|Use Options To Minimize Risk And Maximize Profits
I received an ad call one afternoon.
It was a woman named Leanne. She was married with three grown children.
She wanted to sell their house, so I went through the process of screening
the call and getting the relevant information about the house, the mortgage
balances, and what they wanted. It was a nice house, 3/1, 1300 sf, basement,
on 2.5 acres, no repairs needed, just outside a town called Spencer, Indiana.
They had two mortgages totaling $64,000 and were $4,000 behind in payments.
The property was appraised one year ago for $97,500. We talked for a while
and she informed me that since they had gotten a 2nd mortgage, she and her
husband Greg were having difficulty staying current on the payments, and
Greg hasn't had much work recently so now they are really behind and have
to do something. Leanne asked me what I would pay them for the house. I
asked her what she was looking for. I believe the conversation went like
"Well, if we could
sell the house and get $85,000 for it we'd go ahead and do that."
I said, "$85,000. For
a cash sale, Leanne, that's a bit higher than I can go. If I did pay you
cash and paid off your two loans, are you sure you couldn't go any lower
"How much lower?"
I told her, "Well, based
on what you've told me all I can really do here is save your credit by paying
off your underlying loans and back payments. I might be able to go a couple
of thousand higher but that would be about it."
"So how much is that?"
"Now this is based on
your information now. You said that you had $64,000 owing and were $4,000
behind in payments. If I paid those off and added on a couple of thousand
for moving money then that would make it around $70,000."
"Is that what you
would pay? $70,000?" she asked.
"That's right Leanne.
$70,000 is what I could pay."
longer pause..................and then a big, long, sigh from Leanne.
"Well how long would
this take?" she asked, breaking her silence.
I said, "Well, the
way I would have to do this Leanne, is to option your house. You see
$70,000 is more than I'd be willing to come out of my pocket with to buy
the house, but I would be able to finance it for that much. It would take
about three weeks before I get things organized on my end to exercise my
option and then another three weeks before we close."
"Six weeks, huh?"
"Yeah. Does that sound
like it's going to work for you Leanne?" I asked.
"Well, it could be OK.
I don't know. We were really looking for more but let me talk to my husband,
Greg, and we'll talk it over. I'll tell him what you said and we'll get
back with you tomorrow."
"OK Leanne. When do
you think you'd be calling?"
"Oh, probably in the
afternoon. Talk at you later."
And we ended the call.
I thought the deal sounded good, but I didn't know what the husband was
like and anticipated he would come back with all sorts of objections
about the option. What was it? How are we protected? Why can't you pay
more? Rather than worry about it I reviewed the answers to all of those
questions and then set about finishing what I was doing before the call.
The next day at about
2:30 pm the phone rang. It was Leanne. She told me she had spoken to her
husband about it and they had decided to go ahead with the $70,000 Option
deal I had proposed to her yesterday. They wanted me to come out and
explain it to them a bit more and get the paperwork signed. I made an
appointment for the next day at 5:00 pm.
The following day,
I showed up at their house in Spencer and after some small talk began to
tell them about the option contract and what it meant, that it gave me
the right to buy but not the obligation to, and that they also had the
right to continue trying to sell the house on their own if they wanted
to do that, that clause is written in the agreement. I explained to
them how I was going to sell the house with owner financing and then
sell the note for cash to pay them off.
They agreed with me
that it should be easy to sell on a Contract, but they wanted to know
how long it would take me. They then informed me that the house had been
listed for nine months and hadn't sold. I didn't know that. Well, I
couldn't be sure, but I expect it would take about three weeks to find
my buyer. I would need a three month option, but it should only take
about three weeks to find the buyer. I then went into an explanation of
how I would market the house, how I qualify all my buyers first and then
only call them for a walk-through when that's the only thing left to do.
No pesky appointments.
All of this, including
a bit of tangential chatter, took about three hours. But at the end of it
all, Leanne and Greg signed the agreements and seemed to be comfortable
with me and my plan. They asked one last time if I could pay them a bit
more than $70,000. I explained that this was the most that I knew I could
deliver to them. I could agree to pay them more but if I did that I would
be dealing with unknowns and it could cause problems later if I wasn't
able to deliver their price. So rather than get their hopes up with a
higher price, I would prefer to stick with the promises I know I can deliver
on. They seemed happy with the explanation.
So I drove home with
the signed Option Agreement, pretty happy. The next day I ran the following ad:
Spencer - Contract. Owner
Will Finance Gorgeous 3br 2 ba
home on 2.5 ac. $105,000. $900/mo
+ Down Pmt. Call 333-4455
I set up a voice mail
box to pick up the calls. The greeting repeated all of the information in
the ad as well as the address and told the caller to drive by the
property and, if interested, to call back and leave a message with their
name and phone number.
After two days I began
getting calls. Most people wanted to know how much down was needed. For
each of these my response was "how much do you have?" They would say
something like a thousand dollars and then they would say they couldn't
afford that high a payment and they had credit problems and they didn't
like the area. After two weeks, I'd spoken to about 30 junk callers like
this, but also had about five people with good enough income and credit
and varying amounts of acceptable down payment (5%+). After three weeks
of screening calls I found a lady who said, "Hey that's a nice house. I
want it." Her name was Candy and her husband was Charles.
I took an application
over the phone and prepared to pull her credit. Candy and Charles made a
combined income of $6,000 per month, easily covering their debts. I asked
her how much she had to put down, and she said none. She didn't have
anything to put down. I told her I needed something to show their commitment
to buying the house, and with her income she should have had something
saved, what was going on? She went on to tell me how they had just been
through a very long and drawn out child custody battle with Charles'
former wife, had won the custody of the two kids but had been cleaned
out by the attorney fees. I told them I needed some sort of down payment,
even if it was just symbolic. She said she had none. They had a good income
but no cash right now, that's it. I asked what her credit was like and
she said perfect. So I told Candy that I would give her information to
the note investor who would be buying the mortgage to pull her credit and
review her information. If the investor sees a high credit score on the
report and OKs buying the note with no down then we could do the deal.
It would take a day or so but I would get back with her when I got word.
She sounded even excited when she said, "OK, call me as soon as you know."
Before I called the
note buyer, I drew up the deal on a piece of paper so I had some hard
numbers to work with. I decided the purchase price would be $105,000 so
this would be the new value. A year earlier the house had appraised for
$97,500. Allowing for appreciation, $105,000 was on the high side but
reasonable. It was a nice property. I knew this particular notebuyer went
up to 82% ITV (Investment To Value) with their note purchases, and that
their minimum discount was two percent. This was a solid borrower so I
figured 3% to be on the safe side. What I was trying to do was find out
what would be the note amount that when discounted two percent would leave
me with the 82% ITV maximum that the notebuyer would pay. Well, 82% of
$105,000 is $86,100. And if I divide $86,100 by .97 I get $88,762.89. I
decided to make it $88,500 to stay with round numbers
So my deal was: 1st
Mtg: $88,500 at 9.9% for 30 years, fully amortized 2nd Mtg: $14,500 at
10% for 15 years, fully amortized 3rd Mtg: $ 2,000 Down payment ($200
per month for 10 months).
I filled out a Paper
Worksheet with all the relevant details about the transaction and faxed
it along with the 1003 Standard Loan Application I had filled out for
Candy and Charlie to the notebuyer, with a note saying that it was the
1st Mortgage that I wanted to sell. She called me back the next day with
her quote. It was 97.5%. They would purchase the note for 97.5% of the
face amount. Boy! That was even better than I had expected. No problem
with the lack of down payment, the borrowers had good credit. 97.5% of
$88,500 was $86,287.50. My immediate thoughts were that I would be
clearing about $15,000 cash at closing, after closing costs. Gee. Gee
Whiz! That's a nice profit.
With the quote in
hand I called Candy to give her the good news and made an appointment
for her and Charlie to see the inside of the house the next day. I was
cautious about being too optimistic as no money had changed hands and
they hadn't signed a contract yet. Meeting them at the house, I showed
them through pointing out all the good things and telling them what I
knew about the house. We moved on to the yard showing them the property
lines and eventually got back to my truck.
I asked them, "Well,
what do you think?"
I wasn't sure, but I
think I made some sales mistake by asking them that. At any rate, this
question seemed to bring to light the fact that Candy was having a bit
of trouble taking the step and committing to the deal. Charlie was saying
it looked fine let's sign, but Candy was umming and ahh-ing and looking
very uncomfortable, looking around, and giving these furtive looks to
Charlie as if to say, "save me." She started to say "well I don't know"
kinds of things and then asked if they could think about it. I hated to
break the easy-going mood that had existed up until now but the time had
come for us to get a little more serious. About this, I knew there were
some sales rules to follow.
I told them, "Well,
maybe on another house you could, but on this one I'm going to have to
know what you want to do today. Because I've got another three buyers
lined up, on hold, pending the outcome of what you guys decide to do
today. It's OK if you don't want to buy. But I just need to know it today.
I promised I would give these other buyers an answer by tomorrow. The
house is available, and it's yours today. What would you like to do?"
I think that's the
Now Or Never Close. If it's not, it should be, because it worked.
They looked at each other for a long time. I can't imagine the fireworks
going on in their brains, but after nearly a full minute of silence
Charlie said, "let's just buy the damn house!" Candy looked at him a
little longer and said, "Yeah, OK Charlie, OK". We then OK'd the paperwork,
and I took a $500 check from them to bind the agreement.
From here, I gave the
closing agent both the option contract I had with the sellers and the
Purchase and Sale Agreement I had with the buyers and told her I was
creating three owner financed mortgages and selling the First to a
notebuyer, and I wanted to do a simultaneous closing, using the funds
from the note sale to close on my cash purchase with the sellers. She
said, "no problem."
I must admit I heaved
a sigh of relief. I gathered the documentation from Candy and Charlie
that I needed for the notebuyer (tax returns, pay stubs, the purchase
and sale agreement), ordered the appraisal, title report, and stood by.
The appraisal came in dead on $105,000. Candy called me "every" day and
after three weeks she was a nervous wreck.
Finally, we scheduled
a day for the closing, to execute the documents. We closed the transaction
with the sellers first. Understandably Leanne and Greg were a little somber
about having to part with their home, but they signed the documents, we
shook hands and they left. On the other end of the spectrum, Candy's smile
was a mile wide as she and Charlie bounded into the room. We chatted and
I watched as they signed the mortgages that obligated them to pay me
$15,500 cash now, $155 a month for the next fifteen years, and the
Third that was $200 a month for ten months. Ten minutes later it was over.
They gave me a lift down the road to my car, and on the way Charlie said,
"Thanks Ben. We don't know how you did it, but thanks." We shook hands
and they dropped me off.
The next day I got a
call from the closing agent telling me that the wire from the notebuyer
had come through and that I could come in and pick up my check. I drove
in, signed a few more things and she slid the check across the table to
me. I looked at it. $15,551. Being the professional, she proceeded to
tell me that I should present my Land Trust to the bank when depositing
the check, they'll want to see the paper trail. But then she let slip
that, "Hey that was a pretty good deal. You put in $5, held title for
ten minutes and got $15,500 back. That's not bad." I agreed and said,
"It's a reaction to blocked up toilets and bouncing rent checks."
We chatted a bit and I went to the bank.
Ben Innes-Ker is a full time real estate investor and author of the
Motivated Seller Magnet - Automatic Lead
Generating System. He is constantly fine-tuning his marketing and business systems to make his
investing more profitable with less effort, so he can spend more time enjoying life with his wife and 2
y.o. daughter. He shares these unique profit making systems with his Power Marketing Members.
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