Option Land In The Path Of Growth By Steve Gillman At Isnare.com Ezine Articles

When you option land in the path of growth, you make a relatively small investment for a large potential profit. What is the downside? You will lose most of your small investments.

When you buy in the path of growth, you want to do three things:

1. Determine if the area is growing.

2. Determine the primary direction of the growth.

3. Buy property in the path of growth, wait for an increase in value, and sell.

However, what if you don't have the cash or ability to finance real estate that will sit there without producing income? That is when you may want to consider options. If you don't even have enough money to buy options you could find a partner who will put up the money if you do all the work.

Option Land In The Path Of Growth - An Example

You find a few properties that in the path of growth, and are either for sale or look like they are not being used for anything. The latter are more likely to be optionable at a low cost, although to keep the option fee low you may have to offer a higher purchase price. At the county building or wherever the property records are kept, you get the names and addresses of the owners.

You suspect that properties in this area will be worth 30% more within a year. One that is worth about $300,000 has an owner who is open to the idea of an option. You meet with him and explain that you want to develop the land or team up with an investor who can help you, or alternately just find a bigger developer to turn the deal over to. However, you can't buy it outright at the moment, and you don't want to spend the time working on the deal if you won't be able to buy it later.

Thus, you need an option, so you will have the right to buy it when you are ready. You will need it to be for 18 months so you have enough time, and you will need it to be assignable, so you can bring in another investor if necessary. The owner wasn't planning on selling just yet, so he is open to the idea of an option, but will only agree to 15 months.

You agree that you might be able to do something in 15 months, but you can only risk $3,000 for the option. The owner wants $8,000. You finally agree to pay $6,000 for the option, but if you buy the property it will be at $315,000 - 5% more than its current value. The option fee will apply towards the purchase. Reminding the seller that he gets to keep the $6,000 if you don't buy it is what finally convinces him to agree.

A year later the property has gone up in value by only 20%, not the 30% you were expecting. You find a buyer who will pay the market value of $360,000. Rather than go to the trouble and extra expense of a double closing, you decide to assign the option to the new buyer for $40,000. He must pay $309,000 (the original $6,000 option fee is credited towards the $315,000 purchase price), at closing, making his total cost just $349,000.

Meanwhile, having invested $6,000, plus let's say $1,000 in advertising, you have a profit of $33,000. If you lost $7,000 on half of these deals you would still be doing okay. This is why investors take the risk with options that most often expire worthless: The pay off can be big enough when it works to more than cover the losses.

The other possibility when using options to profit from growth is to actually buy the property at the end of the option period. If it is an income producing property, the increase in value over the option period may make it possible to finance the purchase without additional cash. For example, in the above example, a bank may loan $315,000 on a property worth $360,000, in which case you could even get your $6,000 investment back out of the deal (although you would have closing costs).

At this point, if the area is truly growing fast, and the income from the property covers your expenses, you wait another year or so and make an additional $70,000 when you sell.

One last thought. Do your homework. It is common for prices to stop rising just when you think they are most likely to jump up even faster. When you option like this, you are combining the risks of options with the risks of speculating on prices. Of course, you are also combining the advantages of both as well.

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