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Property Option Contracts - Mentor Wanted

Discussion in 'Innovative Techniques' started by Anthony Jovceski, 21st Aug, 2016.

  1. Anthony Jovceski

    Anthony Jovceski New Member

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    Hi All,

    I'm new to Property Chat and I can already see why this site is recommended by some of the best in the business. As a brief introduction, I currently work as a Site Engineer for one of Australia's largest builders. On the side I also run a property development company called Auden Property Group.

    In recent years, I have spoken to a number of developers on the widely used Option contracts used to acquire their next site. All our previous sites have been acquired the traditional way and now we're keen to use more innovative techniques.

    I'm looking at expanding my knowledge on Options but publications and books on the topic seem hard to come by. If anyone can recommend any books or the like would be appreciated...

    I'd also appreciate if anyone can recommend people in the industry who currently use Options and would be willing to act as a mentor. At the moment, I'm based on a project in Maitland NSW but more than capable of traveling to meet up over a coffee and hopefully create a long lasting business relationship in the process.

    I look forward to reading your responses.

    Regards,
    Anthony J
    0423 153 466
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should start reading legal publications. There are many academic style articles out there.
     
  3. thatbum

    thatbum Well-Known Member

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    If you've had success previously using the "traditional way", I'm wondering why you feel like you need to investigate the use of options?
     
  4. JDM

    JDM Well-Known Member

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    I don't think the topic is really broad enough to require a book. The general rundown is:

    Types of options

    Call Option Agreement - You have an option to purchase the property (no obligation to purchase)
    Put and Call Option Agreement - You have an option to purchase the property and if you choose not to, the seller can then exercise their option to make you buy the property.

    Option fees

    A Call Option Agreement would usually have a high call option fee which is the money you pay for the right to have an option to purchase. A Put and Call Option Agreement would usually have a nominal call option fee and a nominal put option fee ($1 or a peppercorn).

    It is not uncommon for a further call option fee to be payable once the option agreement goes unconditional (usually upon satisfaction of due diligence and development approval).

    Conditions

    The usual conditions to acquire a development site would be due diligence and development approval. It depends on the size of the project but the due diligence period usually runs anywhere from 14 days to 2 or 3 months. The development approval period would usually run anywhere from 6 to 12 months and can vary outside of this depending on the size of a project.

    Dates

    The call option period is a commercial agreement but usually runs anywhere from 3-12 months after the development approval date. This is the date by which you have to give notice to exercise the call option otherwise your right to buy the property lapses. Some people might get their DA and exercise the call option straight away while other will wait until the last day to exercise.

    The put option period is usually short (7-14 days is not uncommon).

    Why use an option

    Some of the benefits of an option agreement:
    1. you get the chance to acquire the development approval before you have holding costs
    2. if it's a call option only, you can elect not to exercise your option and walk away if you don't get the DA you hoped for
    3. in Queensland, you can nominate another buyer to purchase the property without paying transfer duty twice
    4. you can on-sell the property without ever settling on it (ie get the development approval, on-sell at an increased cost and then exercise the call option in the name of the new buyer while you pocket the uplift)
    I'm happy to answer any questions you might have about options but this is the general rundown of how they work in practice. Also feel free to reach out when you're considering your next site and we can discuss what might work for you in more depth for that site and what you're trying to achieve.
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Years ago i purchased an aussie book on lease options. I lent it to someone who never gave it back.It was privately published so would be hard to find.
     
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  6. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    @JDM what is the commercial benefit of a put and call option as opposed to just entering into a contract of sale? I know put & calls have been used to defer stamp duty and to allow the nomination of different transferees without incurring double duty but are there other commercial benefits beyond these stamp duty benefits? Some of States have legislated to treat put & calls as agreements to transfer which negates the stamp duty benefits.
     
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  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think stamp duty savings on transfer in qld
     
  8. JDM

    JDM Well-Known Member

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    Main reasons are:

    1. Delayed payment of transfer duty (in Queensland at least - not sure on other States)
    2. Chance to on-sell without having the funds required to settle
    3. Can nominate another buyer without duty in some States (a lot of people think this is only beneficial when on-selling but it is really common to enter the option in one entity and then nominate to another related entity once the correct structure has been worked out and appropriate companies/trusts created)
     
  9. CU@THETOP

    CU@THETOP Well-Known Member

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    Lent it to a lawyer? Bloody typical!!

    OP- get a NSW lawyer who does property- like Terry W.
    A highly technical area of law.
    Commonly used by "gurus" (sarcasm emoticon) like Mark Rolton to stitch up those with lawyers of less ability.
     
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  10. SRE

    SRE Member

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    Say your intention was to onsell the option to the nominee,
    Thanks JDM for your thorough explainations.

    Can't you get those benefits by entering into a standard contract with conditions?
    -Subject to council approval
    -Subject to finance
    -Settlement within 12 months of council approval.
    Then onsell the contract for a higher value within 12 months.
    If you never settle on the property then you dont have to pay stamp duty right?
    Do you think that option agreements over complicate things?

    Would appreciate your thoughts.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    wrong
     
  12. SRE

    SRE Member

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    As I am learning can you elaborate?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Assignment of contracts generally results in same duty as settle and sell.
     
  14. CU@THETOP

    CU@THETOP Well-Known Member

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    How I've seen it scammed before ( as the grant of an option is dutiable; but one expects duty only on the "option fee" ) Is the option in general terms is between the the owner ("Biddy") and the switched on options property course graduate with platinum mentoring ("Wooden Duck") where Wooden Duck (WD) pays Biddy the sum of say $1000 (which will come off the purchase price anyway) so that Biddy will sell the property at a pre-agreed price (theoretically a bit above market price but given that Biddy is old and doesn't really understand the documents anything is possible but FFS keep her away from any semi competent lawyer) if the option is called on within 2 years. There will be a contract attached to the option deed but the buyer will be blank- but the option allows for the option to be assigned and/or a third party ("Golden Payday Developer" aka GPD ).

    At the end of 2 years if no onsell or suitable plans approved (the option deed allows for WD to lodge approvals with council, take soil samples etc etc) then WD can walk away and Biddy is a whole $1000 better off for having her property locked off the market for 2 or sometimes more years.
    However with a bit of platinum mentoring and PMA a GPD will come along and buy the now plan approved ( or even simply more valuable property due to market increase) option from WD for say $50,000. GPD still has to enter the contract attached to the back of the option- presented as an offer which Biddy must accept-- (usually a 30 day unconditional one) in its own name and pay the price agreed 2 years ago with Biddy. The beauty here is that WD's name does not appear anywhere on the contract so there is no stamp duty liability on the final sale. Indeed there is no way the OSR even knows about the option in the 1st place (unless you tell them) so the WD won't even pay duty on the option fee!

    And that's how even with $1000 you can make $50,000 on your first option deal and now I drive a Porsche etc etc.

    I expect this is what you learn at the various options courses. Sounds simple and the legal part is straightforward. Finding the good deals and/or overcoming your moral compass to take advantage of Biddy is the hard bit.
    edit: Just to make it clear full stamp duty will be paid by GPD on the purchase of the land however.
     
    Last edited: 11th Jan, 2017
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  15. mrdobalina

    mrdobalina Well-Known Member

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    I recall a poster on PC (or the last days of Somersoft) who raved on about using options to buy property with no money down.

    Thread was a massive hoo ha with very little info! Haha
     
  16. TMNT

    TMNT Well-Known Member

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    I looked into options a few times especially when the spruikers were hammering it

    I found it to be hypothetically allpossible.

    however you had to be very lucky and find people who not only wanted to sell (or you had to convnce) , or were a bit guillable or indifferent about real estate or unaware of hte market or the markets in general

    There is obviously less risk for the buyer with less money down

    but not worth it for me, to me the odds are the same as knocking on every door in the every tryign to score a bargain,

    this might work for larger projects or people with lots of contacts, but for the average pleb for me, its a big no no
     
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  17. JKWS

    JKWS Well-Known Member

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    Ive used one, IMO its a down market tool..

    They are not as scary or hard to work with as people think.. You have to be fair in your negotiation and reasonable in your offer. Thats all I can add..

    I purchased a site at 30k down, 1.5 years till payout figure 330k (which was in turn 300k).. In that time I managed to get 7 units all approved and onsold the site to a much smarter developer who managed to get another 2 on the site!!

    I was 22 at the time so anyone can do this.. I don't think you'll struggle if something comes along and you don't have a mentor, just throw any queries up here on PC.
     
    Last edited: 19th Jan, 2017 at 9:16 PM