As I deal with a lot of investors, I often run into deals with Options, Lease Options, and Lease Purchase agreements. The problem is that these terms are often used interchangeably because many investors have received bad information on what they actually are. “Lease Options” are often pitched to investors in a “sexy” manner but nine times out of ten, they person pitching them is using the terms incorrectly. This brings us to a question that was recently asked (and recently misunderstood by another):

What is the difference between an Option, Lease Option, and Lease Purchase?

An Option is easiest defined in the manner in which it is stated. The buyer has the “option” to buy it. He also has the option not to. An option by itself has no lease attached and typically no other tie-in agreements. There may be an option fee associated with purchasing an option (or there may not be). Options are used primarily by investors, but also may be used by buyers who are nervous about certain external aspects of a property. For example, an option may be used to give a buyer the ability to buy a property at a pre-negotiated contract value/terms at some point in the future. A personal experience where this was used was when one of my buyers put an option on a piece of land where he wanted to build a gas station. There was a new road getting ready to come through and he did not want to buy the property if the road was going to dissect the property. He put the option on the property until the department of transportation finalized the plans for the road. Options typically:

• Have a predetermined/pre-negotiated contract in place and the buyer has the “option” to purchase at some point in the future
• Have a fee associated with obtaining the fee. This can range from $1 to several thousand dollars and is usually determined by the motive of the option (someone just wanting an option to pre-negotiate  deal while waiting on an external source such as department of transportation is called an “innocent option” and is usually not costly where an investor trying to tie up a property to resell or assign the option may have a higher fee associated with it). Option costs are also determined by the length of the option. An option for a few months may be next to nothing where an option for a few years would be substantially more
• Owner of the property cannot sell to anyone else while the option is in place
• Are typically easily assigned or transferred by buyer without consent by seller unless specifically noted otherwise in option
• Have an expiration. If a buyer does not exercise his option within the time period – it expires and he loses option and typically any fees associated with obtaining the option (the option fee which could have been as little as $1 or quite substantial).
• Come without obligation. The buyer has an “option” to buy property but he is not obligated to.

Now, this brings us to a Lease Option. The only real difference between an Option and a Lease Option is that a Lease Option also has a lease attached. Think of this like renting a place (the lease) and having the ability to buy it at any time during the lease period. In a lease option, the option may be easily assigned but often times, the lease is not. A perfect example of a lease option is the a buyer really likes a home but he has to sell his first before he will qualify for a loan or there may be other issues associated with obtaining financing. He may negotiate the terms of the purchase agreement up front using the option, and then you attach a lease so he can move in now and the seller can cover the note. Lease options are very popular among investors and vacant properties because it gives the seller the ability to have money coming in on the property during the interim while buyer is getting their financing together.  A lease option is nothing more than a lease [with an] option to purchase.

Now, this brings us to a Lease Purchase. This is probably the most under-used term for what it is. Often, investors and real estate professionals alike, substitute the term lease option for lease purchase. In fact, there are entire books written by real estate agents who improperly use this – no wonder the investors are confused! A Lease Purchase is pretty easily understood once you have full understanding of options and lease options.

• A Lease Purchase agreement still includes the lease and an option, HOWEVER, the buyer (or tenant) is responsible for things such as insurance, taxes, HOA dues, and other basic maintenance items as well as mechanical issues, and any other expenses
• The “option” in Not Really an option – it is more of a convenience fee
• Buyer is typically obligated to purchase under a lease purchase
• A Lease Purchase is also typically classified as “Rent to Own” and some portion of the money from the lease may (or may not) be applied toward a future downpayment for the purposes of a bank loan
• May be called a “Land Contract”, “Land Trust”, “Deed Contract”, “Contract for Deed” or other terms which are more in the legal realm than the investor/real estate realm.

Options and Lease Options are typically used when a buyer is not 100% sure if they want to buy a property or if they just need a small amount of time to determine their ability. Lease purchase agreements became really popular in the 80’s when bank rates were very high and sellers were willing to finance to buyers under long term loans (seller financing). They have since become an instrument for investors to sell to people who may not otherwise qualify for a loan or need a long-term solution to get prepared. A lease purchase agreement could last from 1 year to 10 years. An average is 3-5 years with the ability to renew if necessary.

If you are considering any of this as a viable solution for your properties or as a buyer, I urge you to contact me, quite frankly because there simply are not that many people in our area that fully understand this and you run the risk of serious issues if you do not know what you are doing – or have someone that does!

With tax advantages (Go Zone) and other incentives (SRAP, MDA), many investors fell prey to unscrupulous or unknowledgeable agents and brokers pushing properties just to take advantage of these incentives. It is unfortunate that this happened, but in some ways it has made it a great market place for serious investors who work with a broker who truly helps minimize risk and secure the investors objectives.

There are so many ways to make money in real estate investing. I am familiar with many, but my specialties lie in the analysis of residential (single family and multi-family) properties. This includes developing raw land for residential use as well. I will touch on just a few here that offer exceptional opportunities.

Go Zone
Go Zone has been extended through the end of this year. It is expected that this will be the last extension so if you are looking to take advantage of this, NOW is the time to do so. Go Zone offers the ability to depreciate 50% of the improvements on a property in the first year. The property has to have not been put into service (see more info on Go Zone). This depreciation can be carried back to recoup taxes as well as forward to help mitigate future tax liability. Just because it sounds good though – don’t always jump just because it looks good on paper!

Go Zone is an excellent incentive when used as a part of your overall real estate investment plan. Some agents have no problem selling you an overpriced property that will never cash flow, just so you can get go zone depreciation. Stay away from multi-family right now. The market is inundated with duplexes and fourplexes from people buying overpriced for Go Zone. Unless you have something really special – stay away. It simply makes no sense to spend $80k-$100k a door when you can buy foreclosed units for $40k-$50k a door, sometimes less. Single family homes are the best way to go. Their are a handful of communities where you can pick up existing inventory that will cash flow and offer a high chance of good appreciation. Single family homes give you the best exit strategy as well – much easier to sell a home than a duplex.

Foreclosures
Due to many investors being taken advantage of over the past few years, there are numerous foreclosure and really great deals in the multi-family market, specifically in duplex units. It is not uncommon to find fairly new duplexes in the $80k-$100k range that will reach rents around $1500/month (both sides). Many of these deals reflect double-digit CAP rates which are almost unheard of in the residential market.

There are also opportunities in “flipping” properties. The best deals are for those that have cash and a stomach to sit on something for several months. The properties that have the most potential for return on investment also require the most work and may take a few months to complete if you are working to adhere to a stricter budget. If you have the stomach for it, and the cash to put up, deals can be found with 30% or more cash on cash. I have personally assisted investors with deals that provided over 100% cash on cash in all cash transactions. Rehab loans are harder to come by in the investment arena. An owner-occupant (someone looking to live in the property) can look at FHA 203k programs (I have a great lender for this), but investors are finding it harder to get loans to rehab and hard money is so tight right now that when you can find a hard money lender willing to fund a project, the rates and points will eat away a large portion of your profits.

Overall “Short” Analysis (Summary)
If you need tax incentives, make sure you can cash flow. Properties in select areas can cash flow easily with 25-30% (most lenders requirement now) and the single family market is an easier exit strategy. Look for indicators of higher potential appreciation areas. If you are just looking for straight positive cash flow (passive income), and are not as concerned about the exit, look more at duplexes because now is the time to buy right.

Contact Me with any questions or to assist in putting together a more detailed investment strategy. I look forward to working with you.

While Go Zone accelerated depreciation is a great reason to buy real estate investments on the Mississippi Gulf Coast, it is not the only on. While every home buyer and investors needs are different, the one thing everyone wants to see is appreciation in their investment. Looking for emerging real estate markets is one of the key factors for investors who want to see their real estate investments grow in value.

The Mississippi Gulf Coast is a truly under-valued area in terms of real estate in general. Part of this is due to other states’ overall view of Mississippi in general, but we all aren’t toothless slobs that can’t enunciate – just the ones they show on the 6 o’clock news. The rest of us are at home with our families or working

Whether you believe it or not, the Mississippi Coast is a true emerging real estate market and more investors are realizing that now. If you want to be an early mover, contact me and let’s analyze your investment strategy.

So What Makes the Mississippi Coast so Special?

The MS Coast has numerous economic engines which include:

1. Federal Dollars. Keesler Air Force Base (Biloxi), Naval Construction Battalion (Gulfport), Camp Shelby Army Base (Wiggins), Stennis Space Center (Hancock County) and the Coast Guard station (Gulfport) which are all within about 40 miles of each other. Keesler Air Force Base is home to the Cyber Command Training Center as well as the Hurricane Hunters. These bases keep a steady flow of military personnel moving in and out of the area which helps to balance the housing market even when national housing statistics are very gloom.
2. Local Economic Influences. Most strong real estate markets have at least one driving force to the economy – the MS Coast has many. Not only does south Mississippi have the military installations, but it also happens to be a major gaming destination. Billions of dollars have come to the Coast through the gaming industry. A “Vegas on the Beach” if you will, major casinos in Biloxi, Gulfport, and Bay St Louis, with more planned in other areas such as D’Iberville (a truly growing area) as well. Other economic engines include seafood, ship building, tourism (beaches, islands, fishing) and a growing container port. Gulfport is expanding its already large container port to be one of the largest in the country and will be state of the art (see Port of the Future – outside link opens in new window).
3. Prices. The Gulf Coast of Mississippi is one of the most undervalued areas in the country as far as what you get for the money and what its potential is. With the exception of a surge immediately after hurricane Katrina that had to balance itself out, homes have shown very steady appreciation historically. Currently, new homes can be bought in the $120k+ range but inside subdivisions, I recommend going a step above to the $130k-$140k range. The initial cash on cash looks less appealing, but these subdivisions usually offer a much better exit and less chance of “going downhill”. There are many very nice subdivisions that offer smaller homes in this range that would appeal to investors, but most agents do not show the potential. For those comfortable with buying older homes and doing some upgrades, it is very feasible to see positive cash flow and equity almost immediately in 10+ year old homes. Want to take the development route? There are an abundance of quality properties to start on.
4. Tax Incentives. Tax incentives are a great reason to look at an area, but there is so much more to it. Many investors who bought under the first part of the Go Zone got took in by unscrupulous builders and real estate agents that sold properties at above (in my opinion) market value in order to reap the rewards from those sales. Go Zone is an awesome incentive – when you are talking to someone who wants your repeat business in the future and not just a fly-by-night company looking to make a buck. If you are considering taking advantage of Go Zone, time is drawing near. Don’t wait until “later” because you may lose out on your ability. Pickings are slim and the best properties go to early movers. I can help you get great deals if you contact me in enough time. Don’t let Go Zone be your only reason for investing here though – there are so many good reasons.
5. Location. Location, Location, Location, right? The Biloxi/Gulfport/D’Iberville/Ocean Springs areas are located on the beautiful Gulf Coast. If I didn’t have you before, let me say it again – waterfront communities! Everyone loves being near the water. Well, maybe not everyone, but a LOT of people do. We also happen to be approximately an hour from New Orleans, LA and Mobile, AL. Both of these cities can be identified as emerging markets on their own, but the MS Coast is better than either due to federal spending, diversified local economy, gaming, tourism, and the in-progress port expansion.
6. Growth Potential. The MS Coast is comprised of several cities including Bay St Louis, Pass Christian, Diamondhead, Long Beach, Gulfport, Biloxi, D’Iberville, St Martin/Ocean Springs, and other smaller areas surrounding. In many cases, there is no clear definition between these cities other than the corporate lines that divide them. This makes for a huge growth potential in these areas producing one large city base rather than several smaller communities. There is also plenty of room for expansion in the northern parts of these counties which has already started due to lower insurance rates north of the Interstate, however, the bulk of the population is in areas south of the Interstate with the exception of North Gulfport and the outstandingly fast growth in the D’Iberville area.
7. Quality of Life. As a “military brat” myself, I have lived in numerous place. I was born in Biloxi and moved back in 1999 to help my grandmother, who’s health was diminishing. I have found no where else that I really could say that I loved as much as here. There is always something going on, the people are great, the dining is just as good as the people, and when you simply don’t know what else to do – a simple walk on the beach or day on the water will put your mind at ease and really help you appreciate life.

This is my home, one of the best emerging markets in the country, and I enjoy it daily. An investment on the MS Coast is a great one indeed, provided you are talking to the right person. I look forward to discussing your needs with you and working on your portfolio. When you are ready to move here yourself, I look forward to relaxing with a fishing pole in hand, and enjoying what the Mississippi Coast has blessed us with.

Go Zone accelerated depreciation is in its final year without any anticipation of being extended again. This means that if you are serious about doing anything with Go Zone property – you need to start acting now.

There are a lot of agents out there that are selling properties, saying they qualify for Go Zone under a “developer’s option”, but from the tax professionals I have spoken with, this is very murky water. I have had one broker tell me that they have been able to make this work, but two tax attorneys said no way. My philosophy is that if you go by the book, you won’t be heartbroken later when some IRS auditor tells you that you tried to game the system and lost.

The inventory for truly qualifying Go Zone property is declining. There is almost no multi-family properties that qualify and there are few single family properties that really make sense from an investment analysis. When I look at any real estate investment, I feel that it is important to make sense before tax incentives – otherwise it is not really an incentive, it just becomes a tool to sell.

There are a handful of single family homes being built that will qualify and make good sense from an investment standpoint.  If multi-family (duplex, triplex, fourplex or more units) is what you are most interested in, I have builders ready to get you a top-quality product that will make sense financially AND you can get the Go Zone depreciation.

Contact me today for more information or if you are ready to get started.

The Go Zone offers 50% accelerated depreciation in the first year of acquiring an eligible property. While the ins and outs need to be discussed with your tax professional, I have been working with Go Zone since its inception and not only can I assist you with the information, but also the properties.

I take a little different approach than many agents. Many agents are pitching overpriced junk because it makes sense as an investment after the go zone depreciation is applied. I look for properties that are good investments before the depreciation. This makes the Go Zone icing on the cake instead of just a way for builders to make more money on their work.

It is no secret that waterfront properties are typically in higher demand and make more money as rentals. What if you could build waterfront developments, be in them for about the same cost as inland properties, and create a higher cash flow?

Some investors may shy away from this proposal because of the risk of waterfront properties in a hurricane area. If you do not feel comfortable with the fact that flood insurance should take care of this for you, I can assist with many other Go Zone viable properties as well.

Contact me today. Time is running out and it has been posted in good faith that there is no reason to expect Go Zone to be extended again beyond the end of this year.

The MS Coast won another victory when the Go Zone bill was extended last month, providing for accelerated depreciation on real estate property put into use during 2011. The prior extension [2010] was a bit “thrown together” and extended the “put into use” part, but did not extend the expenditure date. What this means is that if you bought real estate in the Go Zone for the tax credits, you had to purchase something that was built on or prior to December 31, 2009 – this has changed.

The new extension will allow for any new property that has not been put into use. So, any property built since the Go Zone was enacted and not put into use will qualify.

What does this mean to you? Anyone looking for Go Zone property during 2010 had to find property that was built before the end of 2009 and never occupied (put into use). As you can imagine, the later in the year it got – the harder it was to find good, viable property as all the good ones were already sold. This left mostly bad investments or really high-dollar investments that only a handful of people could qualify for.

After a few hours tracking down information on the extension, I was able to get in contact with two attorneys that are well-versed in Go Zone. One of which I have referred before, and the other was very prompt in response to my inquiries and based on some papers he has authored/co-authored, seems extremely knowledgeable.

John Harral with ButlerSnow stated to me in a phone conversation that ultimately, any property built after Katrina and put into use during 2011 would qualify, although he also said that any specific questions should be directed to him or another Go Zone familiar attorney and your tax adviser.

Michael Haun with Paul, Hastings, Janofsky & Walker LLP, stated:

The recent extension pushed back both the placed-in-service date and the construction date to January 1, 2011.  Consequently, with respect to nonresidential real property or residential rental property that is placed-in-service by December 31, 2011, the adjusted basis of such property attributable to construction before January 1, 2012 is now eligible for the additional first-year depreciation.

What does that mean? In as simple terms as possible – anything that has been built and not put into use will qualify. There are an abundance of opportunities in existing properties as well as building new ones that would qualify for this. Use this CONTACT ME link to email or call me to help you find viable investments for your needs.

Attorney John Harral can be reached at (228) 575-3038
Attorney Michael Haun can be reached at (404) 815-2279
I (Damion Flynn, Broker) can be reached directly at (228) 365-1883