I am willing to bet anyone an ice cold case of Beck's Beer that the numerous commercial real estate market meltdowns that have occurred during the past 30 years would not have been so severe if the high rollers had bought more real estate options instead of properties. In this way, if they did not want to exercise their real estate options, they could have simply let them expire, and that would have been the end of it.
And they would not have incurred any of the transaction,
maintenance, management, holding, and debt service costs that eventually
forced them to go belly up. In other words, they would not have been
saddled with the financial responsibility and personal liability that go along
with outright property ownership, and they automatically would have avoided
having to:
1. Fill out intrusive loan applications.
2. Qualif y for new loans.
3. Make monthly loan payments.
4. Circumvent loan due on sale clauses.
5. Worry about liability lawsuits.
6. Support negative cash f lows.
7. Contemplate being foreclosed on.
8. Collect tenant rental payments.
9. File tenant eviction lawsuits.
10. Chase deadbeat tenants.
11. Go into debt.
12. Buy any property.
13. Pay outrageous loan fees.
14. Assume existing loans.
15. Make expensive property repairs.
16. Babysit tenants.
17. Fret over escalating property taxes.
18. Fill vacancies.
19. Pay exorbitant property insurance premiums.
20. Maintain property and tenant records.
21. Clean up after messy tenants.
22. Pay transaction costs.
23. Assume financial and personal liability.
24. Manage property.
Potential Risks That You Cannot Control
When Using Real Estate Options
Although I consider the use of real estate options to be a relatively low-risk investment
strategy, there are potential risks that you cannot control when using
real estate options. For example, the property under option could be:
1. Foreclosed on.
2. Placed under the control of a federal bankruptcy court trustee.
3. Condemned by a government agency under the right of eminent domain.
4. Destroyed by fire, storm, or earthquake.
5.Taken as part of a government asset forfeiture lawsuit.
When I was starting out as an option investor, I bought a one year option
on a run down commercial property in Ruskin, Florida, that belonged to a fertilizer
manufacturer. And two months later, the company filed for protection under
Chapter 11 of the U.S. Bankruptcy Code, and the property I owned an option on
came under the control of a court appointed bankruptcy trustee. The judge presiding
over the case in U.S.
Bankruptcy Court in Tampa ruled that my real estate
option to purchase agreement was personalty or personal property and that I
did not have an interest in the property. The case dragged on for over two years
and, in the meantime, my option expired and I was out my $3,500 option fee. The
$3,500 lesson that I learned here was to always do a lawsuit search on the individual
or business entity that owns the property before I ever plunk down my
hard earned money to buy an option.