All Topics / Value Adding / Options and Subject to’s

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  • Profile photo of wrappackwrappack
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    @wrappack
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    Firstly, (at the risk of repeating fellow forumites) a big welcome to Peter, and thanks to the admins and Steve for setting up a special developers section.

    Personally, I am a development virgin, rapidly filling in my gaps of knowledge prior to jumping in.

    The way to go seems to be to get CONTROL over the property, as opposed to ownership, as a large part of the increase in land value is simply because council in the future may say YES to something (ie subdivision/duplex/shopping centre, etc), whereas before, there was not that ability.

    In controlling the property, one also has an escape hatch if things go sour (hostile neighbours, finance, change mind, better deal comes along, etc), without owing a huge amount of cash on a property which you cant do with what you want.

    I have heard of two different ways of doing this, the option, and the subject to’s.

    ie 1% option for 6 months gives you the right to survey, lodge council apps, etc, and buy if you wish.

    ie subject to- ie buy the land subject to council allowing subdivision/units, etc.

    My problem is twofold.

    Firstly, all REA (that I have ever encountered) either are ignorant or very dismissive of subject to’s and in particular,options. “Oh, look, those things arnt really done, you know, the owner just wants you to do your homework, and make an offer with a six or eight week settlement” spiel is heard often. I doubt wheather any offer (of option/subject to) has actually been presented. I cant really blame the rea, after all, if they sell a 2M property, they will get say 3% or 30 grand. On an option or subject to, they will definately get nothing for 6 or 12 months.

    Secondly, and most importantly, is how I (meaning physically myself) can present an offer or a subject to to a vendor. ie Is there a simple legal way of getting a contract for sale, and adding a page or two of “option stuff” or “subject to” stuff, and then presenting it to the vendors solicitor/vendors myself. May I please say that I am NOT trying to cut the rea out of the loop, nor deny him his earned commision. Rather, I am after a relatively inexpensive way of getting an option/subject to over an already listed property.

    Also, what is the basic offer. ie I have heard 1 or 2% for options of six months?

    Kindest Regards,

    Paul (wrappack)

    Profile photo of Misty1Misty1
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    i too,eagerly await answers to these qu’s…..[confused2]

    Profile photo of Michael RMichael R
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    Securing “options” on land or other property – controling for no/minimal money down, is the foundation of real estate development/investment.

    First rule, restrict the use of real estate agents to locating the property. If possible, source the property yourself. Always submit the offer directly.

    If you don’t understand the process, or the market, then you should not be attempting to develop the property.

    Second rule, always use a qualified and experienced lawyer to prepare the contract. Do not do this yourself, no matter how successful or experienced.

    Third rule, unless your intention is to on-sell the contract, always have access to sufficient capital to conduct the preliminary phase of the development, i.e. research, feasibility, planning, design, professional fees – which is generally incurred prior to calling on institutional loans.

    “1 or 2% for options” is not clear?

    An option is simply a “contract” – subject to are “conditions of contract”.

    If the developer has a proven and successful track record, often an option can be secured for no money down. However, such an option/contract will typically expire in 30-90 days.

    Otherwise, on most occasions a deposit [5-10 percent] will be due and payable within 7-30 days, i.e. if the option extends for 90 days to 6 months. The deposit is held by the sellers lawyer in an interest bearing trust/escrow account. If the contract is not exercised, the full deposit plus interest is returned – if all conditions are satisfied.

    Typically an option is “subject to” financing, planning approval and an engineering report. These three considerations are the foundation of any development.

    Alternatively, the transaction may be subject to/include regulatory factors, i.e. zoning, or assurances made by the seller, i.e. install utilities.

    From an investment perspective, if the land/property offers a clear and viable opportunity, i.e. favorable zoning change planned, an option can be secured with the intention of on-selling prior to the expiration date.

    The holder of the option simply on-sells the land/property [contract] to a third party for a higher price than the original agreement [with seller], if there is no provision preventing such a transaction.

    This response pertains to securing an option for the purpose of development, rather than an option to acquire and retain an established building – although many of the same principles can apply.

    — Michael

    Profile photo of Luan CaoLuan Cao
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    I agree with everything Micheal has stated. But would like to add a few things.

    Sourcing the property your self is always the better option but this can be time consuming and difficult. R/E agents will have experience and a better in getting owners to put there property on the market. Like Wrappack says that most agents are not willing to entertain the ideas of options and some ‘subject to’ this is because they just want their commission ASAP, which is understandable because its their job.

    The key then is when putting in an offer on the property either by option or subject to, firstly make sure that it is in writing. Then either ask for the agent to get the owner to sign the offer or return it some how that shows that the owner themselve have seen the offer. This guarantees that the owner has actually had the offer submitted to them.

    Also there is a legal resource centre in Philips street in Sydney where there is a standard option aggreement available. Although this letter may save you some money from your solicitors having to draft the option agreement, I concur with Micheal that you will require a good legal practitioner to help with the administrative and procederule requirements for purchasing properties using option agreements

    Kabung.

    Profile photo of wrappackwrappack
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    Many thanks for your replies. Am especially interested in the boilerplate option agreement. I tried googling and whitepaging the resource centre in Phillips street, but was unable to find anything. Kabung, you wouldnt happen to have their phone no?

    Profile photo of AphexAphex
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    I disagree with Michaels break down of option Vs subject to.

    With an option you do not have to state any conditions. The 1-2% is your fee for having the right to buy that property in 6 months. This alows you to keep your intentions for the property disclosed from the agent and the owner.

    This would be handy if you think you have realised potential in a property that if made more public would attract unwanted compitition.

    For the Capital Gains enthusiasts, you could put an option a a property that you thought was about to suddenly increase in value. Just like options in the Stock Market

    Profile photo of Michael RMichael R
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    “With an option you do not have to state any conditions.”

    Correct. However, an option is nothing more than a “contract” between two or more parties. On most occasions this contract will include some form of condition. An example being, if the option is not exercised in x days/months, the contract [option] expires.

    “The 1-2% is your fee for having the right to buy that property in 6 months.”

    There is no pre-defined fee or expiration period.

    An option can be negotiated for no money down or considerably more than 1-2 percent – and if a fee is imposed, it is not necessarily non-refundable.

    The expiration date is typically representative of supply and demand [market conditions] and/or the agreed price.

    “you could put an option a a property that you thought was about to suddenly increase in value.”

    In a nutshell, this is the basis of securing an option.

    ” I disagree with Michaels break down of option vs subject to.”

    My comments can be somewhat broad because I do not generally have much time to elaborate – my intention is for people/readers to further research and gain an understanding which conforms with their specific circumstances.

    In terms of my experience with option contracts, let’s just say this methodology has been the foundation of at least 90 percent of the transactions [small/large scale development/investment] I have conducted over the past 15 or more years.

    — Michael

    Profile photo of wrappackwrappack
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    I would assume a couple of things. Firstly, in this current market, we cant just take an option and get some cap gain.

    Secondly, we need to get something approved by council in a relatively short period of time.

    Would I be right in assuming that the best would be an amalgamation of land for unit developments in medium density res development, and subdivision of larger estates into more blocks in the less dense areas?

    Since I think there will be less developers looking for land in the near future, I am considering (but always open to other options- no pun intended) taking options/subject to’s on larger tracts of land, and getting da’s to council regarding subdivision.

    Any flaws in my thoughts/plans?

    Profile photo of Luan CaoLuan Cao
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    Wappack,

    I think the fundamental flaw in your plan is your basic assumption that there will be less developers looking for land in the near future.

    I think that is unreasonable to assume, as many developers have what the business community describes as ‘land banks’

    I’ll give you an example of a situation this is a real situation and is a chess game currently being played by some of the largest developers in australia.

    There is a large parcel of land north of the harbour bridge within the sydney metropolian area, by large I mean about 50ha (thats 500,000 sqm) maybe more, I haven’t looked at the maps lately.

    About 18 months ago Mirvac (yes the large listed company) acquired a number of properties that was part of this 50ha. They bought about 4 or 5 properties totalling about 20 acres, 2 outright and on 3 on options. The paid $200,000 on per option with an exercise price of $1.6m per acre.

    After a report came back from the water board assessing the contributions that developers must make toward the sewerage treatment plant upgrade would total $26mil instead of the originally $7mil estimate. Mirvac didn’t end up exercising the options and they expired lossing about $600k

    Then enter Meriton(as in Harry Triggaboff) who have now have aquired some of the land that Mirvac once had under options plus a few more. They will probably end up not doing anything until they aquire the whole 50ha but I couldn’t be certain of that.

    Now I was offered to take up options on 2 blocks there totalling about 11 acres for an option fee of $1.00. for 12 month but I still didnt take it up. WHY???? Because I would have lost my dollar.

    The reason I tell you about this experience is as Frank Lopez says in the movie ‘Scarface’

    “never underestimate the other guys greed”

    The big players like meriton will hold on to that knoing that they can afford to and just slowly drown everyone out of the deal.

    Now my question to you is do you think that you can locate a large tract of land that no other major developer has looked at or contemplated?? Large tracts of land are what the major developers are looking for and unless you can play a competitive financial chess game with them your probably gonna be in touble.

    Another example would be Woolworth buyin the foster subsider ALH. Why??? for the land bank.

    Companies like this have deep pockets and can afford play hard and unless your pockets are just as deep then you wont be able to play. The only other way you can compete with them is by having a stronger strategy. This means you have to have 2 things, in my opinion, knowledge and information. Because all developers are aware of the same thing about land and Tony Soprano says it best “God aint making any more”

    So if you wanna play ball with big tracts of land against major player, im not saying its impossible, because its been done before, but make sure you got a strategy.

    Kind Regards
    Kabung

    Profile photo of Michael RMichael R
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    “many developers have what the business community describes as ‘land banks'”

    Correct. Real estate development/investment is all about “leverage”. The objective is to establish as much equity in land or other holdings as possible, for as few dollars [capital investment] as possible.

    This in turn compounds borrowing power expedientially.

    “Large tracts of land are what the major developers are looking for”

    Disagree. The land area is generally inconsequential. Whether the land is acquired outright or with an option in place, the decision is primarily based on maximum return and limiting risk + supply and demand, and other market influencers.

    “This means you have to have 2 things, in my opinion, knowledge and information.”

    The keys to success.

    — Michael

    Profile photo of wrappackwrappack
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    Many thanks for your replies.

    I think the fundamental flaw in your plan is your basic assumption that there will be less developers looking for land in the near future.

    By saying there would be less demand, I was referring (perhaps badly), that we are not in a runaway bull market now, nor likely to be in the near future.

    While I would love to somehow be involved in the type and scale of the projects you mention, I must start relatively slowly and surely.

    My feeling currently is to look at getting options on acreage just north of my area (gosford), that is subdivisible. ie if I could option 50acres and subdivide into 5*10, or buy 10 acres and subdivide into 5*2, etc. Not quite the multimillion stakes, but a heap of people want to live on acreage, esp. due to the urban sprawl “It just isn’t the same since those sydneysiders moved up here!”

    In doing this, I would also avoid the massive headaches of project managing duplexes/triplexes, etc. All I would need are basic services (water, power, phone, roads, etc) after council approval. This sounds like a lot less headaches than 74 subcontracters per housing job! Then, I plan to sell them myself (probably by vf deposit), saving on rea commission (but please dont get me started on them!)

    Ps- unable to find the legal resource centre via telstra/google/whitepages.com.au. The only one was the womens legal resource centre! You wouldn’t happen to have their phone number?

    Profile photo of rmkrmk
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    yes as all have suggested the one thing that i think you can be CERTAIN about is that LAND will ALWAYS be sought after and it matters not it size..
    M

    Profile photo of PeterCombenPeterComben
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    I prefer not to make comments on using options as it is not a strategy that I have used. I certainly have bought a number of properties for development on “subject to” contracts.

    I guess the key in all of this is finding the best way for you individually. I would like to throw into the mix probably my most powerful strategy… that is of joint venturing with vendors.

    More food for thought [biggrin]

    There are specialists who are making $Millions per year by using the option strategy and obtaining planning approvals that they on-sell, but as I say, it’s not my strategy of choice.

    Peter.

    Peter Comben
    http://www.smartpropertydevelopment.com.au

    Profile photo of wrappackwrappack
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    Many thanks for your reply Peter.

    Obviously, you have developed a heap of properties in the last couple of decades.

    If not options or subject to’s, how did you develop the property? Were you in a jv as a builder, as opposed to the landowner?

    WOuld be very interested to hear any other alternatives.

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