What You Missed July 2013 General Meeting
by Robert Davis
Making Money with Options Using Little to No Cash
Presented by: Jack Shea
July 2, 2013
Jack Shea asked the question, “When is the next bubble going to happen? Are we already in a real estate bubble?” He mentioned some other bubbles like the tulip bubble in Holland and the dot com bubble in the USA. When there is excess money available and low interest rates, this can help produce buying frenzies and price bubbles. Jack thinks we may be headed for another real estate bubble. Since the beginning of 2013, he has seen overbidding on prices at auctions. He suggested accelerating the sale of any flippers we have. Basically, don’t get stuck holding properties too long. The current rise in prices may trend back down, especially if interest rates start going up. If we are buying to hold, we better have a super deal! Jack prefers to use the option-to-buy method instead.
He said the option to buy has mostly all the benefits of buying a property without the big risks involved in ownership. For example, we can usually buy an option on a property for a small cash outlay. Therefore we have high leverage on the value of the property. If the value goes up, we can exercise our option and pocket some profit. We are also not the owner of record for an optioned property. This means if something goes wrong with the property, like an EPA problem or a sink hole, the owner is responsible and we can get out with just losing our option money. Also, if the property value goes down a lot, we could renegotiate the option price and terms with the owner rather than just lose the option money.
Some other benefits of the option to buy are in the terms. We could perhaps say a part of our rent payment would be accumulated towards our down payment. This could actually amortize the sale price more quickly than a mortgage loan. We can also have built-in extensions and actually depreciate the property for tax purposes. Options on real estate can also be exchanged via the 1031 tax code. Options are not attachable by law suits either. In order to show any profits from exercising our option, we need to hold the property option for at least a year. We may want to keep one or more options “on the shelf,” so to speak, to use when we have a surprise sale that produces exchange money we need to reinvest.
Jack also said we can option nearly anything. Some of the things we may option are cars, boats, notes, real estate, mobile homes, mortgages, etc. These are considered personal property when we option them. He also mentioned using a Contract-for-Option method when we want to sell a property. Here, the client has a contract that would eventually give an option to purchase if all terms of the contract are fulfilled. He says he converts about 75% of his contracts to owners. This method usually requires less management as well.
According to Jack, the Land Trust is an essential part of being a prudent investor. Not only can the Land Trust shield our assets, it can also be used to divide the ownership of the beneficial interest of a property without going public with all the details. Jack showed us how we can prosper more in the next real estate bubble, and how we can survive when the bubble breaks.