<<

. 5
( 7)



>>

These costs were really starting to add up.
The coup de grâce was the four discount points we had to pay for
the buyer on the $84,000 FHA government-insured loan. Each discount
point was 1 percent of the loan amount. This amounted to $840! We had
no idea this was going to be so expensive. Needless to say, we were not
happy with what happened to our $10,000 potential profit.

Actual Profit
Potential Profit $10,000
Loan Interest $ 1,540
Property Taxes $ 750
Homeowner™s Dues $ 353
FHA Discount Points $ 3,360
Actual Profit $ 3,997


Wholesale Buyers

We actually prefer flipping our foreclosure properties to wholesale buy-
ers. Wholesale buyers do not get buyer™s remorse. (Well maybe a little
bit.) We know some of you are thinking:“Wait a minute. How can you
FLIPPING FORECLOSURES
164



make any money flipping real estate to wholesale buyers? Don™t whole-
sale buyers want to pay a wholesale price?”
We do flip our foreclosure investments at a wholesale price to
wholesale buyers! We are not greedy about it. We prefer to do many
smaller deals and make a quick profit rather than one or two big deals
that are very time-consuming and that entail more risk.
We have come to appreciate that being successful real estate in-
vestors is strictly a numbers game. Although we prefer to flip our fore-
closures to other investors for all the reasons we just talked about, we
are still smart people. Our marketplace is both retail and wholesale buy-
ers. The more buyers you have in your potential pool, the more likely
you will be able to flip your foreclosures successfully.
In the next chapter we will show you how to assign your fore-
closure contracts. This speeds up the flipping time. Rather than you tak-
ing title to the property, you may never have to take title to the foreclo-
sure property to make Quick Cash. The buyer you assign your contract
to will receive title directly from the owner. Fasten your seat belts!
15
CHAPTER




Assigning Foreclosures
O
ur number-one way we flip foreclosures is through assigning
real estate contracts. This is a way to flip real estate without buy-
ing or owning the property. You may not even have to close es-
crow. We really are not flipping real estate at all. To flip real estate,
technically, you need to own the real estate.
We are flipping real estate contracts. Real estate contracts are per-
sonal property. We own the contracts. Once you know how to assign
contracts, your real estate investing career is going to take off.
We will give you the information you need to understand assigning
contracts. We will talk about the types of contracts you can assign. We
will then apply assigning to the foreclosure arena and show you how to
make Quick Cash assigning your foreclosure contracts.



What Is Assigning?
Assigning a real estate contract transfers your position in the contract to
another person for a fee. Said technically, assigning a real estate contract
allows you, the assignor, to assign the contract to a new person, the as-
signee. An assignment transfers your rights to purchase a property
under the terms of a real estate purchase contract to a new buyer.
The new buyer literally steps into your shoes and can buy the
property under the same terms and conditions you negotiated with the
seller. The assignor gives paperwork”the assignment”to the assignee,

167
ASSIGNING FORECLOSURES
168



who receives the paperwork in return for money or other valuable con-
sideration.


Assignment Fees

The money you receive for assigning a contract is called an assignment
fee. The fee is negotiable between you, the assignor, and the person you
assign the contract to, the assignee. The other party to the contract you
have had accepted”seller, lessor, optionor, lender, or whomever”has
no say in your negotiations with your assignee.
What should the fee be that you receive for assigning a contract?
We have assigned a contract for as little as $1,000. We have also assigned
a contract for as much as $100,000. Typically, the fees we have received
for assigning contracts range between $5,000 and $15,000.



Types of Real Estate Contracts That You Can Assign
Virtually every type of real estate contract can be assigned. You can as-
sign purchase contracts, options, leases, lease options, mortgage con-
tracts, trust deeds, . . . the list goes on. You can even assign an
assignment contract! If it is a real estate contract, you can figure out a
way to assign it. Assigning a contract is the easiest and quickest way to
flip real estate.


Purchase Contracts

The complete name for a purchase contract is actually “purchase con-
tract for real estate and deposit receipt.” This is the contract that con-
tains the terms and conditions to which you and the seller agree when
the seller accepts your offer to purchase their property.
We have included a blank purchase contract along with other use-
ful contract forms in Appendix C. You can access the Texas Real Estate
Commission™s contract at www.trec.state.tx.us/. Office supply stores in
your area may carry a generic real estate purchase contract. Or you can
use a purchase contract from a local real estate company.
Types of Real Estate Contracts That You Can Assign 169



The truth of the matter is that you can use a napkin at a restaurant
to write a real estate offer. We don™t recommend using napkins to write
your offers, however”the ink runs on the napkin when it gets wet.
(We™ve had it happen.) As long as the purchase contract is in writing, it
is valid. Every state has a statute of frauds, which says that for a real es-
tate contract to be valid, it must be in writing.
If you are working with a real estate agent and they want to use
their contract, then use their contract. It is not worth the aggravation
spending the time to educate a real estate agent on why you should use
your contract. Just make sure everything you want in the contract is
communicated by whatever purchase contract you use.
You™ll want to include everything you can possibly think of in your
purchase contract. Every blank space is either filled in, or the letters NA
(not applicable) are written in. You are negotiating not just for yourself
but also for the buyer to whom you are going to assign the contract.
Believe us when we tell you the new buyer wants a really good
deal! How the new buyer gets a really good deal is when you write a re-
ally good contract that you have accepted from the property owner.
Your state may require special wording if you are purchasing a
homeowner™s equity in pre-foreclosure. We have already mentioned the
wording required by the State of California in the pre-foreclosure phase.
Remember, the pre-foreclosure phase lasts until the foreclosure sale oc-
curs, no matter what the state of the property is.

Deposit Receipt There is a deposit receipt section in every real estate
purchase contract. Sometimes this is referred to as the earnest money
deposit. This is where the buyer includes some type of valuable consid-
eration with the contract to show good faith to the seller. In other
words, the deposit the buyer attaches to the offer shows that he or she is
earnest about buying the property.
We recommend using a promissory note as your deposit instru-
ment for all your contracts for two reasons. First, by using a promissory
note, you protect your cash. Second, you don™t want 10, 15, or 20 per-
sonal checks out there accompanying all those offers you are writing
and presenting.
You only have to turn the promissory note into cash if your offer is
accepted and you are going to open an escrow. If you assign your pur-
chase contract before you open escrow, then the promissory note never
gets cashed.
ASSIGNING FORECLOSURES
170



The promissory note we recommend you use can be found in
Appendix C. It is in the format of a check. You may be able to find a
similar promissory note in the legal forms section of an office supply
store.
This is a much simpler version than the promissory note used by
lenders as evidence of the debt for a real estate loan. The main idea here
is to have something attached to the purchase contract that represents
consideration. This gives validity to your contract.


Option Contracts

A real estate option contract says you will buy a property within a cer-
tain time frame. You will commit funds in the form of an option fee or
option money to keep the option open for the agreed-upon period of
time.
Option contracts have a unique feature among all the different real
estate contracts. All contracts are originally bilateral. Consent in the
form of mutual agreement on both the seller™s part and the buyer™s part
is necessary for validity. Once the option has been agreed to, only the
buyer can exercise it.
The seller can™t back out of the deal if the buyer exercises the op-
tion. The optionee (buyer) can back out of the deal and not be sued for
specific performance. The optionor (seller) gets to keep the option fee
the optionee put up, but that™s all.
We use an option contract that is designed to be assigned by the
wording of the contract itself. See our book The New Path to Real Estate
Wealth: Earning Without Owning for a copy of this option contract. In
the event you are using an option contract that is not set up to be as-
signed, all you have to do is add the words “and/or assigns” to the buyer™s
name portion of the contract.


Leases, Lease Options, Mortgage Contracts, and Trust Deeds

Every type of real estate contract can be assigned. Leases, lease options,
mortgage contracts, and trust deeds can be assigned. Even an assignment
contract can be assigned.
Car dealers use assignments in their rebate programs. Assigning
contracts is everywhere in the business world.The point is that we want
you to feel comfortable assigning real estate contracts.
How to Assign a Contract 171



How to Assign a Contract
Assigning a contract begins when you write the initial offer. In the initial
offer you make to the owner, whether it is a purchase contract, an option
contract, a mortgage contract, or a trust deed, you use the terminology
and/or assigns in the contract.
You have a new name from this day forth. Think of it as if you are
being given a royal title. This title is much better than sir or madam. It
is even better than your royal highness. It is more powerful than your
majesty. From now on, as a real estate investor writing contracts, you
will be known as: Your Name and/or assigns.



Assignment Contract

We have shown you how to assign a real estate contract using the
and/or assigns name addition. What about an actual assignment con-
tract? We find that having an assignment contract available makes assign-
ing any contract a more viable option.
You still want and/or assigns in the buyer™s name section in what-
ever contract you are writing. By using the assignment contract in con-
junction with and/or assigns, you build an added layer of written
protection for yourself, the owner of the property, and the new buyer.
Assigning a contract is completely aboveboard and legal. When an
owner asks you what and/or assigns means, this is what you should say.

And/Or Assigns Script “_________________ (Owner™s Name), the
and/or assigns clause gives both you and us the added flexibility of
bringing in additional buyers or money partners to successfully close
our transaction. Would that be all right with you?”
In our experience, the owner™s answer has always been yes. Some-
times we have had to work with owners a while and educate them on
the benefits that this phrase has for them. All you are trying to do with
and/or assigns is create flexibility.
What do you do if the owner™s answer is no? You want to make sure
the owner understands what you are trying to do by having the ability to
assign your contract. Flexibility is the name of the game in making a real
estate deal work.
Flexibility on your part and the owner™s part is especially important
in a pre-foreclosure real estate deal. If the owner will not agree to give
ASSIGNING FORECLOSURES
172



you the flexibility you need by having and/or assigns in your contract,
let the owner know that you will not proceed to present the rest of the
contract.
You must stick to your guns on this point. And/or assigns is that
important to your real estate investing success. It is much harder to
come back to the negotiating table after you have already reached an
agreement with the owner. Have and/or assigns part of your agreement
from the beginning. See our book The New Path to Real Estate Wealth:
Earning Without Owning for a copy of our assignment contract.



Why Use an Assignment?
There are four main reasons for using an assignment. Assigning a pur-
chase contract makes you money without buying the property. Assign-
ing is the fastest way to flip a property. Assigning is the quickest way to
make money in real estate investing. Assigning avoids all the pitfalls of
real estate ownership.


Assigning Makes You Money without Buying Property

Assigning a real estate contract makes you money without buying prop-
erty. In a traditional real estate investment, you (the investor) make
money by finding a property, writing and having your offer accepted by
the seller, opening and successfully closing an escrow, fixing up the
property (if necessary), and then selling the property to a buyer. This is
what a timeline would look like for buying real estate to make money:



Buying Timeline for Buying Real Estate to Make Money

Find Write Offer Open Close Fix Sell
property offer accepted escrow escrow up property



Spend Spend Make
money money money
Why Use an Assignment? 173



We are being rather generous with the timeline. It is actually harder
than that. The reality of making money when you buy real estate the tra-
ditional way begins with that timeline. You really don™t make any money
until you do the following: advertise and show the property, receive and
accept an offer, and open and close an escrow. Then, and only then, do
you make money.


Selling Timeline for Buying Real Estate to Make Money

Advertise Show Receive Accept Open Close
property property offer offer escrow escrow



Spend Make
money money




Assigning Is the Fastest Way to Flip Property

Assigning a real estate contract is the fastest way to flip property. Let™s
face it. Paperwork is the name of the game in real estate investing. The
less paperwork involved in a real estate transaction, the better.
The less paperwork involved in a real estate transaction means the
less time it takes to complete the transaction. The less time involved on
your part and the real estate investor or retail buyer you are assigning
the contract to means a faster turnaround time for you.

Paperwork for Flipping without Escrow This is the paperwork in-
volved in the simplest flip we do. This is a no-money-down deal. There is
no escrow involved. We write a purchase contract and promissory note,
which we present to the property owner. The owner accepts our offer.
The owner gives us back our promissory note and a quitclaim deed to
transfer title to the property. This makes three distinct pieces of paper-
work for the buying side.
ASSIGNING FORECLOSURES
174



Flip Paperwork for Buying Property

1. Real Estate Purchase Contract

2. Promissory Note

3. Quitclaim Deed


We receive a purchase contract and a personal check as an earnest
money deposit from an investor we flip the property to. We give the real
estate investor a quitclaim deed.
The investor gives us a cashier™s check. We give the investor back
his or her personal check. Again, we don™t have an escrow between the
investor and us. We have an additional four distinct pieces of paperwork
on the selling side.

Flip Paperwork for Selling Side

1. Real Estate Purchase Contract

2. Personal Check

3. Quitclaim Deed

4. Cashier™s Check


Now we have a total of seven distinct pieces of paperwork in-
volved in this transaction: three pieces of paperwork on the buying side
and four pieces of paperwork on the selling side.

Paperwork for Assignment What if we just assigned our purchase
contract instead of doing a traditional flip where we actually owned
something? Would we speed up the flip by doing an assignment? How
much paperwork is involved if we assign our purchase contract?
We write a purchase contract and a promissory note, which we
present to the owner. The owner gives us back our promissory note. So
far everything is the same as doing a flip.
Why Use an Assignment? 175



Here is where the assignment transaction changes the paperwork.
The owner does not give us a quitclaim deed. The owner gives a quit-
claim deed to transfer title to the investor to whom we assign the pur-
chase contract. We now have one less quitclaim deed using the
assignment.
The next paperwork that changes with the assignment is that there
is no second purchase contract. We do not receive a purchase contract
from the investor. The investor takes over our position in the first pur-
chase contract.
The investor does not write a personal check to accompany his or
her offer to us. We receive a cashier™s check from the investor. The in-
vestor receives the quitclaim deed from the owner.


Assignment Paperwork

1. Real Estate Purchase Contract

2. Promissory Note

3. Quitclaim Deed

4. Cashier™s Check


The difference in the amount of paperwork for a flip and an assign-
ment is substantial. The flip paperwork includes seven items. The assign-
ment paperwork includes four items.
Our point is that assigning a contract is the fastest way to flip prop-
erty. Assigning a contract is flipping property! Flipping is good. When
you use assigning as a flipping tactic, you™ll streamline the paperwork
and reduce the time involved in the transaction. You™ll also make the
same amount of money on the deal.


Assigning Is the Quickest Way to Make Money

Assigning a real estate contract is the fastest way to make money in real
estate investing. When you have a Quick Cash strategy, time is definitely
of the essence.
ASSIGNING FORECLOSURES
176



The timeline for assigning contracts is substantially shorter than
the timeline for a traditional real estate investment. Even with flipping a
property, you can™t make money as quickly as when you assign con-
tracts.
As you can see, you can make money quicker and at more junctures
along the way than with a traditional real estate investment strategy of
buy the property, own the property, and sell the property.

Assigning Timeline

Find Write Offer Open Close Fix Sell
property offer accepted escrow escrow up property



Make Make Make Make
money money money money




Assigning Avoids the Pitfalls of Real Estate Ownership

Assigning a contract avoids all the pitfalls of real estate ownership. We
feel that assigning is the best strategy for the foreclosure arena. Assign-
ing foreclosure has multiple advantages to the traditional foreclosure in-
vestment strategy.
These advantages include no landlording, no monthly mortgage
payments, no property taxes, no hazard insurance, no maintenance costs,
no homeowner association dues, no lawsuits, no extensive record keep-
ing, and no income tax problems.



When to Assign a Contract
You can assign a real estate contact before, during, and after the closing.
Assigning a contract before the closing is the way we like to do our own
transactions. You tie up a property with an accepted contract and imme-
diately search for a buyer to whom to assign the contract.
When to Assign a Contract 177



Assigning a contract during the closing is our second-favorite way
we like to do our transactions. You tie up the property and assign the
contract before the closing takes place. The assignee takes your place in
the closing and then winds up closing the escrow.
Assigning after the closing is the final way we like to do our trans-
actions. Again, you tie up a property with an assignment clause in the
contract. If you don™t find a buyer before closing and wind up closing
the property yourself, you can quickly transfer your interest in the prop-
erty to another buyer after closing. Essentially, you are going to flip the
property using what we call an assignment deed.
Look at the timeline for assigning contracts. This will give you a
way to visualize the different times you can use an assignment. Anytime
you can assign a contract and make money is a good time to do an as-
signment.
The timeline is the same for assigning in the foreclosure arena. You
can assign your contract after you write the offer to buy the owner™s eq-
uity and before an escrow is opened.You can assign your contract to buy
the owner™s equity during the escrow. You can also assign your contract
to buy the owner™s equity after closing escrow.

Timeline for Assigning Contracts

Write offer Open escrow Close escrow



Assign before closing Assign during closing Assign after closing



Assignment before Closing

We don™t ever want to close an escrow. At least not in the traditional way
most real estate investors do. We want to “close” our deals in a different
way. In the normal course of events a real estate transaction goes like
this.
A real estate investor finds a potential property. The investor writes
an offer on the property and presents it to the owner. There is a negotia-
tion back and forth between the owner and the investor. There is an
agreement as to price and terms. Then the owner and the investor open
an escrow or go to a closing.
ASSIGNING FORECLOSURES
178



Once the escrow is complete, the escrow closes. The owner re-
ceives money or other valuable consideration from the investor. The in-
vestor receives the title to and possession of the property.

Close by Assigning We close our deals by assigning our owner-
accepted real estate contracts. By using an assignment of contract, we
use a one-page escrow instruction between us and the buyer to whom
we are assigning the contract. In the case of a foreclosure we have the
owner give a quitclaim deed to the new buyer.


Assignment during Closing

An assignment during closing is a very common occurrence in our real
estate investing. We have said that our favorite time period to do an as-
signment is before closing, but doing an assignment during closing runs
a close second.
The difference between assigning before closing or during closing
is whether you have formally opened escrow. An assignment before clos-
ing means you have written an offer and had it accepted but have not
opened escrow before you assign the contract. An assignment during
closing means you have done all of the above and opened an escrow.
The new buyer steps into your position as the buyer in the escrow.
The assignment fee can come to you through the escrow or outside the
escrow. Either way is fine.
An escrow will be opened for two reasons. If the owner requests
an escrow, an escrow will be opened. If the new buyer requests an es-
crow with the owner, an escrow will be opened.


Assignment after Closing

At first blush it might seem out of place for us to talk about assigning
after the closing. However, as we have taught you to do with every con-
tract you write, you used the clause and/or assigns when you wrote the
purchase contract.
What do you do if you decide to close the transaction yourself be-
cause it is such a good deal or you have not found a new buyer before
the closing date comes?
When to Assign a Contract 179



The fastest way to assign your interest in a property after you have
closed escrow is to quitclaim the property to a new buyer. Whatever in-
terest or title you have in the property is transferred to the buyer.
We are the only people who will tell you that you can assign a
piece of real estate after you have closed escrow. We call a quitclaim
deed an assignment deed. We use this deed when we want to quickly get
out of a property that we wind up owning.
Once you assimilate the assigning tactic into your foreclosure in-
vesting strategy, you will begin to find all kinds of contracts to assign.
Real estate contracts to assign will begin to find you. We look to assign
every foreclosure contract we write.
In the next chapter we will show you how to use real estate option
contracts to make Quick Cash in foreclosures. There are many advan-
tages to using an option contract in general. When you see the advan-
tages of using an option contract in the foreclosure arena, you are going
to get very excited. Of course, we will recommend you think about as-
signing your real estate option contract!
16
CHAPTER




Optioning Foreclosures
A
real estate option contract gives you the right to buy a property
without the obligation of having to buy it. In a normal purchase
contract, when the buyer and seller have a meeting of the minds
and sign the contract, the buyer must perform and go through with the
agreed-upon purchase. If the buyer does not perform based on the terms
of the contract, the seller can sue the buyer for specific performance.
An option contract allows the buyer and seller to have a meeting of
the minds, sign the option contract, and offer the buyer a time certain to
exercise the option. If the buyer does not exercise the option, the option
expires, and the buyer owes no further obligation to the seller.
Put another way, an option contract gives a potential buyer the
right to purchase a property before the specified future date in the con-
tract for the amount and under the terms and conditions written in the
contract.



Optionor/Optionee
In an option contract the parties to the contract are the optionor and the
optionee. The optionor gives real estate paperwork”the option con-
tract”to the optionee. In return the optionee gives money to the op-
tionor for granting the option. This is called the option fee. The seller is
the optionor. The buyer is the optionee.


183
OPTIONING FORECLOSURES
184



Option Fee

The option fee is the consideration given by the optionee to the op-
tionor.This is what satisfies the consideration requirement and makes an
option contract valid. As we have said, in return for the option fee, the
optionor gives the option to the optionee to purchase the property.
The option fee is usually a percentage of the agreed-upon purchase
price for the property. This percentage can range from as low as 0.5 per-
cent on a higher-priced property to as much as 10 percent on a lower-
priced property. For a $100 million purchase price the option fee may be
$500,000. On a $300,000 purchase price the option fee may be $30,000.
Option Fee Percentages
$100,000,000 Purchase Price $300,000
0.5% Option Percent 10%
$ 500,000 Option Fee $ 30,000

The option fee can be applied to the purchase price in the event
that the optionee exercises the option to purchase. Sometimes the op-
tion fee does not apply to the purchase price. This may happen when a
second or third option time period is negotiated. We always negotiate
the option fee applying to the purchase price. That way, if we exercise
the option, we already have past money credited to the deal.

Option Fee Applied to Purchase Price We made an offer on a five-
bedroom, four-bathroom, 5,000-square-foot, single-family home in a great
neighborhood. Our offer was in the form of an option contract. We
wanted a six-month option period because we were concerned about
which way the real estate market was headed.
Were we still in the prosperity phase of the real estate cycle? Or
were we headed into a recession? If the real estate market was still going
in an upward direction, we would buy the property. If the real estate
market was headed in a downward direction, we were not going to buy
the property.
We negotiated the option fee to be applied toward the purchase
price if we exercised the option. If we did not exercise the option, the
seller would keep the option fee. In this case the option fee was $2,500.
Although this was a very small percentage of the $300,000 purchase
price, the seller still accepted our contract.
Why Use an Option? 185



Option Fee
Purchase Price $300,000
Option Fee $ 2,500
Remaining Balance $297,500

Option Fee Not Applied to Purchase More frequently than you
might expect, the negotiated option fee does not apply to the purchase
price. Home builders often acquire finished lots for construction
through option contracts with a real estate developer.
In many cases the home builder will want to extend the option
past the original time period. Let™s say the first option period was for six
months. An extension could be needed by the home builder because the
builder was unprepared to start building.
To extend the option period for another six months, the developer
may require another option fee from the builder. Sometimes the second
option period may be extended to a third or even a fourth option. Al-
though the developer may have been willing to apply the first option fee
toward the purchase price of the lots, the developer may not be willing
to apply any of the other fees to the purchase price once an extension or
extensions are agreed to.




Why Use an Option?
When you use a real estate option contract, you can tie up a property
without revealing your interest in the property. It gives you the right to
buy the property without revealing your identity. Once you close on a
property, your name is revealed in the public record as the buyer of the
property. You can wait to exercise your option until you have put to-
gether all the pieces to your overall real estate plan.
Walt Disney assembled the property for Walt Disney World in
Florida using option contracts. He did not want to tip his hand to the
many different property owners from whom he needed to purchase
property. If remaining property owners knew he was buying property,
they could hold out for a higher price. Disney would have had to pay big
bucks once word got out that he wanted to put all the properties to-
gether for Walt Disney World.
OPTIONING FORECLOSURES
186



Ten Reasons to Use an Option Contract

1. Maintain Privacy If it was good enough for Walt Disney, it™s good
enough for us. As we have said, when you close escrow on a property,
the grant deed or warranty deed is recorded. This deed becomes part of
the public record. This means anyone in the world can get on the Inter-
net and find out who owns that property. Why? Because the deed names
the grantor, the seller, and the grantee, the buyer”that™s you.

2. Protect Your Cash Just like with the stock market, where you can
protect your cash by using a stock option, using a real estate option pro-
tects the amount of cash you have in any single investment. Rather than
buying property with 100 percent of your cash, by using an option you
control 100 percent of the property with only a small percentage of the
cash.

3. Limited Risk/High Return Using an option contract limits your
risk as an investor and gives you a high return. Leverage has always
been one of the benefits of real estate investing. If you think the invest-
ment return is good using the leverage available in a standard real estate
transaction, how good do you think the investment return is using an
option?
What would the return on our investment be if we used a $20,000
option to tie up a $200,000 property for one year? Let™s assume a 5 per-
cent appreciation on the value of the property.

Leverage
Option Fee (10%) $ 20,000
Purchase Price $200,000

Appreciation
Purchase Price $200,000
Annual Appreciation 5%
Value Increase $ 10,000

Return on Investment
Value Increase $10,000
Amount Invested $20,000
Investment Return 50%
Why Use an Option? 187



4. Control Property The name of the game in real estate investing is
control. Donald Trump controls more real estate than he owns. When
you have control of something, you are oftentimes in a better position
than when you own something. Our Quick Cash investment strategy is
based on controlling property, not owning property. We take this one
step further by controlling property with the paperwork of real estate.
By using an option contract you can control lots of property without
owning any of it.
Briefly, the advantages of controlling property without owning it
include Quick Cash, no landlording, no monthly mortgage payments, no
property taxes, no hazard insurance, no maintenance costs, no home-
owner association dues, no lawsuits, no extensive record keeping, and
no income tax problems.
The advantages of controlling property with an option contract are
the same as the advantages to flipping property. Except it is better with
the option contract because you can flip the contract rather than flip-
ping the property. In other words, with an option contract you control
the property without owning it.
Let™s add some numbers to this controlling-property-with-options
scenario. How much property could you control using $2.4 million as
option fees? Some of you can do the numbers in your head. $2.4 million
is 10 percent of what number? That™s right”$2.4 million is 10 percent of
$24 million. No wonder Donald Trump likes to use real estate options.

Leverage
Option Fee (10%) $ 2,400,000
Purchase Price $24,000,000

5. Buy Time By using an option contract you can buy time. You may
need time to bring in a money partner. You may need time to get your fi-
nancing together. You may need time to find a new buyer.
Now is a good time to talk about money partners. There is a ton of
money out there looking for a good real estate investment. Our experi-
ence as investors has been that finding the right property and/or the
right seller is much harder than finding a money partner.
If you™re the kind of person who has a lot of money to invest in real
estate, congratulations! We wish you good luck in finding a good deal.
Unless you find someone like us in your area, you will wind up paying
too much for your properties. Of course, you could always contact us.
We do business anywhere!
OPTIONING FORECLOSURES
188



As we told you throughout Chapter 14, buy the property first, then
get the financing. Most people think of a money partner as someone
who puts up the down payment or can pay all cash for the property.
Sometimes finding a money partner is finding someone who will put up
his or her credit or ability to get a real estate loan.
During the time we were writing this book, we found an ad for a
property that was advertised $1 million under market. We wrote an
offer on the property in the form of a real estate option contract. This is
a property we are thinking about keeping for ourselves.
We will use the option period to find a money partner who will
qualify for and obtain a loan to be used to purchase the property. We
plan on assigning the option to purchase the property if we decide we
are not going to keep the property.

6. Assemble Partners We use an option contract when we need to
assemble partners to go in on a real estate transaction. Sometimes these
partners are money partners. Sometimes they are developers. Some-
times they are home builders. Sometimes they are your real estate team
for your area.
You may need to find a real estate attorney. You may need an es-
crow company or closing agent. What about a title insurance company
or even a termite company? You may need to find a real estate agent.
Whatever the partnership needs are to put together a successful
transaction, by using a real estate option, you will give yourself the nec-
essary time to form the partnership(s).

7. Watch the Direction of the Market You can use an option to tie
up a property and watch the direction of the market. Everyone has
20/20 hindsight with regard to the turning points of the real estate mar-
ket. The trick is to have 20/20 foresight with regard to these turning
points. When things are going well, that is easy to recognize. When
things are going not so well, that is easy to recognize.
As we already noted, the economic cycle is one of expansion, pros-
perity, recession, and depression. Then it repeats itself. Real estate value
is greatly influenced by the economic cycle. Typically, real estate is said
to do well in the expansion and prosperity phases and poorly in the re-
cession and depression phases.

8. Handle Contingencies We use an option contract when we know
there are going to be contingencies that need to be handled as part of
How to Option 189



the purchase contract. A contingency in a contract is a condition that
has to be met, satisfied, or accomplished; otherwise, the whole deal can
be blown out of the water.
When you are buying the owner™s equity in a pre-foreclosure situa-
tion, you may have to handle several contingencies. Can you take over
the owner™s loan? Will you be able to get clear title? Can you find a buyer
to whom you can assign the purchase contract?
We recommend you consider using an option contract to purchase
the owner™s equity. After you have handled all the contingencies, then
you exercise your option and purchase the equity.

9. Procure Financing By using an option contract you can take your
time procuring the best-available financing for your real estate deal. We
have seen interest rates for real estate loans go from historical highs in
the early 1980s to historical lows in the early 2000s.
By doing a 6-month, 12-month, 18-month, or even longer option pe-
riod, you should be able to find an attractive interest rate to finance the
transaction. If not, then you do not have to exercise your option.

10. Income Tax Planning When you use an option contract, you can
get certain income tax advantages as an investor.You may want to use an
option contract if you are involved in an Internal Revenue Code section
1031 tax-deferred exchange.
When doing a 1031 exchange, the process sometimes becomes a
chicken-and-egg debate. Which comes first? Do you sell the property
you have and then look for a property to buy? Or do you find a property
to buy and then sell the property you have?
We recommend you buy the property you want to exchange into
using an option contract. When you find a buyer for the property you are
exchanging out of, then you exercise your option and buy the property
you want to complete the exchange.




How to Option
Optioning begins with the option contract. You can take a standard pur-
chase contract and turn it into an option contract. Or you can use an op-
tion contract from the beginning.
OPTIONING FORECLOSURES
190



A real estate option contract is similar to a grant deed or warranty
deed in that only the seller needs to sign the document to make it valid.
Just like in a grant deed or warranty deed, the seller will be granting
something in an option contract.
In a grant deed or warranty deed the seller is granting title or own-
ership in the property to the buyer. In an option contract the seller
grants the right for the buyer to buy the property during the option pe-
riod for a price agreed on in the contract.


Purchase Contracts

You can start with a purchase contract and turn it into an option con-
tract. To do this, go to the supplements section. This is the section in the
purchase contract that states that the attached documents are incorpo-
rated into the purchase contract. Add the real estate option contract to
this section. Attach the option contract to the purchase contract.
The two contracts together become one contract when the option
is exercised. You can find a copy of the option contract we use in our
book The New Path to Real Estate Wealth: Earning Without Owning.


Option Contracts

We recommend using an option contract from the beginning of the
transaction. That way both you and the seller know you are interested in
putting together an option at the outset of negotiations.

Memorandum of Option A memorandum of option can be
recorded to protect your optionee interest in the property. Your name as
the optionee does not have to appear on the memorandum of option.
If the optionor/seller does try to sell the property to another buyer
during your option period, a title company doing a title search for the
other buyer will uncover the recorded memorandum of option. This will
prevent the seller from transferring clear title, and the deal with the
other buyer will fall apart.

Assigning an Option Contract We use an option contract that is al-
ready set up to be assigned by the wording in the contract itself. In the
event you are using an option contract that is not set up to be assigned,
When to Option 191



all you have to do is add the words and/or assigns to the buyer™s name
portion of the contract.

Lease Option Contract A lease option contract can be known by sev-
eral other names. It may be called a lease with purchase option. It may be
called a residential lease with option to purchase. No matter what it is
called, its purpose is to combine a lease with an option to purchase.
In a standard lease the lessor, the property owner, gives a lease to
the lessee, the tenant. In return the lessee pays the lessor rent. In a stan-
dard option the optionor, the property owner, gives an option the op-
tionee, a potential buyer. In return the optionee pays the optionor an
option fee.
In a lease option the lessor/optionor, the property owner, gives a
lease and an option to the lessee/optionee, the tenant. In return the les-
see/optionee pays the lessor/optionor rent. There is no option fee in ad-
dition to the rent.
The lease may require a deposit to be applied to a security deposit,
a key deposit, a cleaning deposit, last month™s rent, and/or whatever else
the landlord wants. These deposits are not an option fee.



When to Option
As we have already said, by using a real estate option contract you can
control property without buying it. In foreclosure investing timing is ev-
erything. You need to be in the right place at the right time. You also
have to use the right investing tools at the right time.


Lawsuits, Creditors, Divorce, and IRS Liens

Aside from not tipping off surrounding property owners and potential
competition, there are four more important situations when it may be in
your best interest to use an option contract to protect your privacy.
These include being involved in a lawsuit, being hounded by creditors,
going through a divorce, and having the IRS on your case.

Lawsuits When you own real estate, you are a target. Attorneys file
lawsuits against people they think have assets worth going after.
OPTIONING FORECLOSURES
192



Attorneys take on clients for a percentage of the money the attorney can
win in court.
How many of you have heard the expression “you can™t get blood
out of a turnip”? When an attorney is searching the public records to
find your real estate assets, you want them to think you are a turnip.

Creditors When creditors come after you, what do they come after?
They may not be able to get your home, but they certainly can come
after your real estate investments. What real estate investments?

Divorce If your ex-spouse is trying to get money out of you, the first
place his or her attorney will look is to your real estate investments.
Again, what real estate investments?

IRS Liens Don™t even get us started on the IRS or your state taxing au-
thority. If you don™t pay the taxing authority what they think you owe
them, they will put tax liens on your real estate assets. When you go to
sell these assets, the tax lien will show up against the title to your prop-
erty.
So if you are involved in one of these situations, we recommend
using options. You can be a real estate investor who controls property
without owning it. We are firm believers in the right to privacy in busi-
ness affairs. Make using options part of your privacy protection.



Options and Foreclosure
We are going to conclude this chapter on optioning foreclosures with
examples of using an option contract in the foreclosure arena. You may
want to use an option to tie up the owner™s equity in pre-foreclosure.
You may want to use an option to help an owner get their hands on
some cash in return for your having an equity interest in the property.
Let™s take a look.


Tie Up the Owner™s Equity

In Chapter 8 we talked about buying the owner™s equity. We are going to
bring back that situation and show you how to buy the owner™s equity
Options and Foreclosure 193



with an option contract. You are really tying up the owner™s equity with
the option. You won™t exercise your option and buy the equity until you
have another buyer to flip your option contract to. Remember the fore-
closure situation. We will bring back just enough of the elements of your
offer to buy the owner™s equity in Chapter 8 so we can contrast this with
optioning the owner™s equity.
Foreclosure Situation
Foreclosure Value $185,000
Mortgage $150,000
Owner™s E'quity $ 35,000

Your Offer to Buy the Equity Instead of the owner™s equity being
$60,000 in the non-foreclosure situation (when the value was $200,000
and the mortgage was $140,000), the owner™s equity is $35,000 in the
foreclosure situation. The owner has suffered a $25,000 loss in equity.
You are going to offer the owner $10,000 for the $35,000 equity. If
you keep the property, you are going to have to pay the lender the
$10,000 in back payments to stop the foreclosure. Now you will have
$20,000 in the property. If you have to make repairs and do fix up, you
may have $3,000 to $5,000 more involved.
Then you add in mortgage payments, property tax payments, and
insurance payments. Resale costs could add another $5,000 to $10,000
or more to your investment. When you add this all up, your total is
$30,000 to $35,000!
Your Offer
Cash to Owner $10,000
Cash to Lender $10,000
Repairs and Fix Up $ 5,000
Carrying and Resale Costs $10,000
Total Invested $35,000

Your Offer to Option the Equity Put the same contract together
with the owner to buy the owner™s equity. But make it an option to buy
his or her equity. Rather than giving the owner $10,000 up front, give
the owner a $1,000 option fee, which applies to the $10,000 if you ex-
ercise the option.
You now have protected your cash to the tune of $9,000. You have
tied up the property. You have bought time to find another investor or
OPTIONING FORECLOSURES
194



buyer to flip your option to. The way we recommend you flip your op-
tion is by assigning it to the next buyer.
If you do not find a buyer to assign your option to, you have two
choices.You can walk away from the deal and be out your $1,000 option
fee. And the owner cannot sue you for specific performance.
Or you can exercise the option yourself and fix the property. Then
you can sell the property to a retail buyer. Either way, by using the op-
tion, you can make money through maintaining control of the property.
Making Money with an Option
Retail Buyer Wholesale Buyer
Sales Price: $200,000 Flip Fee: $10,000
Mortgage: $140,000 Mortgage: 0
Gross Profit: $ 60,000 Gross Profit: $10,000
Invested Money: $ 35,000 Invested Money: 0
Net Profit: $ 25,000 Net Profit: $10,000


Buy-Back Option

We call this use of an option “having your cake and eating it, too.” If your
first offer to the owner in pre-foreclosure to buy their equity meets with
a rejection, try using the buy-back option technique.
Normally, the buy-back option is used in any situation in which
someone must take the risk of sacrificing part of their equity and future
appreciation in exchange for getting their hands on some immediate
cash. This exactly describes the owner in pre-foreclosure.
Using a buy-back option is similar to doing an equity share with the
owners. Instead of the owners giving you an option, you give the own-
ers an option! You present the same offer to buy the owners™ equity that
they previously rejected.
However, now you add the feature that you will give them a buy-
back option if they will accept your offer. Let™s put some numbers to this
so you can see the beauty of the buy-back option.
Using the previous example, you give the owners the option to buy
back the property within six months for $200,000. It will be as if you
fixed the property up, held on to it for six months, and sold it to a retail
buyer.
Options and Foreclosure 195



Making Money with a Back Option
Sales Price $200,000
Mortgage $140,000
Gross Profit $ 60,000
Invested Money $ 35,000
Net Profit $ 25,000

If you decide to flip the property to another investor, the owners
will still have the right to exercise the buy-back option. The other in-
vestor will then be selling the property for a retail price.
In the next chapter we will show you how to buy foreclosed prop-
erty from the lender. These are properties that have moved from the
lender™s loan portfolio to the lender™s property portfolio. They are now
real estate“owned”REOs.
17
CHAPTER




Buying from the Lender
W
hat about buying from the lender after the foreclosure sale?
Usually, the lender has the biggest financial stake in the prop-
erty. After all, they made an 80, 90, 95, 97, or even 100 percent
loan to the borrower to buy the property to begin with. Can you get a
better deal from the lender once the property goes out of the lender™s
loan portfolio and into the lender™s property portfolio? We think the an-
swer is yes.
Lenders™ property portfolios are called real estate“owned port-
folios, or REOs for short. As we have said, with VA REOs, some investors
call them repos (short for repossessions). Real estate lenders are in the
business of making real estate loans. Real estate lenders are not in the
business of owning real estate. While lenders want to sell their REOs for
as much as possible, they also want to move these REO properties as
quickly as possible.



The REO Department
Our recommendation to you is to work with several lenders™ REO de-
partments and see what happens. You may find a niche working with
one contact in one lender™s REO department. Once you can put together
your first deal, you have a track record with that lender.



199
BUYING FROM THE LENDER
200



Your contact person will then start calling you with other deals
perhaps before they become open to the public. We say it this way: Con-
tacts with people create opportunities. Contacts create contracts.


Price

There are only two major concerns for you as a real estate investor in a
real estate deal. The first major concern is the price you can get a prop-
erty for after all is said and done. What is the rock-bottom price the
owner will accept?
What about the price when you are dealing with REOs? We have al-
ready said that we think you can get a better deal from the lender after
the foreclosure sale if the property doesn™t sell. The lender is now the
owner of the property. Getting rid of the property is now the lender™s
number-one priority.


Terms

The second major concern is the terms you can get a property for after
all is said and done. Usually, if sellers get their price, the buyers get their
terms. If buyers get their price, sellers get their terms.
For example, we will pay full price to a seller if we get our terms.
What are our terms? We want to make no down payment. We want the
seller to carry 100 percent of the financing. We want to make no
monthly payments on the seller financing. If we get our price, we will
give the sellers their terms. If the seller accepts our wholesale price, we
will pay cash.
What about the terms when you are dealing with REOs? Ah, there is
the rub. Are you going to have to pay cash? Are you going to have to
qualify for a new loan? Are you going to have a combination of cash and
new financing? Will the lender selling you the REO make you a great deal
on the interest rate if you get a loan from that lender?
The REO Department 201



Pre-Foreclosure

We are going to take you through one of our deals. This deal started out
in pre-foreclosure. We found a property listed with a broker in our target
area. We called on the sign and spoke to the listing agent. She informed
us that the owners were very motivated. We liked hearing that.
They were two months behind in their loan payments. The owners
were in pre-foreclosure. The agent then told us a separation had oc-
curred between the husband and wife. A divorce was imminent. We
liked hearing that even better.
We began working with the owners. We pursued the property
through the posting of the notice of default. We were unable to make a
deal. We went to the foreclosure sale on the courthouse steps.
We felt the price at which the lender made the credit bid was too
high. So did the other investors at the foreclosure sale. No one else bid.
The lender had no alternative but to take the property back.
While real estate lenders are professional sellers, sometimes their
own bureaucracy gets in the way of them making an effective deal. We
did wind up finally making a deal with the lender after the property be-
came an REO. But we are getting ahead of ourselves. First things first.

Working with the Owner The first thing we get from the owner in
pre-foreclosure is an owner authorization to lender for release of bor-
rower information. We will show you the actual authorization form we
use. We will provide blank spaces rather than names in this and the
other forms so you can use the forms in your own deals.
We want to speak to the lender directly. This establishes a contact
between the lender and us. Usually there is one person in the REO de-
partment who is assigned to a particular property. If not, we recommend
you ask to speak with the same person every time. We didn™t realize how
important this contact would be until much later.
BUYING FROM THE LENDER
202



OWNER AUTHORIZATION TO LENDER FOR RELEASE OF
BORROWER INFORMATION


Date: ___________

To Whom It May Concern:

I (We), _______________ (Owner™s Name(s)) do authorize the re-

lease of my (our) loan information, loan # ______ for the mutual ben-

efit of all parties to ______________ (Investor) and/or ____________

(Investor).

Sincerely,

_________________ (Borrower™s Name(s)) __________________


The second thing we get from the owner in pre-foreclosure is an
owner authorization to investor for property access. We want to be
able to get into the property without having to wait for the agent or
owner to meet us. In this case, as with many foreclosures, the owners
had moved out of the property.


OWNER AUTHORIZATION TO INVESTOR FOR
PROPERTY ACCESS


Date: ___________

To Whom It May Concern:

I (We), ________________________________ (Owner™s Name(s))

do authorize the ___________________________ (Investor) and/or
The REO Department 203



____________________________ (Investor) to access my (our)

property at ____________________________.

I (We) have given this authorization to ____________________ so

they may show prospective partners and/or investors the property in

order to complete funding of our sale.

I (We) have given ____________________ special instructions on

how to gain entrance to the property. This authorization for access to

my (our) property to _____________________ and/or __________

begins today and extends through _________ (Date).

Signed

____________________ (Owner)

____________________ (Owner)


We next present the owner a letter of intent to purchase. We are
getting our initial agreement with the owner down on paper. This gives
us a written basis of understanding on how the deal will proceed. Again,
we give you our actual letter of intent to purchase from this deal.
BUYING FROM THE LENDER
204



LETTER OF INTENT TO PURCHASE
CONFIDENTIAL & PRIVILEGED



Date: ___________

This is a letter of intent for seller to sell and buyer to buy from seller

______________________ (property address) for ______________

(net dollars) to seller. This intent to purchase is contingent upon buyer

and buyer™s attorney approval of the results of: 1. Conversation with

seller™s lender(s). 2. Conversation with listing broker. 3. Preliminary

Title Report.

Closing is to be expedited upon removal of all above contingencies

and attorney approval of release of funds for funding this transaction

will occur on the next business day. Buyer™s attorney is ___________.

Possession of property is to be given to buyer immediately upon ac-

ceptance by seller of this letter of intent to purchase. Buyer retains first

right of refusal in the event seller receives and accepts any other offers.

If any of the above contingencies or approvals cannot be fulfilled to the

satisfaction of the buyer and buyer™s attorney, buyer will terminate this in-

tent to purchase the next business day upon dissatisfaction or disap-

proval. Possession will then be immediately released back to the seller.
The REO Department 205



Seller accepts costs that buyer is already incurring as consideration

for this agreement. This agreement may be assigned by buyer to ex-

pedite closing.

_________________________ ______________________
(Buyer) (Seller)

_________________________ ______________________
(Buyer) (Seller)



Working with the Lender When we contact the lender in the pre-
foreclosure phase, we are looking for two things. First, we want to estab-
lish a contact with someone working for the lender. Second, we want
something in writing from the lender so we know where we stand money-
wise with what the lender thinks is owed. This is called a payoff quote
schedule.

Payoff Quote Schedule
Principal $81,057.19
Interest $ 3,720.37
Late Charges $ 828.63
Returned Check Fee $ 100.00
Foreclosure Expense $ 1,000.00
Attorney Fee and Collection Cost $ 855.00
Legal Fee $ 200.00
Foreclosure Cost $ 502.30
Foreclosure Fee $ 549.29
Property Valuation Fee $ 234.00
Property Inspection Fee $ 7.75
Payoff Quote Fee $ 10.00
Escrow Advance $ 3,944.60
Total Amount Due $92,989.13

Is this an incredible list or what? Why is there a foreclosure expense
for $1,000, a foreclosure cost for $502.30, and a foreclosure fee for
BUYING FROM THE LENDER
206



$549.29? What are the differences between a foreclosure expense, a
foreclosure cost, and a foreclosure fee? Only the lender knows. We think
it is padding the bill.
In the nickel-and-dime category, how about the property inspec-
tion fee for $7.75 and the payoff quote fee for $10? Someone drove past
the property, and the bank charged a fee. And did you catch the returned
check fee for $100? Guess how many returned checks we are talking
about. Two!
What is important about the payoff quote schedule is that it be-
comes the basis for the lender™s credit bid at the foreclosure sale. In fact
this is very close to the actual credit bid this lender made at the fore-
closure sale.
Try as we might, we could not get this lender to budge in negotia-

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