Feb
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February 07 ~ Options
By supportWe are live and online!!
The most exciting new venture in Massive Action’s history has gone live today.
We have been trying for months to find a way to be able to help more people effectively. Consulting and workshops are expensive to do and limited by my time and location.
We have been trying for months to find a way to be able to help more people effectively. Consulting and workshops are expensive to do and limited by my time and location.
So after many moons we have managed to get our entire team of professionals to join us in offering you an online mentoring and investment forum. Now you can work with not only me, but my students and all my team of experts.
The price is so low I’m embarrassed to mention it here so go and find out more for yourself and join New Zealand’s first online private mentoring and investment forum today!
And the beat goes on….. and on……. and on…… and on!
Well it’s a funny old investing world. Every expert in the country, including myself, is talking up the coming slump but the market just keeps on keeping on.
It’s fascinating to see the fundamentals of the usual cycle just kind of “not work”. The impact of the baby boomer generation and a changing world economically may well cause us to not have the normal bust and recovery phase. It looks increasingly like we may just have some slower growth until the next boom.
Immigration is keeping things ticking over and that is only going to get worse, (or better for us as investors). More info on the boomers in my previous article HERE.
So we have to get used to the fact that things will never return to the Halcyon days of cashflow lying around. We will have to become more sophisticated animals to keep going forward. Yes investing is going to be harder work, get used to it!!
So this month I want to start my new series on some of the strategies that you will want to use to become a more successful investor. Ready??……
Lease Options 101. License to print Money.
We need to start with the second part of the phrase “lease~option” as they all contain an option. And options just by themselves can be a very groovy investing strategy.
Options: An option is a written contract giving you as purchaser the “option” to purchase a particular property, usually for a specific price and for a specific time frame.
Unlike a conventional S&P agreement an option is effectively a one sided agreement. The seller HAS to sell if the purchaser “exercises” his option. However the purchaser is under no compulsion to buy unless he chooses to.
Now of course you pay a fee for this privelege. In effect you are buying this option. Generally this fee would be credited off the purchase price if you exercise your option.
So how does it work and why would you do it??
Let’s look at a current example of mine [First Name].
A vendor has a lifestyle lot for sale in Auckland. It happens that the land has just been rezoned and can be further subdivided but the owner is a developer and wants to get on with his next project.
So the opportunity is to purchase the site, further subdivide them and then onsell, right?
Option 1: the traditional method.
Enter into S&P and try to negotiate long term esttlement with prior access to start subdivision. As the vendor is a developer he will have to pay GST on the sale as soon as it is unconditional so he is wanting short term settlement. In addition dealing with the council may take ages so how long is long enough to settle??
Lets assume you manage to negotiate 6 months settlement on 5% deposit. You estimate the subdivision to take 12 months to complete, but it will actually take 18 months.
Purchase price $500,000
So the numbers are ……
Deposit 25K paid now out of revolving credit at 9.5% = $198 per month
In 6 months you settle the balance of the land at 8% = $3166 per month
You start onselling the subdivided sites at 450K with 10% deposit, balance subject to title. Lets say you are fortunate and you get them both presold by settlement date.
This means you have $90,000 in deposits, but they are being held in a solicitors trust account.
We get to 18 months out and title arrives and everybody settles .
Total costs: Land $500,000
Interest $60,000
Development $90,000
GST on sales $40,000
TOTAL $690,000
Income 900K less fees $868,000
Profit roughly 180K which is great, but we have had to purchase unconditionally, organise finance, settle and be involved in the project for 18 months.
Option 2:
Now if we had taken an option on the site we could have done things differently.
Now if we had taken an option on the site we could have done things differently.
As an option doesn’t trigger GST for a developer he may well agree to a 12 month option for a fee of lets say $5000. The option means he can’t sell to anyone else and he HAS to sell to us when we say we are ready. We lose our $5000 if we don’t buy but it comes off the 500K price if we do.
So what do we do differently with this opportunity??
Well what you can do includes……….
1. Advertise the property to another developer looking for sections to build on. The developer can either take over your option for an assignment fee or you can contemporaneously settle.
In other words the property may be worth 600K as is to a spec builder developer. You give him the option of paying you a 100k fee and HE takes over your rights in the option.
You get paid as soon as you find a buyer, no mortgages, no holding costs other than the interest on $5000. And you have an entire year to find this buyer!!
Profit 100K, short time frame, no risk.
2. Advertise the 2 sections in the usual ways with 10% deposit and balance on title. You have a year to find the buyers. At the end of your option period you go to unconditional S&P agreement and negotiate 6 months settlement from that date. This is the same time that title will be out so you can contemporaneously settle. No holding costs other than interest on $5000, no mortgages to find etc.
Profit $240,000. Even more than normal, due to no holding costs.
3. Because of the 12 month option you look for an investor looking to capitalise on the 12 months capital growth potential and simply assign the option immediately to another investor for a 10 or 20K fee. Less profit but it may only a days work in total. No risk, no mortgages.
Now in this particular example I am looking at 15 sites, not just 1. So the difference between doing a S&P and an option is around $900,000!!
And the risk is lower with the higher profit.
Lets look quickly at another common situation where I find options a great alternative to S&P’s.
Lets say you buy a unit in a block of three and would love to get control of the whole block. You talk to the new neighbours and they are friendly enough but not wanting to sell now.
You can offer them an option to purchase their property upon their death or whenever they want to sell. In this case the option may have a 50 year expiry and the purchase price may be fair market value but you still get to own the whole property if you want to.
The opportunity to get control of millions of dollars worth of real estate for a grand or 3 is hard to oversell.
If you’d like some hands on training with options consider coming to my trading workshop, or attending a lease options training workshop where I will cover it in depth, or get alongside someone using them. They rock!!!
I will do my very best to teach you more about options and lease options in the next few months but you will need to get a formal education in this area. Hopefully I can whet your appetite enough to see the value in investing in yourself.
The days of pick a deal out of the paper are gone my friend, welcome to the future of investing!!
Look forward to meeting you in the forum or till next month, stay safe.
Regards from Dean, Raewyn and the Massive Action team
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