How To Make Money Optioning Special Properties

by : Steven Gillman

Optioning special properties is another way to make money in real estate that few people consider. However, it can be a way to get large profits from small investments. And the disadvantages? You will lose those small investments most of the time, and spend a lot of time hunting for the right properties.

Investing in real estate through options can be one of the most creative ways to make money. Here is one of my favorite stories which demonstrates the endless creative possibilities.

The Hilltop Investor

Creative real estate investing is mostly about solving problems. Radio stations, police departments and others have a regular problem. They need hilltops to put radio towers on. One creative investor spent his time solving this problem. Here is an example of how he did it.He got options on hill top properties for a few hundred dollars, then found those who needed them, and signed long term leases. With the leases in hand, it was easy to get financing to buy the properties. He invested a few hundred dollars to create years of income.

First, he found hills. Of course, usually the land on top was not for sale, but he talked to the owner anyhow. The owner might not be too interested in selling, but this investor would get him interested. How? By offering to possibly buy the land for more than it was worth.

Let's say that the owner estimated the value at $24,000. This investor would suggest that he might buy it for $30,000, but he needed time to arrange financing. He would give the seller $300 for an option to buy the property within six months. The seller, who hadn't been planning to sell anyhow, would either get to keep the $300, or get more for his property than he thought it was worth.

Now the investor had six months. He contacted radio stations, police departments, and cell phone companies that might need a hill to put a radio tower on. It is common practice to lease these properties on leases of ten-years or longer, for tax reasons, and to conserve capital.

Once the investor got a lease signed, he went to the bank. With a lease in hand, it was relatively simple to get a bank to lend the money for the purchase. As long as he could find a loan with payments that were a couple hundred dollars less than his rental income, he had good cash flow from day one. The lessee had to provide their own tower and other improvements.

What was his total risk? If he didn't find an interested party, he walked away, losing the $300 option fee. As I recall, he succeeded often enough to afford a few losses. Of course, in addition to any cash flow he could generate, he was gaining equity with each loan payment.

Other Option Opportunities

There are other special properties you can do this with. If you read Number 17, you understand the basics of how an option works. You can use options to control commercial property that is right for a fast-food restaurant or a car dealership. You can option a piece of forested land and then get quotes from timber companies to see if the trees are worth more than the purchase price.

You can also reduce the risk further if you approach this the right way. In the example above, the seller is willing to take just $300 for an option, but why? Because it is like free money. He might sell the land for more than it is worth, but if not he gets $300 for signing a simple contract. The fact that his property is tied up for six months isn't important to him, because he wasn't planning to sell it soon anyhow.

The lessons? If you want to get options at the lowest cost, start with properties that aren't yet for sale. These owners have nothing to lose by granting an option. Making the price at which the option is exercised (the purchase price) higher than the market value of the property is another way to get a low option fee accepted. Making the option for less time is another way to get an owner to take a lower option fee, but this can be risky - you need that time to find your buyer or renter.

There is a way to effectively have an option on a property without any fee at all. This is simply to make an offer on a property, with a contingency that let's you out of the contract. For example, if you make an offer, but make it "contingent on my partners approval within 14 days," you will get your earnest money back if your partner doesn't approve. In other words, you have a 14-day option to buy the property, but no option fee is lost if you don't.

This latter technique is perfectly ethical as long as you don't lie to the seller and you really intend to buy the property or assign the contract to some investor who will buy it. Of course, these kinds of contingencies are rarely accepted with a deadline of more than a week or twoFind Article, so you have limited time to find a renter or buyer for the property.