Robin - Recording a Memorandum of Option on the subject property won't do much to protect you in the event that the seller/Optionor reneges on your agreement. 

In fact, I've have title officers tell me that they consider such a recorded Memorandum to be a non-issue for them as it does not, in their opinion, affect the current title condition, as it refers to a potential future purchase for which they would not have to defend in the event of a lawsuit.

Also, should you with to enforce your contract, your only choices are mitigation or litigation.  Suing a seller/optionor for specific performance is expensive and time consuming.  It's just not practical for small deals, nor is it desirable for attorneys to nit-pick your documentation after-the-fact.

Here's what I do: 

1. I enter into an agreement for an Option to Purchase the equity in a property and both Seller/Optionor

2. We both sign an Option Agreement that refers to the Equity Purchase Agreement.

3. We both execute a Memorandum of Agreement that is recorded, however it's mostly for notification purposes

4. I have Seller/Optionor sign a Performance Trust Deed that's recorded on the subject property.   Because it secures the performance of a contract, there is no $ amount; it merely references the option agreement).  It's quite possible to foreclose on such a document and it would be highly unlikely that the Seller/Optionor would be able to sell or further encumber the subject property without the other buyer seeing your recorded P-TD and running away...fast.

5. Or, you could create a title holding trust, transfer title to the THT, have a 3rd party trustee, and option the beneficial interest in the trust.  You'd have a signed, notarized Assignment of Beneficial Interest from the Seller/Optionor in the Trustee's file and would easily be able to acquire your interest without having to foreclose because you already have control of the title.

The last option contract I did was canceled.  I'm wondering what I could have done differently or if an option was the best thing in this situation.

The scenario:  free and clear hillside house with five flights of stairs owned by a 77 year old woman who felt she was getting too old to climb all the stairs.  They wanted to cash out and were not willing to carry any paper.

This 1922 built hillside property had retaining wall issues and probably foundation issues.  I didn't think it was a good property for me to own.  I wasn't sure if I could sell the house for $100,000 or $5,000.  Instead we signed a 45 day option agreement that a strike price of $65,000 and I paid them $20 for the option.

After about 20+ hours of work and lining up a qualified buyer I tried to get the buyer in to see the house.  Instead of a showing, the seller decided they no longer wanted to sell the house.  The son wanted the house (aka the son wanted an early inheritance).  I agreed to let them out of the option and asked to be compensated $2000 for my trouble.  The seller has agreed to pay me the $2000 stating that it was more than fair. 

In order to make an option enforceable I believe I could have had them sign a memorandum of option.  I could have recorded the document, clouded their title and if title did not overlook the memorandum they would have to settle up with me before they were able to sell.  I also could have recorded a performance deed of trust which would be a much stronger position with a title company.  Even if I had done all that I wouldn't be interested in pushing a 77 year old woman into doing something she didn't want to do.

Another investor said cancellation of options are a big problem and I would have been better off to have paid them five grand now, get the deed and pay them the balance in 90 days.  Again, I didn't know if I would even hit my option strike price and it was not a property I wanted to be stuck with.

Another investor recently said 50% of his options fall through (I should have asked him 50% of how many).  He uses a clause in his option contract about getting compensated should the seller not sell the property.  He would not share his verbiage however.

I suppose I could have entered into a purchase and sale contract and then substituted a buyer in escrow.  I just wasn't sure I could sell that dang house and how many people I would have to parade through there while making up excuses.

I've only ever done 2 options and I'm wondering if this high fall through rate is experienced by others (I could say my fall through rate is 50% too).

Sorry for the long post but I’m Just wanting to open up dialogue on options since I don't have much experience with them and I really don't know of others using them much.  Maybe I shouldn't be either?

The question:   What else could have been done instead of an option, P & S contract, or giving them a large chunk of money (to me $5K is a large chunk)?  What other kind of contract should/could I have used.  Maybe an option is best for a unique property like that one?

Thanks Robin

Ken,

thanks for your comments. That state is not very friendly towards lease-options, so it's not something i'd consider. i'd also cut down on the number of potential buyers, as the risk for them to spend money on the house and then having problems buying would deter a lot. The houses are so cheap, that  i feel that the risk is so small.  i sold a lot for 30K in that same neighborhood 5/6 months ago. The tax appraisals on these homes are all +80K, so if a house got destroyed for some reason, then the shell could be donated to the fire dept. after a year for a 'controlled take down' and the structure value used as a tax deduction, which is worth more than the purchase price was.

I guess I'll keep playing with the ideas. ;-)

I think I would Lease-Option these houses as handy-man specials for a period of 1 to 2 years if the State these houses are in allow it.  As part of the option consideration in addition to the $500 you are charging, require them to fix up the house before the option is exercised.  Their rent should match the mortgage payments you would have required at $30,000 @ 10% interest, insurance and property taxes.

You would have the advantage of lower income taxes due to long term capital gains and if the option is exercised after renting it out for over a year, the house may be in good enough shape after their fix up, to qualify for FHA or bank financing.  If you report their payments to the credit bureau and they have also paid the insurance and taxes timely, this will help build their credit towards getting a purchase money mortgage.  You may still need to offer financing for the difference of the LTV funds from the purchase money mortgage and your selling price.

You can always offer 100% owner financing, but it's good to get paid off whenever you can.

Ken,

no, they would need work. I'm also open to an extension after 3 years and increase the price then to 40K and after 5 years to 50K. I do realize that people won't have as much of an incentive to stay in at as someone that has a large down, but I'm also thinking that the prices are so low, that the risk is small. It's lower than rents in the area and I won't have to deal with code enforcement, but they would have to. They'd pay for taxes etc. What's the worst that can happen? I'd take the property back. It already needs work, so the chances that it'll be in worse condition than what I bought is slim.

Only asking $500 down payment with monthly payments of less than rent, will help sell your properties quickly, but your buyer's will not have very much skin in the game. 

Does the current condition of these homes qualify for FHA Loans, if your buyers don't do any fixup during the couple of years before the balloon kicks in?

I'm planning to bring this up at our REI meeting on thursday since i'm looking for a money partner. I know that Rick has invited some very creative minds to this forum, so I'd love to get some feedback on my plan and if there is an issue that jumps out at you that I should address:

I am planning to buy 25 SFH in a particular neighborhood that I know very well. They're all listed right now between 7k and 15K, so it should be possible to buy them for 10k or less. So, total of less than 300k investment. They're so low, because the neighborhood was inundated by some mortgage fraud groups a few years ago and now the banks want to wash their hands off them. I have owned property there for years and have just bought 3 more properties. I know the area and I'm not afraid to walk around alone as a single woman (maybe not at midnight ;-) ).

Planning on selling the homes 'as is' (no rehab whatsoever) for 25k-30k each with $ 500 down, easy qualifying, as long as they have a bank account. Agreement for deed, so it's easy to evict if they don't pay. The payments will be lower than rents in the area. The mortgage will have 10% interest with a 2 year balloon, which can be extended for another year, but the price will increase to 40K. I will use a loan servicing company to pull the funds out of their account.

I have a good relationship with the local neighborhood association and I'm planning to recruit them to help me sell (show the houses etc), as it's in their own best interest to stablilize the neighborhood. They would get to keep the $ 500 down payment.

I sold a normal sized vacant lot there 5/6 months ago for 30K.

Would love to hear some constructive criticism