Posted by Rich-CA on October 28, 2008 at 24:03:44:
The idea that anyone would sign a blank sales agreement with no price inserted sounds a lot like the type of activity many state attorney generals are trying to criminalize. For one thing, nothing would prevent the holder of the signed sales agreement from putting $1 into the sale price and then suing to force the sale. Or some such activity being termed “equity theft” these days.
An “option” is an agreement to sell at the option holder’s request at a specific price. Without the price filled in on the option, it is of questionable legality.
Wanted to quote part of an article written by Tom Severino who was a trainee of Ron LeGrand. It is on Options to Purchase Real Estate. Mainly I’m wanting to know this because I am studying up contracts and I’ve never heard of doing Options this way. Please tell me what you think.
"An Option to Purchase is a much simpler way to do these transactions. With an Option to Purchase you have a purchase and sales agreement with your seller, the buyers name and sales price are not filled out since you donâ??t know this information yet.
There is also an Option Agreement between you and the seller for the price you agree on.
Let me make this simple for you. You agree to buy a property for $250,000.00; you tie this up with the option agreement. You also have your seller sign a Purchase and Sales Agreement with the buyerâ??s name and purchase amount blank. I have had sellers question me on this, and I simply say I donâ??t have the buyer yet, when we do they will be in that slot. We have not had anyone walk away yet, but keep in mind, if this is an issue, then they will probably be a bigger pain in the neck later. Let them go.
Now we find a buyer at $300,000.00. We have the buyer sign the Purchase and Sales Agreement for $300K and now the buyer and your seller are in business together. You submit the Option Agreement and the Purchase and Sales Agreement to your title company and then collect your $50,000.00.
You will be paid on the HUD-1 as a lien and not show up on the chain of title. A much simpler way to do businessâ?¦…and this is ordinary income and not subject to short term capital gains tax, but again seek the advice of the professional accountant."
Don’t you need a Assignment of Option inorder for this to work? I’m just a little confused. Is this legal? Hoping someone knowledgeable with Options can give some advice here. Thanks.
Posted by Natalie-VA on November 01, 2008 at 06:21:54:
“…and this is ordinary income and not subject to short term capital gains tax, but again seek the advice of the professional accountant.”
That part doesn’t even make sense to me. I thought short term capital gains was taxed at your ordinary income tax rate.
I think there are many legal ways to make money in real estate that are not totally ethical. Many of these methods are developed in order to skirt a law, hide something from a lender, or otherwise create some sort of shortcut. Whatever happened to just buying and selling houses or assigning contracts?
In my opinion, the option agreement gives the investor the right to buy the property at a certain price, that is all. The investor can either exercise the option or sell the option. I have heard of investors recording the option and getting a title company to pay out of escrow. Go figure.
I guess the question of is it ethical is different than is it legal. Obviously the investor is working with more knowledge than the seller. The seller could list their property with a realtor and walk away with more money.