Options, pt 1

Options, pt 1

Jason Cochard for Land Academy

Options are really effective risk-killing financial time machines, letting you sell before you buy. In an imperfect market like real estate, they’re financial rocket propellant, if used correctly.

An option is an agreement that gives the buyer the exclusive option to purchase the property under the terms of the option. It binds the seller, but not the buyer. That way, you can begin to look for a buyer for the property prior to actually spending money on the property. After a buyer is found, the option agreement is as good as a purchase agreement and can be sent to escrow without anything else.

I grabbed an option agreement off the internet and tailored it to my situation. The key is that it names the parties, describes the asset, lists a purchase price and an expiration date, the date after which the agreement is voided and the parties go their separate ways. Some people don’t, but I also follow the practice of including an option premium of $10, which is the non-refundable price paid to the seller that makes the contract binding under traditional common law.

If everything goes perfectly, you’ll be able to remove all the risk out of a land flip with an option. Here are the steps:

  • Negotiate price with seller
  • Agree on option terms
  • Sign option agreement
  • Optional: pay option premium
  • Begin to market the property as usual, as if you owned it.
  • Find a buyer and negotiate price
  • Sign buyer purchase agreement
  • Send both contracts to escrow
  • Set up escrow either as a double escrow or two single escrows.
  • Collect the difference in price

I think most sellers understand that we’re here to flip land, and I’m not currently worried about them knowing that I’m going to immediately market the property and close after I find a buyer. If you take one look at any of our sites (like sellers do), you’ll be able to add up what we’re doing. One seller told me, “I believe in capitalism and $x is all I need — I know you’re gonna sell it and if you make $50k on it, I’m happy for you.” From the seller’s perspective, they just want it sold.

But the underbelly of options is exactly that — the seller just wants it sold. So, by doing an option, you’re delaying that satisfaction, which increases the amount of time you have to spend dealing with them, check up on them, make sure they’re still around, etc. And during that time, you’re marketing a property that you don’t own, which is risky and can be potentially embarrassing if you find that you can’t deliver. And if you find a buyer and contact the seller after the option expires, the seller may demand more money and kill the whole deal by asking for a much larger amount.

In my next post I’m going to list a few of the risks that have gotten me nervous or killed deals, and I’ll talk about the remedy to all of the issues surrounding option deals.