Sometimes we must dig deeper to create buying opportunities that otherwise would not exist. We can’t forget the basics; they will keep us out of trouble and provide most of our bread and butter. When opportunities arise for a purchase that seems out of reach or beyond our capabilities, it is the knowledge of these techniques that enable us to go beyond.
What magical secrets exist out there in investment land? NONE! There are no magic bullets or trade secrets in this business, only knowledge that is available to
anyone looking for it. Before I get too philosophical, lets dig into a couple of these techniques and uncover some ideas that may not have surfaced in your Realtor’s or Attorney’s brain in the past 15 years.
Why 15 years? That’s how long its been since money wasn’t easily and readily available through insane, institutional lenders backed by reckless Wall Street lenders
selling over-rated derivatives to uneducated (about these financial instruments) investors. Now that I have that off my chest, we can talk about things that work!
First, its all about the needs of the seller and buyer, mostly the seller. If you are reading
this you are likely a buyer so understand that your needs will automatically get met through the specific structure of the deal. Find out the seller’s motivation for selling. Their motivation may include; management headaches, negative cash flow, time constraints,
need to raise cash, retirement or re-location.
Once you understand the motivation begin to structure the deal around their needs. Lets use one example of a professional who travels. He is having his properties managed by a company but they gobble up the majority of his profits and leave him negative nearly every month. He is not behind on his bills, and already refinanced the properties once and took some cash out, but is not happy with the situation. He wants to sell. With these facts in mind we know that Bob (aka seller) is interested in getting out from under the properties. We must first analyze the numbers to determine whether they are under water or not. We learn that he has a relatively high vacancy rate (higher than the average in the community) and his management and maintenance costs are very high (about 20% of gross rents). We learn from that that if the properties were managed more carefully he should show a profit. As a buyer, we know the numbers will work if self-managed. Bob has 3 properties so we are going for the package deal approach. Our offer is what is owed plus 5% to cover his realtor fees. He will have to take money out of his pocket to close these to pay his attorney and transfer taxes.
The offer will look like this. $250,000 with $12,5000 down. The seller will provide a signed deed to be held in escrow until the land contract is paid in full. We are offering a 5 year balloon to assure us there is enough time in the deal for the market to increase by 15% in order for us to refinance these and cash out the buyer in 5 years. The payments we will make don’t quite cover the mortgage payments of the seller as we are offering a land contract of $237,500 at 6% interest over a 30 year amortization. This will result in a negative cash flow for the seller of $200 per month, which he will be required to put into
escrow with the escrow agent along with our payment which will, in turn, be used the pay the underlying mortgages for the next five years. Keep in mind that if the seller is in any danger of default on anything, in other words, if he has judgments or liens that could
attach to the property, you will need to vary this technique a bit. Specifically, you will take title, file the deed and file a wrap around mortgage which states that the current mortgage is subject to the underlying liens.
For more on this topic, please check out my other posts at timhalladay.com on Real Estate,
Investing, Mortgages and Life
