When a property is listed many investors often wait until the listing expires before they talk to the seller. I plan on showing you an example of how you can solve a seller's real estate problem, stop a foreclosure, leave the listing in place, and still make a nice profit….all by using an option.
Here's an example of how an Option can be used with a listed property… courtesy of Jack Miller.
Out of work, in desperation, Bob had listed his property with the highest “bidder” at a price way over market comparables. His property was being used primarily as a sign location for a major franchisor that was trying to gain access to the local market. No one was actively, working the listing. Bob approached Dave re-questing immediate cash to pay mortgage payments and debts. He needed to move out to a new job in another city, but was afraid of losing his home by foreclosure prior to being able to sell it.
Dave agreed to lease the house at an amount equal to the mortgage payments, and to pay an additional $2000 cash to bring the payments current plus and additional $3000 for Bob to tied him over.
In return he got an Option to purchase the property by taking title subject to the existing $125,000 loan, so his full price would be $130,000. He stipulated as part of the Option contract that it would be SUBORDINATED TO THE INTERESTS OF THE LISTING BROKER IN THE EVENT OF A SALE AT THE LISTED PRICE.
Moreover, the listing agency was permitted to keep its sign location with no infringement on its right to earn a listing fee or any sale commission.
The Option further stipulated that the Optionee would do everything in his power to assist the listing Broker in selling the property at the listed price; including assisting as much as possible in arranging financing for any Buyer who might contract to purchase the property. He did this because of the possibility of a gross profit in the event the listing agency sold the house at the listed price.
The Option was closed and all documents required to convey placed into escrow, with final sale closing to take place upon sale by the listing Broker, or at a date following listing expiration. The $5000 was conveyed and after mortgage payments had been brought current, Bob retained the balance.
Results: Bob saved the equity that he would have lost if the house had been foreclosed; plus he got $3000 in cash to resolve his distress situation while keeping his good credit intact. Dave got an Option which would either result in a huge yield on his $5000 investment if it sold at the listed price; or a good investment house when the Option was exercised when the listing expired. Here are the numbers:
- LISTED PRICE: $173,000
- FAIR MARKET VALUE $160,000
- EXISTING LOAN: $125,000
- OPTION CONSIDERATION: $5,000
- OPTION STRIKE PRICE: $130,000
- GROSS OPTION PROFIT AS LISTED: $43,000
- OPTION PROFIT LESS COMMISSION: $30,890
- OPTION EQUITY PROFIT IF UNSOLD $30,000
As a practical matter, every effort would be made to help the listing broker. If he were successful in obtaining the listed price, here's the profit: If the property is sold at the listed price, the cash profit would be about the same as the equity profit if the property is not sold at the listed price. And of course, there would lots of room for negotiation on the commission if an offer were to be brought in below the listed price.