A seller fixed on selling for no less than $100,000.00 may have a hard time in a market in which the highest bidder to date has offered $85,000.00. However – a buyer who understands the real problem (a stubborn seller unwilling to accept the reality of today’s market) may offer to pay the seller his asking price with the following terms: $50,000.00 down and five separate promissory notes, each of which pays off at $10,000.00, and each of which is due one year later than the other for a total of five years. This totals the $100,000.00 the seller required – and the offer may be accepted. Of course if each note was discounted at 9%, the present value would total around $85,000.00. You see, in this situation the focal point is the seller’s stubbornness to sell for $100,000.00.

Sometimes, time is the focal point , as time can make the difference and the buyer who definitely is going to buy can use this option very effectively as a prime tool when the “G-Syndrome” is rearing its ugly head!

There are four basic creative investment tools that I want to talk about this month. Note that I cite them as creative, rather than conventional. It has been my experience that I can purchase more (and better) properties utilizing creative thinking and finance techniques, than I can when utilizing conventional methods of acquisition. Let’s spend a little time discussing the following:

1. The Option

2. Sweat Equity

3. Lease/Purchase

4. Owner Financing

1. The Option to Purchase: An option is an investment technique that creates a unilateral contract, that is to say, a contract or agreement that is one-sided. It almost always gives the buyer the edge in the transaction. However, when used properly, it can also work on the seller’s “G-Syndrome” and produces signed transactions that may ultimately work for both parties, provided the buyer exercises his option.

When an investor has an option to buy (or lease) at a set price, the owner has little if any control over decision making, and must go through with the deal if the investor chooses to exercise the option within the time frame established by the Option Agreement.

Options can be part of an escape clause and can become an important contract tool that investors can use. Options are widely used as part of an overall investment strategy.

I once was very interested in purchasing an 8 unit apartment building in Melbourne, Florida for $400,000.00. All eight units were rented for $850 each and the rent rolls showed less than 4% aggregate annual vacancy for the 3 year period prior to property going on the market. I was convinced that I could easily and efficiently convert the eight units into executive office suites. There was quite a demand for small, upscale commercial/office space at the time, and I wanted to capitalize on the opportunity.

Each unit was approximately 1200 SF and had 1 bedroom, 1 bathroom, a living room, a small kitchen and ample closet/storage space. I did my due diligence to develop a conversion budget and floor plans and I found I could raise the per unit rent from $850 per month to well over $1900 per month. However, to do this I would have to apply for and be granted a zoning variance from the city of Melbourne.

I entered into an Option Agreement with the seller, with my contingency being granted the zoning variance. I offered the seller the full asking price to appeal to her “G-Syndrome” and in turn was given a six month period to apply for and be granted the zoning variance and to be satisfied with the restrictions, conditions and/or limitations that may be imposed by the city. In addition, to show my good faith and intention, I put up a $5000 deposit that would be applied to the purchase price at closing – or – be refunded if I did not acquire my variance with suitable terms and conditions. The deposit was held by my closing agent in an interest bearing escrow account, with the interest coming to me.

Anytime along the way, I could elect to close on the purchase regardless of the outcome of the zoning procedures. Remember, even if I didn’t get my variance to convert the property, the deal still worked as apartment rentals and would provide a positive monthly cash flow and instant equity.

As it turned out I did not acquire the property, but the Option Agreement put me in the driver’s seat. I tied up the property for six months with the Agreement, during which time the property would experience appreciated value and my deposit funds were not at risk unless I backed out of the agreement.

Sellers accept options relative to what is offered and how that offer helps them move closer to their goals. In the above instance, my seller was going to get her asking price – and – continue collecting $6800 per month in gross rent receipts. She had the luxury of time and did not nee to sell immediately.

There are four ideal times to use the Option technique:

1. When you, as the buyer, have no immediate use for the property. The option can “buy” time.

2. When you, as the buyer, are not sure about the investment and want to tie up the property.

3. When you need a negotiating tool buying other property. You can ask for an option as part of a contract on some other property, either to give the seller something to negotiate out of the offer or to tie up the property in the event of a property value increase.

4. As part of a lease that would give you time to get to know the property or time to hold onto the property at a reduced price prior to buying it.

2. Sweat Equity: Sweat equity transactions enable a buyer to enter into a transaction to acquire property that can be a win-win situation for both parties. This is a form of an option wherein the buyer gives the value of his or her labor as equity to “buy” the option. The prospective buyer can build equity to be used as a down payment.

One needs to watch out for pitfalls so that your labor and hard work pays off. For instance, if the closing extends past the option date, for any of a number of legitimate reasons, you will want your Agreement to provide for extensions of time. Without firm and written terms in the contract, you could end up improving the property and losing your efforts to a seller that has now fallen in love with the improvements – all on your dime.

3. Lease / Purchase: The long-term lease with option to purchase is a good way to tie up a property for a long enough period during which major improvements can be made to the property that will greatly increase its value and insure a profit for you, as the Tenant/Buyer. The amount of cash to initiate this kind of transaction is usually considerably less than a conventional purchase.

Because the Landlord/Seller retains title to the property and all the benefits of ownership during the lease, there is often greater incentive for the owner to enter into a lease with an option if an ultimate sale is what he or she

wants. If the immediate benefits are strong enough, the owner may agree to the option to buy with the ideal that the prospective buyer may not actually be in a position to buy when the option period ends. This is the “G-Syndrome” appearing again.

5. Owner Financing: Any mortgage held in a real estate transaction that is not the first mortgage on the property being acquired is called secondary financing. The best secondary financing is when the seller holds paper for part or all of the deal. Often times this can come in the form of a wrap-around mortgage wherein the original underlying mortgage of a lesser amount is wrapped by an seller held mortgage of a greater amount. The monthly payment on the wrap around mortgage to the seller is enough to pay the monthly payment of the underlying mortgage – and – provide the seller with a positive monthly payment.

As an investor, I am always looking for sellers that are desirous of holding paper. I can avoid the time, problems and costs associated with conventional financing and there is no limit to how many seller held mortgages my debt-to-income ratio or credit score will allow.

There are specific things you should look for when using seller-held financing. The contract should be very specific as to the exact terms of the mortgage and should contain details as to the form of note and mortgage to be used, the property that will be the security to the mortgage, and other data that the investor may feel is essential or that the seller insists on including. A partial list of important questions and considerations about seller-held mortgages is as follows:

1. What is the interest rate?

2. How is the interest rate charged?

3. What is the method for determining amortization and payback?

4. What are the dates of payment?

5. What are the terms of the payback?

6. What is the date the final payment is due?

7. What is the amount of the final payment?

8. Is there a balloon payment date and clause?

9. Is there a grace period for late payments?

10. What is the penalty for late payments?

11. Is there a pre-payment penalty and what is the amount?

12. What is the form of note and mortgage?

One way to ensure there is no misunderstanding between the buyer and the seller is for the contract for purchase and sale to include a copy of the note and mortgage that will be used, properly drawn to show all the terms and conditions of the loan.

One of the keys to using the techniques we discussed here today is to recognize which property can be improved in value. If there is a property, and a way to improve it, then it is worthy of your offer. The important element is to tie up the property with time on your side.

Here is a challenge that I extend to you. Look for a property either for sale or vacant that is run down but in a good neighborhood within your Investment Comfort Zone. Perform your due diligence as to market value and re-sale options. Then, contact the owner and schedule a visit to the property. If the property meets your criteria, make an offer utilizing one of the methods we discussed here today. Order our Contracts Documents CD from our Resource Center to help you use the best forms on the market today.

Keep making offers until one gets accepted. Happy investing!