Options, Pt 2
Jason Cochard for Land Academy
In my previous post, I introduced the basic structure of a flip that contains an option agreement. That will let you preserve your cash until the point where you’re selling to your buyer, and even then the cash is only gone for a few days at most, because both transactions are happening very close to one another. When this goes according to plan, it’s really great.
Full disclosure — I’ve never had it go according to plan.
When we send out offer letters, we have to understand the psychology of what happens in a seller’s mind. We’re shaking the tree, and sometimes something falls out. But that’s the moment that the iron is hot, and you have to close at that moment, or else you’re risking upsetting the psychology of the seller. From their perspective, they’ve received a letter with a dollar amount that they’ll be getting very soon (the wording in your letter, if it’s like mine, talks about how quickly we can close and get the seller their money). Options do almost everything to disrupt that expectation and cause all sorts of things to happen that are annoying to us.
The family gets involved
Once you’ve waited more than a few days before closing the deal, the seller will start talking to their family and friends, all of whom have opinions, and just about none of those opinions will favor you. The seller, even though they’ve signed an option with you, will sell it to their sibling or cousin. The “brother-in-law” simply means anyone with a different last name. This will absolutely happen if there are multiple siblings who own the property through inheritance. One sibling will be hard up for money and want to take the low offer; the other will not need the money so they’ll want to maximize price by listing with an agent. The multiple siblings situation is one of the most annoying, even for a non-option agreement!
The seller gets greedy
Sometimes it backfires and someone wants a non-refundable $5,000 option premium (for their “special” land), which is when I tell them there are two choices: burn the pages one at a time to maximize burn time, or burn them all at once to minimize burn time. They’ll come back if they really want to sell. I have found that this scenario happens when there is something wrong with the property and they have a feeling that you’ll let the option expire because of something you will find (that they already know), so they are just trying to get something non-refundable out of you.
The seller sells the property without you
One option I sent out for signature came back with a post-it note attached, with the seller thanking me for the work but that she had already sold the property. This was only within a few days of our initial call, so I don’t fully believe the word “sold,” but I believe she probably listed the property with an agent. This was totally contrary to what we had discussed only days earlier. Can you imagine if I had already been marketing the property and/or having to explain to an interested buyer that you don’t actually own the property.
The seller doesn’t understand what an option is
I’ve started to also avoid the term “option” with sellers, because they might misunderstand and go into a google-fueled tailspin of internet research, finding some blogs about different creative financing for real estate and see a lease-option described in someone’s blog, which is more common (and more complicated) than the simple option agreement I’m talking about. In one case, a seller almost backed out of the deal because he thought I wanted to enter into a “rent-to-buy” situation. I was surprised that he didn’t understand, because he wrote emails with super proper “legalese” style language and diction, so it seemed like he knew what he was talking about, but he didn’t know what an option was, and assumed I meant a lease-option. It almost killed the deal.
That last one gave me an insight — people know real estate is a serious business with potentially a lot at stake, so their guard is up really high, especially when they don’t understand everything. I get faxes back from offer letters where people cross out all the action verbs and write in the opposite word, cross out the date, etc, to create some kind of legal trail that they rejected my offer. It’s not necessary at all, because the offer will self-destruct at the expiration date anyway, but they do it because their guard is up and don’t know what else to do.
Even if they do want to sell, their guard is still up, and to keep up with what you’re talking about (at least when it’s over email), sellers might just google whatever term they don’t understand and reply with what they learned after 10 minutes, even if they read about the incorrect thing. Since lease options are more common than options, that’s what this seller thought I was talking about, and almost backed out.
Apart from these examples, the core issue is the fact that you’re marketing property that you don’t own, and that will always be risky, because your ability to live up to your promises becomes partially dependent on someone else. So, how do we avoid these issues? Next week I’ll have a prescription for the remedy that has been working for me.