Low Risk Short Sales and Option Contracts
If you are buying foreclosure real estate for a living, a legally viable way of doing it without risking your own money is to use the option contract.
In an option contact, you acquire the option to buy the property in the future. For the option to be legally binding, you will be required to pay to the seller, a non-refundable deposit from as little as $10 up to a few thousand dollars.
As an investor, you do not have to worry about the deposit since you can ask the end-buyer to also pay a non-refundable deposit equivalent to the amount stated in the option contract. This deposit goes towards the closing costs in the final HUD. If the deal does not close, you keep the deposit. Therefore, you will not be risking money out of your pocket.
You will be looking for an end-buyer soon after you acquire the equitable interest on the property made possible by the option contract and another document called the Notice of Option Contract which is recorded at the County Clerk's office.
The beauty of the option contract is you can sell the property for a profit without really buying it until you are confident that you have a qualified end-buyer. Just be sure that the time limit on the option contract is a reasonably long enough for you to acquire an end-buyer for the property.
With the short sale, two transactions are happening back to back. You buy the property from the seller and then, almost immediately, the buyer buys the property from you. This should be stated and made clear in the option contract.
The seller will know that you intend to short sale the property and sell it for a profit, and the buyer will know that you are doing a short sale on the property. It is all transparent and legal when these and other details are fully disclosed in the option contract. Using an option contract is an almost foolproof way of earning a profit without using your own money.
This is the secret of combining the option contract with the short sale. Two transactions are happening, not simultaneously, but one after the other. You buy from the seller, and you sell to the end-buyer. Yes, it is double the paperwork. However, you will not have to do the paperwork yourself. A title company will be closing the two deals.
The end-buyer will most probably use a lender to pay for the property. They will need a title commitment, and the title commitment will show you as an exception on the title as the option holder. At the closing, the title is transferred from the seller to you. You then transfer the title to the end-buyer.
That is a legally viable way of doing business in home foreclosures without emptying your own pockets. And, it works!
While most people are suffering from the affects of the current real estate market there are many more that are enjoying the opportunities that the market has brought about.
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