FAQ Categories: Options

FAQ: Creative Real Estate Investment Strategies

What is a “Purchase/Option Back” strategy as described by Peter Fortunato, and how can it be applied to both notes and real estate?

Peter Fortunato’s Purchase/Option Back involves purchasing an asset (like a seller-financed note or a property) at a discounted price while granting the seller an option to repurchase it within a set timeframe for a predetermined price. This strategy provides the buyer with an immediate return while potentially allowing the seller to recover their asset later. In the case of notes, the buyer might pay 50% of the note’s value and give the seller the option to repurchase it within a specific period (e.g., one year) for 50% of the loan balance at the time. In real estate, a distressed seller may receive a discounted cash payment for their equity and retain an option to repurchase their property at a pre-agreed price, potentially allowing them to recover the equity they lost.

How does a “Listing Option” differ from traditional real estate listings, and what are the benefits?

Instead of listing a property for sale in the traditional way, you buy an option on the property, allowing you the right to purchase it at a set price (net to the seller). You can then market and sell the optionto a third party, potentially for more than the agreed-upon price. This approach transfers any liability for property defects to the option holder and allows you to profit from the “contract rights” without taking full ownership. The seller benefits from a guaranteed net price and avoids direct involvement in negotiations.

1. What is the purpose of a “Management Option,” and how can it benefit an investor?

• A Management Option involves securing a purchase option at the current market price of a property while also entering into a management agreement. This allows you to manage and assess the property without an immediate purchase obligation. If the property proves to be a good investment over the management period, you can exercise the option to buy at the previously agreed price. If it doesn’t seem promising, you can simply let the option expire. This allows for a “trial marriage” with the property.

Explain the “Installment Purchase Option” as it applies to notes and how the risk is managed for the buyer.

In an installment purchase option for a note, a buyer purchases a portion of the note (e.g., the right to the first ten years of payments) for a discounted price. For example, paying $50,000 for the first 10 years of payments on a $100,000 note. The contract typically gives the buyer the option to purchase the remaining portion of the note under similar terms later. If the buyer does not purchase the back half, the seller regains the note and any payments. This allows the buyer to benefit from a portion of the note’s payments while having the option to continue the agreement or discontinue it if it proves problematic, thereby managing risk.

What is a “Shared Appreciation Option” on notes, and why might a lender consider this arrangement?

A Shared Appreciation Option on a note involves paying a reduced interest rate to a lender while offering them a percentage of the property’s appreciation at the time of sale. For example, if a lender requires 12% interest, you might offer 6% interest plus 50% of the property’s appreciation. This benefits the borrower with reduced immediate payments and allows the lender to potentially earn more if the property appreciates in value.

How does using a “Rehab Loan Option” with Land Trusts differ from traditional rehab lending, and what advantages does it provide?

In a Rehab Loan Option, instead of directly lending money to a rehabber, funds are loaned to a third party (such as a friend) to purchase the property via a Land Trust. The rehabber is then given an option to buy the property from the lender for the cost of the property plus advances and interest at the final sale, giving them all additional proceeds from the sale. The primary advantage of this approach, using land trusts to enhance privacy and safety, is that the lender avoids traditional foreclosure proceedings should the rehabber fail or disappear, since they maintain ownership of the property through the Land Trust.

Describe how a standard “Purchase and Sale Contract” can function as an option, and what strategies can be used during the contingency period?

A standard real estate purchase contract with contingencies effectively functions as an option. The buyer can control various conditions like financing approval, inspections, and zoning changes. This allows the buyer time to secure financing or find another buyer at a higher price. During the contingency period, the buyer might negotiate extensions for additional deposits and ultimately decide to close the purchase or not. The buyer can thus control and profit by utilizing contingencies and time limitations in a standard sales contract.

What is the benefit of utilizing options within an IRA, and how can they potentially contribute to growth?

Holding options within an IRA can be advantageous for several reasons, especially in low-interest environments where traditional investments struggle to grow. Options positions, which often cost a modest amount, provide the potential for high-leverage returns with limited capital outlay. The value growth is tax-advantaged and can be done using low-cost positions and high-growth strategies. While self-dealing rules must be followed, it offers an opportunity to build a retirement fund using creative real estate investment strategies.