Hello!
I am in the process of creating a property strategy with options. I just need to educate myself a lot more on the little details!
I'm very interested in any option knowlegde you can pass on, but in particular the process of closing the deal once the option approached expiry.
I know I can excersise the call option which will result in me purchasing the optioned property. What I want to know is how I can go about selling the option?
Is it viable/allowable to put the property on the market (with the vendors consent, of course!), and at settlement simulatneously excersise the option and disburse the funds as appropriate?
What I'm hoping to achieve is to bypass actually purchasing the property but pocket the profits from the option, basically to prevent the double handling involved in excersising then selling.
Otherwise, how do you go about on-selling an actual option? Where do you find buyers?
Thanks in advance, I appreciate any knowledge you can pass on!
Jess
You just sell the property. Find a buyer and then when found you assign them the option. The new person then settles on the contract to buy the property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
That's what I hoped to hear!
Are there any challenges in selling a property that you don't hold title for in the traditional way? ie through an agent? Are most agents willing to do this?
I am not sure., You would have to make sure you get the owners permission to onsell the option with terms for this in the agreement. You could also include terms to cover being able to list it with an agent. Agents would be most concerned with their potential commission and would be unlikely to help out unless they understood the legal owner had given their approval to sell.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Jess
With regard to the selling process, i'd take Terry's advice.
However, even with this done, with "standard" call option wording, the strike price of the Option remains visible to the person you assign the Option to. We overcame this challenge by including a "Higher Price" clause into the Option. This clause makes the original strike price invisible to the new purchaser. It also allows your profit to be converted into a mortgage (usually 2nd) on the property, if you wish.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
If they've assigned you an option over their property, and the legalities of it are intact, then you would simply sell the property in the normal manner. Using an appropriate information memorandum detailing all the relevant material and research around the property is a must. In my opinion anyway..
The issue you may have is whether you've improved the property in any way ( DA/BA etc) or are simply counting on capital growth for profit, or if your'e trying to sell the sizzle without the sausage. All of this will impact on what you can reasonably ask for the assignment of the option. So will the length of time remaining on the option, obviously longer is better. All things being equal when you were granted the option by the vendor it should have been made clear that your intent was to onsell or sell the property, or purchase it, depending upon the conditions you included in the option document and if it was Call/Put etc.
Don't leave it too late, as you have to also factor in due dilligence for the purchasor etc.
Thanks so much for your responses!
The way I intend it to work is that I would add value to the property before onselling, so there 'should' be considerable gain on the option. I'm very familiar with share/equity options, and can see so much potential with the equivalent property options but I need to know every detail about the ways to close.
I'm focusing on residential property, so my plan (as it stands in baby-idea form) is basically to get an option, improve the property and sell the option / property for a profit (when it suits – I will also be using this strategy to purchase). Ideally, this should allow me to renovate someone elses property without the cost of actually buying it first, then on-sell, also without owning the property. Effectively becoming the middleman that facilitates the reno and sale of the property. The difference between the option strike and the sales price less costs would be mine. In theory.
Can you see any blindingly obvious flaws in this? Particularly legal flaws?
I recall reading recently about options and i think the artical mentioned that a portion of stamp duty
is payable by the option holder if they onsell the option. Not 100 percent sure, but check it out.
May vary state to state.
Cheers.I've heard that in some states Stamp Duty is payable, but not others. Thanks for your response!
Depends on the State laws I think with Stamp Duty, but in theory, yes, the difference between the buy price and the sell price, less expenses, is yours. Check the tax implications too. Some states look at 'control' vs 'ownership' in that area.
Certainly stamp duty will vary from state to state.
I think Vic has introduced new rules which would mean stamp duty is payable on the option at the full rate as it you settled on the property – but check this.
in NSW, last time I checked, stamp duty was payable based on the option fee, rather than the value of the property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
That's interesting about NSW – in my plan the option fee would be literally $1.00, so that opens up another new area to look into.
Where is the best place to look / contact to keep on top of these regulations?
The best place to look is the actual legilsation.
In NSW this would be the Duties Act 1997. http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/
an option to purchase land in nsw is classed as dutiable property under s11.
there are special rules for put and call options under s107.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Not saying it 'can't' be done.. but getting an option fee of $1 is not the norm. Yes some people can still do it, depends on the size of the deal. Single resi option and flip more likelyl than a 20 acre lot for subdivision.. be prepared for that. Vendors are a bit more educated these days..
Thanks Terry and Matt,
Re – the norm – my baby-strategy isn't exactly the 'norm', either….
There will be enough incentive to the owner that they will be happy to give me a $1 option, if it all works out! Still lots of formulating and work to do though – I appreciate your advice guys. Thanks heaps!
Hi Guys,
With a call option, do u all use a family trust to set up the transaction – with payment made to the trustee of the trust?
Regards
Hi dada
That's what we do.
Land Tax can be a bit of a challenge for a Family Discretionary Trust but as you would only hold the Option, there are no Land Tax implications at this point, i.e. until the politicians think it up
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Hi Paul/Terryw,
back the earlier statement – just want to get the flow of the transaction right.
“Find a buyer and then when found you assign them the option”
so say vendor wants $100k
Buyer buys it for $120KSo I simply use the ‘Assignment’ (not the nomination clause) clause to assign the option for $10K or maybe $20K (as a form of deposit?), and on the day of settlement, they will settle on the property $110K ($120K-$10K) with a cheque made payable to the vendor.
$100k to the vendor and remaining $10K passed on to my account . Is that right?
Is there any difference between the ‘assignment’ or ‘Nomination’ clause … or are there similar?
Regards
Daba
what does your option agreement say? And what did your lawyer say? The wording of your agreement will tell you what you have to do.
I think assignment means the transferring of the rights associated with the agreement. Nomination means to appoint.
If you assign an option agreement you would probably receive the fee upfront. The assignee would then nominate themselves on the contract of sale of land.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry's correct. If you assign the option to another party, they will pay you a fee for that assignment to be completed, which would ordinarily be the difference between the vendor's strike price, and your profit margin. They would pay you that up front, and then on option expiry (or whenever they choose to complete the transaction) they then settle with the vendor.
As Terry suggests, look at your option document, ask your solicitor and make no assumptions.
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