how to make an options?

fullout

We use Put & Call Options on all of our development site acquisitions.

Whilst over the year we now prepare our own i agree with Mel if in doubt get legal advice.

Last think you want is to find that the Agreement becomes the subject of litigiation and you loose any potential profit as your Option document is not legally binding.

Cheers Richard
[email protected]
http://www.fhog.com.au

There is no such thing as a problem.
Just a solution waiting to be found

Simon

HQ is based in Milton.

Cheers Richard
[email protected]
http://www.fhog.com.au

There is no such thing as a problem.
Just a solution waiting to be found

quote:

---

We use Put & Call Options on all of our development site acquisitions.

---

Hello Richard,

Call options on real estate is easy, I can understand that.

Put options on real estate has me stumped[?]

In what situation would one use put options?

Thanks
Wayne

http://www.tradingforaliving.info

Thanks for that Richard,

I’m still a little lost as to why party 2 would grant a put option.

If party two does not exersize the call, then presumably they do not want to proceed with the purchase. But alas, party one exersizes the put and party 2 ends up with property anyway.

questions: Is the put option only exersizable at expiry?

Is the call option exersizable anytime?

If so that clears it up for me.

Thinking aloud here… So if party two does not want to proceed, but neglects to rescind the contract prior to expiry, then party one exersizes at that point.

Is that correct?

Thanks
Wayne

http://www.tradingforaliving.info

Thanks Richard[]

http://www.tradingforaliving.info

Wayne, an example of a Put option could be:

My house is worth $400K. I offer a Put option contract to you at $390K in one year. I tell you that if I do not exercise, I will pay you $xK for your troubles.

I am unsure as to whether or not I want to sell it, and will make a decision at the time. You would like to buy, and don’t believe the price will go down (same theory as shares). If I exercise you buy, if I don’t, you make $xK. If the property has fallen in value, you still have to buy and somehow fund it.

When there is a put and call option, I believe it is almost identical to an exchanged contract, except that it’s not an exchanged contract. Stamp duty is not yet payable, and if I was the buyer I could onsell the option for a profit. I am happy to grant a Put in this case because I want to buy, but don’t want to pay stamp duty yet (especially useful if off the plan purchase), and/or may want to sell the property before settlement (whereas exchanged contract would cause double stamp duty).

Cheers
Mel

fullout, that’s where you have to educate your vendor (or buyer if you are the one selling the option) of the benefits. You’re right, a lot of people don’t understand it, and it won’t benefit everybody.

It’s a matter of finding something that is a win/win for both parties. For example, you see a property that has a tenant, and has been for sale for 6 months (a long time in some markets). The seller obviously isn’t in that much of a hurry. They have a price of $100K. You have done your research, and believe that in two years, the place will grow by 20% or $20K, and/or you know that you could add value by subdividing, or getting a DA approved etc.

You offer the vendor an option for you to purchase at $110K in 18 months. For this you give a non refundable option fee – as low as possible, but as high as it needs to be if you are certain you will want to buy.

While you have the option, you sit and wait for the rise if that’s the plan, or if you can value add, you start the process with the council (this could take up to 2 years). When the option time ends, you either buy (and make the profit you have managed either of the above ways), or you don’t, and lose your initial fee.

The seller is happy, cos they get a higher price than originally advertised for. If you don’t take it up, then they keep your deposit, and can readvertise to sell if they want.

If it’s a rental option, the seller has had income in that period which would meet his requirements for his loan/living expenses etc., which he may not have had if the place was vacant.

Cheers
Mel

I think you can get title deeds from the council? For a fee of course – althoug some might be free. I have not done this, so I am going on vague recollection of what others have posted regarding this topic.

If you do a quick search you might be able to find the posts.

As for the negotiations, I think initially a letter, but face to face would have to be the best bet – as long as you know what you are offering, and have a good presentation/manner.

Cheers
Mel

Sorry, that should probably read ‘name on title’ rather than ‘title deeds’

fullout, if you have an option to buy a house at $120K, you do not have to have and/or nominee at all to onsell that property at $140K. You are merely onselling your option.

If you don’t want to pay stamp duty, you either have to get your buyer to pay you the $20K extra for the option, or you need to somehow convince the seller to sell to the other guy for $140K and give you $20K (could happen, but need to convince the seller why they should).

Otherwise, you do a simultaneous settlement, where you pay your stamp duty, but walk away with your profit without having to explain to anybody what you were going to make beforehand.

Cheers
Mel