With all the strategies used by real estate investors would you believe there are only three basic transactions in real estate?

To transfer an interest in or to real estate you can either give a property away, sell it or transfer the use of the property.

Why would someone give property away? There are benefits to gifting property. I won't get into estate planning but transferring property can save the owner or their estate from taxation. They may also give property away as a means to achieve some other goal. This is common among developers, where the developer transfers property to a municipality for a public good. Streets and right-of-ways first come to mind, but the developer may grant land for a park or land for a firestation in order to obtain favorable zonning and taxation considerations for a proposed development. Setting property aside for a neighborhood swimming pool, tennis court, club house or for other recreation is sometimes a good move for marketing lots. These common areas may be managed by the developer after land is transferred to a home owners association. The transaction was a gift, but the management becomes an income producing activity.

Selling the property is what we think of most often in transferring property. Real estate may be sold in whole or in part, or a specific interest or right may be sold. A good example of selling part of a property or an interest to it while retaining title are easements.

Easements for the use of land may also be sold. Easements are general or specific, meaning that the seller retains title to the land but for a period of time or forever transfers the right of use to the property for either a general or a specific use. Easements are commonly granted for ingress (entering) and egress (exiting) over a roadway or a driveway. Common easements include uses for utilities, roadways, driveways, common walls, common areas and water wells. Easements are a "cloud" on title, that is when an easement is filed, the title to that area given becomes restricted in its complete use by the title holder since it allows others to use the property. An area where an easement is given probably can not have a building placed upon it since it would then limit the purpose for which the easement was given. A Lease is a type of easement granted for a specific period for a specific or general purpose. It is also an exchange of an equitable interest.

A seller may sell an equitable interest in whole or in part. Such transaction provides a buyer with an economic interest in or to a property without transfering title. A leasehold interest is the economic interest a tenant acquires arising from a rental or lease agreement for the consideration paid. All kinds of properties are leased, residential, commercial, industrial as well as agricultural. 

An option to purchase is another example of an equitable interest in property. Selling an equitable interest in or to property is a popular stategy in wholesale transactions by investors. The investor does not take title to the property they only acquire an interest it, the right to purchase the property at a stated price over a certain period of time. The buyer of the option then has the right to purchase the property at a premium (more than was initially paid for the option) for the right to purchase at a price which is perceived to be lower than they the buyer could buy it for during the option period.

A lease-option is simply the right to lease the property and at the same time having an option to purchase the property. This strategy can be used in several ways, depending on your position as a buyer or a seller. For the seller, offering such a transaction will increase marketability, it provides a means for buyers to purchase who would not otherwise qualify under conventional methods. Then the advantage for a buyer is obvious. Little or no money down may be used to acquire a lease-option, making it easy for a buyer with limited resources to control an equitable interest to a property. While a lease-option can be condensed into one contract, for legal cosiderations it should be treated as two distinct rights. Since different rights are conveyed to a tenant and an optionee (buyer of the option) any cure for the failure of the tenant to perform under the lease portion, or visa versa, may be restricted due to the rights conveyed as a tenant or potential buyer.

Not only are purchase rights under an option sold, but the interest in a lease may be sold as well. Unless otherwise limited by written agreement, a tenant may re-let or sub-let the leasehold interest in the property. There are "investors" that acquire a lease and sub-let at a higher rent. This provides rental management services for owners without having to hire an employee or for the tenant/manager having to meet real estate license requirements. However, the original tenant who leases from the owner will be responsible to the owner for any loss as agreed and the sub-tenant is only liable to the principal tenant unless otherwise agreed.

So, if you are an investor getting started with limited funds, a lease-option or just an option may be your best strategy for getting involved in real estate. You may also be interested in real estate management by sub-letting or re-renting properties that you rent. These contracts can be fairly simple, but still require the investor to be aware of the pitfalls. Lease-option agreements can also be very involved and require extensive real estate knowledge to achieve investment goals. 

The best way to find these deals is to search for rental property that is poorly managed or where the landlord is experiencing problems, like filing for judgements for lost rent. Finding a landlord working on a property or cleaning it is a great time to convince them to get out of the landlord business and sell creatively. These transactions are to ultimately lead to the sale or transfer of title.

Selling the property can be accomplished in hundreds of ways, this is where investor strategies are used. Sales are accomplished by tranferring title from the seller to a buyer for cash or other consideration. Sales that are accomplished without other consideration, such as an exchange of properties or financed in some manner by the seller are cash transactions. The seller receives cash from the buyer. Where the buyer obtains the cash is another thing, it may be from a mortgage or by some other means that the buyer transacts prior to buying the property. Where the money comes from is generally irrelevant to a seller.

The contracts and instruments used vary widely from state to state, but basically begin with an agreement to perform in one of these transactions. 

The sale begins with an accepted sale contract. When the purchase is closed, that is when title is transferred, several documents may be in play. The buyer will sign or execute a mortgage deed of trust to a lender as collateral for the loan provided. A mortgage is the loan agreement which refers to the collateral assignment of the property purchased and a deed of trust or trust deed is a three party agreement that provides for the assignment of the property for collateral to the trustee. The trustee is a nuetral party who administers the terms of the trust and performs the duties of either effecting the release of the collateral and delivery of clear title upon full payment of the debt or securing the property for the lender and selling the collateral to cure the debt, which is a foreclosure. At closing, the seller usually warrants title with a warranty deed, but may, if agreed, convey the property without warranty by providing a special or limited warranty deed or even a quit claim deed.

A special or limited warranty deed simply transfers title without specific warranties such as to title concerns such as easements, leasehold interests, physical condition or compliance with codes, regulations or ordinances. These deeds are usually made by non onwer occupied sellers such as banks or government entities when selling property owned through foreclosure or seizures.

Quit calim deeds only convey that interest that the grantor (seller or maker) may have in or to a property to the grantee (buyer). A quit calim deed does not warrant anything and is usually made in connection with a deed-in-lieu-of-foreclosure by a borrower giving title for the forgiveness of the debt. They are also used to assign property from a one entity to another without a conventional sale transaction, such as from an individual to their trust or between married individuals or from one company to another where both companies are owned by a common owner.

We will take a look later at creative ways to accomplish some of these transactions.

Bill Gulley

American Realty Institute, LLC