looked at comparable sales and I know the market. But, that’s not all I need to know or do. I will need to spend time and money for inspections, a portfolio analysis and determine the best use of the property, in other words my due diligence.
Most buyers will make a contract on a contingency basis anyway, things found may keep a home buyer from buying.
Carol: Yes, that happened to Ted and Alice after spending weeks messing with a house they tried to get.
Jane: Yes, it happens all the time it seems.
Let me ask you, do you really care who buys your house if you get the price you agree to?
Bob: No, not really, just as long as we get the price we agree to.
Jane: Great, because as I mentioned, my time is valuable too, just like yours. If I find, for any reason that this house won’t meet my personal investment needs I can turn to those other investors I mentioned.
Other investors can buy the property quickly and they pay me for my expertise in the work I provide them. As I said, we often work together and it’s not all about competition, my work saves them a lot of time. And Bob, you still get the price we agree to!
Carol: Oh, you just refer the others to the house and it gets sold through your network. That’s how Bob and Ted will be working too, through counseling referrals with other counselors.
Jane: Yes, it’s common practice in may types of service businesses.
How we do this is by using an Option Contract on the property that includes the terms of the sale. This gives me the right to buy at the price we agree to over a period of time. If I need to present this property to other investors I can assign or give them the option contract and they will buy it at your price.
Bob: So, you’re saying that you might buy the house and if you don’t you’ll sell the house to one of your investors?
Jane: Yes, but I sell the contract, not the house, you sell the house and I coordinate things under my contract at no cost to you.
Bob: That’s like a free Realtor!
Jane: In a way, I either buy the house or I sell the contract so that you get your price. A Realtor accepts offers for you and you never know what the sale price will be until you agree to accept an offer. You’re also paying a commission and since you’re trying to sell the house yourself, I assume you don’t want to pay commissions, is that right?
Bob: Well yes, we need to save money on this sale.
Jane: Bob and Carol, what we can do is reach a fair price for both of us. We can contract under this option method with sale terms included. Your chances of selling will be much higher than you trying to find a buyer yourself. Either I buy it or my investors buy it, the transaction can go much quicker than you trying to sell or using a Realtor who may advertise it for weeks. In the mean time, we can use an escrow closing for both of you, that might allow you, Carol, to join Bob in your new how much sooner!
Carol: Oh, I see, that would be wonderful.
Jane: Yes, I understand you wanting to be together and without the unknown hanging over your heads about the house. Remember too, time is money, the sooner you get to work Bob, the sooner you’ll be making money!
Bob and Carol, this is what I have found as far as prices go for a house like yours in this area.
Let’s let them talk about price now.
Clearly, Jane will not be having the issues that Zack suffered using his sale contract.
Jane has clearly told Bob and Carol how she operates and why her time is valuable, just like their time.
Bob and Carol are not under any illusion that the house will sell but only that the chances of getting their know price will be better working with Jane. Jane made no promise to buy!
With an option contract the sellers may not make assumptions until someone exercises the option and they move into the sale terms agreed to.
Jane has solved the real problem, it’s not so much about selling the house in this case as it is giving the sellers the opportunity to move on and join their friends in business. Bob needs to work and Carol can join him! That motivation will show up in their agreed price.
If Jane needs to be more creative, she might use a lease agreement to cover the mortgage payments for the sellers.
No equitable interest in the property is taken by Jane, her interest is in the contract.
If the seller transferred any equitable or legal interest in the property they may only do so subject to Jane’s right to purchase, or anyone else under the option contract. Filing a memorandum of option will prevent any lender from making a purchase money loan to another buyer in reality.
So, Jane is not on the hook, no misleading or deceitful tactics were used, her liability in this deal is about as low as it can get! She’s not responsible for any assumptions that a seller may make under a purchase contract, nor is she obligated to perform. But, Jane has earned the trust of the seller to get their price, so from an ethical point, she needs to perform. But, she’s not legally obligated to perform.
She totally avoided the issues that Zack got caught up in, Zack said and implied he was buying under his contract, that led to all the tortuous conduct aspects.
Look to my article “Wholesaling as a Business” state laws vary but using options to wholesale can still have licensing issues being in the business of wholesaling.
Now, let’s listen in again.
Jane: Bob and`Carol, I’m writing a check to both of you for $150.00 as the option price that is counted toward the purchase for the 4 month option. I will pay the filing fees of the memorandum of option at the Recorder’s Office as well.
I’m very glad to hear you’ll be going with Bob, Carol. I will call you and keep you informed of how things are going. I wish you all the best in your new business, (oh see, they are shaking hands!)
Carol: Jane, you’re an angel for us, taking this off our minds and letting us move on, we really appreciate what you’re doing for use, thank you.
Well, looks like everyone is happy, fully informed, with an agreed price and moving on to other opportunities! Very well done Jane! 🙂