What You Missed November 2015 General Meeting
by Rob Earhart
Making Money with Options
Presented by: Jack Shea
November 3, 2015
“Things have changed in the options world, mostly for the better.” Jack continued, “when I first got to Florida, I went to a real estate seminar meeting and learned a lot. Meetings like SREIA puts on teach people a lot about investing.”
Jack explained, “a lot of investors are holding properties in the wrong entities, but those that attend meetings learn how to protect themselves.” “A lot of people think they are doing well but, they are not really, once you factor in all the costs they incur.”
I got a few books and started buying options, then I took a seminar on how to work with options.
Options are good for landlords because the tenants take care of the property, but tenants will not put a roof on. They will just leave and you end up having to put the roof on anyway.
“I put tenants in on an option because they stayed longer and required less maintenance. They tended not to put holes in the walls and we found that about 25% of them would buy the house,” he explained.
“We would find someone who had some credit bumps and would get 75% of them qualified to buy because they had some money.” Jack warned, “I had one tenant I wanted to evict but a judge in 1983 said that a tenant with an option to purchase could not be evicted, but had to be foreclosed on.” Since then we changed the wording so they got the option after 360 payments had been made and that took care of the issue. “When you buy a car, do you get the title before it’s paid off?” Jack asked. “No, so we do the same with an option.”
“If I have an option to buy and the house burns down, I’m not your guy, but if it goes up in value, I’m your guy,” quipped Jack. “When the houses went down in value we just did not exercise the option, so did not lose out,”
“I purchased my own home with an option, and for 15 years bought homes only in options. I looked for out-of-town owners who wanted to rent and looked for a long term lease.”
You can exchange options, and can buy real estate or mortgages. If anyone sues you, the options cannot be attached since they only have a future value. You can option cars, boats, mobile homes, and even leases.
Jack instructed, “you might have a house near a sinkhole, or have mold issues, then you can walk away from the option.” Jack also instructed us how we can depreciate property that we don’t even own and get $3,600 per year in depreciation on a $100,000 house. With several houses you could end up not having to pay any tax. Then, if you exercise the option later on, you can roll it into a 1031 exchange and delay the taxes again.
Jack proposed that, “If you die, your heirs get the property on a stepped-up basis so the taxes are less.”
Jack warned that “when you take my course I’ll teach you to get all of the documents in escrow so when the house is worth much more and the original owner dies, the heirs cannot prevent the sale, it just closes.” Without that documentation, the owner or heirs could prevent the sale.
When you don’t love the house and you have a tenant that pays $50 - $75 extra per month and has paid the first and last month and a deposit, they could then buy the house without bringing any money to the closing. When it sold, we did not have to clean the carpets, patch the nail holes, or do any other maintenance.
There are a lot of people teaching options that do not do them right. “Our book has all the forms for leases, options, etc. that have all the tax issues handled.” “Mark Warda and I have been doing some classes and have checked out some recent lease-option cases,” said Jack. “You need two dates and two signatures; the date you originally signed and the expiration date must be listed to be valid.”
If you lease option a property, it is considered an asset. In Florida, if the tenant has more than 5% interest or has been there over a year, you will have to foreclose to remove them; you cannot evict. If the option is for four years, we write it so that they must make 48 payments before they have any value in the property.
We can write a contract for the beneficial interest. Jack instructed, “you just need to create a land trust and declare a beneficiary, then you can option the contract for the beneficial interest.” “Florida has the best statute for land trusts, and they have been around since the 1890’s." The trustee and the beneficiary are not liable, according to Florida Law, and according to the law do not have to show the trust to anyone.
You could find a property, option it, and bring the option contract to a meeting like this and sell the option. If you have the time, and there are lots of people that don’t, they will pay you $4,000 - $5,000 to find properties for them.
Another tip Jack talked about was contacting out-of-town owners, getting an option and renting the property; you don’t need a real estate license since you have an interest in the property, and an option qualifies as having an interest.
You can supercharge your IRA with options. Tie up $100,000 property with a few hundred dollars and, when sold, put a lot more money in your account.
Jack talked more about his book and described the forms on CD, the forms in the book, and more tips on how to use options, such as optioning a house for five years, with three five-year extensions.
You can’t use options at every purchase or sale but there are ideal areas that these tactics work great on: houses that are not bankable, not salable, not wanted, etc. You can option it, do the rehab and negotiate so the seller gets paid at the closing… just some more tips you can learn from Jack Shea and Mark Warda.
Jack talked about his December 12th seminar on land trusts. He encouraged all to attend and learn the correct way to exercise options. He stayed for awhile to answer questions and help people sign up for his class.