Here’s an interesting Reader Mail question I got in follow up to “The Real Estate Option Contract…Undressed” post. It deals with:
- land options,
- equitable interest,
- and ignorant Realtors…
See if you can identify with Ken’s question, and/or maybe you have some feedback of your own you can offer him…
From: Ken Barns
To: ** REI Tips **
Subject: Real Estate Option QuestionHi Jp,
Great video on real estate options. I do have a few questions.
First, my goal is to invest in vacant land. Let’s say I get a piece of property under option contract for $20,000 but FMV is $45,000. I market the property to a vacant land broker/Realtor or investor.
The vacant Realtor tells me the only way they will try to sell it to their buyers if I exercise my option to buy the property. Being that I don’t have $20,000 to purchase the property, however,
I am able to get the seller to do seller financing $2,000 down $200 a month. The question is can I go back and present the deal to the vacant land Realtor since I now exercised my option to purchase the property even though I am making payments on it? Basically, can I sell/or assign a real estate option if I am making monthly payments on it?
Best Regards,
-Ken
Interesting question, Ken. I think I can clear this up for you, and I’m betting others might have some helpful advice to share as well.
But first off, let me say I’m not an attorney and I am not giving legal advice here. In fact, please (everyone) consult with your real estate attorney before you go and use any of this. Gotta cover my butt here…
Having said that, let me say I’m pretty darn sure your Realtor’s flat out wrong and full of the crap of ignorance but totally convinced of his total awesomeness and right-ness.
Equitable Interest (You Got It!)
The fact is, having an option (or a purchase contract) in place gives you the equitable interest in the property you need, so you can legitimately advertise for its resale. So long as you don’t actually sell it before you’ve bought it. (I know, Captain Obvious.)
Then once you have an interested party, you can either exercise your option and purchase the thing, then immediately resell…OR you can just assign your option…which is not actually selling the property, but rather your equitable interest in the property…which is (I believe in most states) considered personal property rather than real property. A whole different ball of wax.
The Problem with So Many Realtors…
This stinks, but in my experience most Realtors aren’t very good at “outside the box” thinking. So unless you’re serving up a plain vanilla deal, they’ll play the “I’m a Realtor and I’ve never heard of that, ergo you can do that and it’s illegal” card.
Not trying to beat up on Realtors here – I’m NOT anti-Realtor. I used to be one. It’s just a sad truism that (and there are of course exceptions to this) the vast majority find it necessary to assume that anything they’re not familiar with is probably illegal and will get you/them in trouble. I fact, I tend to find the same thing is common in attorneys.
So What Are Your Options? (Pun Intended)
Well if you’re determined to use this guy to list, then personally I’d probably start by sharing (confidently) with the Realtor that you realize it’s not what he’s used to, but it’s actually quite legal to advertise something for sale if you have a legal contract in place (in this case an option), just so long as you don’t sell before you buy.
In fact go ahead and tell him you have a buddy (me) who’s local MLS has even introduced “Equitable Interest” as a new listing category recently for just such occasions. And yes, it’s true.
If he remains defiant / obstinate, then moving on to another Realtor is always an option. I’m just saying…some folks don’t want you be an expert…cause they’re the expert.
Now Back to Your Original Question, Which Was…
“…can I go back and present the deal to the vacant land realtor since I now exercised my option to purchase the property even though I am making payments on it?…Basically, can I sell/or assign a real estate option if I am making monthly payments on it?”
Well that depends on the scope of your Realtor’s ignorance frankly. 😉
As I said, you should have already been able to list it. Now that you have actual owner financing in place, you just snatched another few “sticks” from the owner’s “bundle of ownership rights” (anyone who’s been through Realtor school is probably smiling at that one). So you should be DOUBLE able to list the dang thing!
But I should point out that you won’t need the Option agreement anymore. In fact, you will have already exercised it and it’s now considered executed.
Now you didn’t specify the type of owner financing you mean, but there’s two main types:
- “Standard” Owner Financing: The deed transfers over to you and the seller gets a note for what you owe him and a mortgage/deed of trust securing it. In other words, the seller is the “bank/lender”.
- “Contract for Deed” / “Land Contract”: You don’t actually get the deed transferred over to you until you’ve finished making your installment payments. But you’re still considered “owner”.
In either of these types of owner financing, if you defaulted on your payments the former seller would have to foreclose (rather than evict) in order to kick you out and reclaim the property.
So, long story short, you should definitely be able to list this thing with an option in place. And double as much with owner financing in place. Whether your Realtor believes it or not.
And also I suggest getting a new Realtor. 😉
Hope that helps. Anyone else have any thoughts on this? Share them below please – We’d love to hear ‘em.
I agree with JP completely. I also used to be a Realtor and now I am “just” an investor. Case in point- in the state of Utah Realtors now have a state-approved lease option contract Realtors can, and are in fact encouraged, to use in place of the Utah Real Estate Purchase Contract when applicable. A state-approved Realtor lease option contract. Go figure.
First let me say…I agree with you, Realtors tend to freak when they encounter any out of the box thinking. But I know that the local MLS I belong to, states specifically that we cannot list a property for an option holder. It seems ridiculous to me…but that’s their rule….here it is:
•The listing must be for the sale and purchase or lease of real property or an interest in real property only. Any personal property involved in the sale or lease is incidental. When a pending sales contract specifically prohibits assignment of contract, such interest in the property may not be listed in the MLS. Listing of a non-equitable interest in real property, such as an Option Contract, is not permitted in the MLS.
Hey Jay, thanks for commenting!
First let me say what you’ve shared is the FIRST TIME I’ve heard of an MLS specifically prohibiting option contract listings. Maybe there are other places like this too but it must be a new thing. And maybe it applies to Ken’s situation above. But I want to point out a couple things:
If your MLS won’t allow them, it doesn’t mean it’s illegal. I know you didn’t say this, but I don’t want anyone mistakenly drawing that conclusion. It really just means another stupid Realtor rule was put in place by the local board for some dumb reason.
Also I completely disagree with their characterization of an option contract as a “non-equitable interest”. I say that’s ignorant bull crap. But in the end it doesn’t matter what I think or say…apparently it’s now the policy of your local Realtor board that they don’t want ’em listed in their MLS, and I’m sure they’d be willing to fall on the sword over it. Because, after all, they’re the “experts”, right?
And finally, going back to Ken’s ultimate question of whether or not having some owner financing in place would give him what he needs to be able to get it in the MLS…I’d say yes…but I guess he’ll have to see if his local board has some dumb new rule about not listing property if the underlying financing is from an owner than a bank. (But I seriously doubt it.)
Thanks again for your insight, Jay.
It says, “When a pending sales contract specifically prohibits assignment of contract, such interest in the property may not be listed in the MLS”.
Question is, whose contract specifically prohibits assignment of contracts? Unless it has a clause specifically stating “this contract can not be assigned”, etc.
Seems stupid to me. Like title companies, lawyers or any other “team members”, if they don’t understand working with investors….NEXT!
JvM
Thanks JP for this very enlightening discourse! I, too, WAS a Realtor and am contemplating making the “switch” to “Investor” status. For the record, folks, when properly used, the term “Realtor” refers only to members of the National Association of Realtors. I realize the term is being used generally to apply to any real estate agent/professional. Just thought I would make the point for those not in the know!
Thanks, Commercial Loans, I was going to say something about this as well. Realtor is not the same as real estate agent. Using it in this common way is still incorrect. Dare I say, ignorant :>)
I am a real estate licensee (agent), a Realtor and an investor. While there are those real estate people that do not understand investing, I wouldn’t go so far as to suggest all or most are ignorant. I think we can also agree that investors have their share of ignorance as well. What with all the newbies in both fields as well as the quick buck artists and gurus trying to take advantage of both, it’s not surprising we see conflicting ideas.
One thing we are seeing with our local MLS is that one can not market a property that is currently being marketed. In other words, if a property is pending it can not be marketed to a new buyer through the MLS as it would be appearing more than once.
Regardless, yes, if the real estate person or attorney for that matter, doesn’t agree with what you are trying to do you should get another. But at the same time you can try to educate. And it is always a good idea to listen to a nay sayer to see what the argument is.
Every once in a while they might be right.
Good point. REO bank addendums always expressly prohibit assignment…and thus wouldn’t be listable in this particular MLS. Other than that, I haven’t seen contracts that specifically say you can’t assign them. And any contract that doesn’t expressly mention that is automatically assignable.
Great point and spot on. Thanks!
Well said, Steel.
My RE Attorney years ago told me that as long as you have a contract on a property you can list it for sale. If your Realtor does not understand this, you need to find one who does.
Well lets look at the line ” Listing of a non-equitable interest in real property, such as an Option Contract, is not permitted in the MLS.”
If I were lawyering this, and I am not one, I would say thta since it IS and equitable interest in the property it can be listed. The “such as an option contract…” is NOT controlling language, just a misguided hint.
The legal part of the statement would read “Listing of a non-equitable interest in real property is not permitted in the MLS.” It is not the right of nor the perview of the MLS to decide that an option contract is advisory.
Now with all that being said, there are some specific states that the option contract IS NOT an equitable interest, unless and until it has been excercised when it becomes a contract. To solve this issue, just remove the option, and sign a contract that acts like and option but is not an option.
HAHA!! I was just reading away enjoying the post and the comments and POOF “best bacon lampshade” and “best ad ever” pop down! At first I was annoyed at ANOTHER pop up or pop under or whatever they are called but then I was laughing hysterically because it wasn’t another lame attempt to get me to sign up for your newsletter or blog feed or anything … it was just funny. LOVED IT!! Thanks for being totally different.
I understand what you are talking about except one thing I would like to make clear. For I am a licensed real estate agent in the state of Georgia and I just want to point out something here. It is not the Realtor or Agent, it is their Broker. Since you were an agent once I know you understand what I am trying to say. I have had Brokers that just always want to play on the conservative side, the safe zone. And most Brokers just instill these things into new Agent/Realtors minds as it being law. Then if the Agent questions the Broker all the Broker will say is that that is the way I run my Brokerage and if you don’t like it you can leave. I just want to point the finger at the right person. Agents/Realtors have been blamed for being so many things by Investors over the years. I am glad to see that we are able to work together more lately and I think we should each give more respect for the other as we move forward.
Well said, indeed. Put very well.
Well an Agent who has an Option on a piece of property is allowed to market the property for sale on MLS but has to disclose that said Agent has an interest is the property. But can not be listed at the same time. As said before that there can not be two listing for the same address in the MLS.
so if i am a agent and i do have option contract on a property. I can list my option contract with my broker so it could be put in MLS and still be the listing agent to get commission.
what do i have to statue in option contract and MLS that i am a licened realter and have option in the property?
so if i am a agent and i do have option contract on a property. I can list my option contract with my broker so it could be put in MLS and still be the listing agent to get commission.
what do i have to statue in option contract and MLS that i am a licensed realtor in Michigan and have option in the property?
How do you prep the seller when using an option? Give me your best presentation, JP and others.
I’ve been wholesaling for a couple of years and I just listed my first 4 deals and it hasn’t gone too well.
The first deal fell through when the sellers used some excuse involving her family and the Mexican Cartel…..uh ok! The second one called around the other wholesalers and back-doored me because the investor said my contract wasn’t valid, I already had a buyer lined up too!
Also my broker demands that I list for a minimum of 6 months! Is that necessary?
HI, TROOK – I just tell it like it is. I’m very open and up front about the fact that I may or may not be able to find a buyer (when using an option) but that I’ll do my best… But once I get a deal (find a solid buyer) I’m converting that option to a contract ASAP…that, or assigning the option and getting paid TODAY for it.
Re: listing for minimum 6 months…yeah, Realtors are trained that way. If he won’t budge, you’ll need to find another Realtory who’s willing to go month-to-month with you. The deal is, they don’t want to go through the effort of putting it all in the MLS plus all their other listing junk, just to have you pull it out quickly. They’re just trying to protect their time value. But it’s not a rule or anything.
…jp
It all depends on the MLS rules and the BROKER RULES. At least in my state of Georgia. I am a Agnet/Investor and I hate some of the MLS rules as well. I have a great Broker but he is still subject to the FMLS rules as well. Hope this helps. Shirley
It’s sort of like this: I was in the Apartment Management business for years here in Atlanta, GA. and in our lease it says, “No sub-letting allowed” but we allowed them all the time. What happens most people don’t try to negociate the clause and assume they can’t do it. But if a tenant would find another and they agree to have that tenant fill out an application and their qualified then management would consider it. It also depends on the time of the year; if it is the hot season or slow season.
So our sales contracts do prohibits assignment of contracts, but that can be negociated with the owner of the property through their agent and it might go through. Then it would be a Special Stip with all disclosures. So give it a try.
Predatory and agent and broker will end up in ethics committee with charges and possibly Investigation via RE Bureau of Investigators. Not ethical…
Creative Marketing/Option/ 99 days with an empty worthless clause of extend to keep the hope of making above the ethical 6% and in most states…it is not ethical and maybe used in short sales, not standard sales. Basically your having a seller say they will settle for $400K and the home is worth $450K..so anything above the $400K goes in your pocket. That is BS….Fidiciary and ethical do not equal scam…..Sounds like these losers are learning from Don Sena Courses and those contracts are not valid and will fail even outside in the Standard Business Court. I bet if someone tries to pull out of the MLS listing after 3 days ….these option users threaten the seller with a supposed law suit or a pay off to get them off their back. This is predatory and it will land RE Agents in the pokey.
It’s no big problem to list for 6 months, what matters is you have the right to cancel your listing. In Ga, the seller has to pay $25 to cancel the listing.