A realtor asked me to show her a real-world example of a deal we did that demonstrates how we make impossible deals possible. No problem, but I ask one favor: As you read this, BEFORE reading how we structured this deal, think about how YOU would have put it together.
In 2013, I got a call from a seller. He had a three-bedroom, two-bath home in Acworth, Georgia on Cox Farm Road. The property needed zero work – it was beautiful! Fair market value was $70,000. His mortgage balance was $95,000 – making him $25,000 upside-down in the property. The home would rent for $800 per month. His mortgage payment was $900 per month (principal, interest, taxes and insurance) – a $100 negative cash ﬂow. At the time, the home was vacant and costing the owner over $1,100 per month. The ﬁnancial drain was killing him. One last thing: Th e owner HATED tenants! His last two tenants had damaged the property costing him thousands of dollars in repairs.
The owner just wanted done, but he wouldn’t consider doing a short sale or letting the home go back to the bank. He was a man of honor and integrity.
Can you make this impossible deal possible? What if I told you that structured creatively, this deal will make you $200 per month, risk-free…with a tens-of-thousands-of-dollars bonus at the end? Please take a few minutes to structure this deal in your head.
Here’s the agreement: Knowing that I could ﬁnd a tenant who would rent the property for $800 a month, I leased the property from the seller for $600 per month and became his tenant. I had the right to sublease the property to another tenant. I would only pay the property owner rent if my tenant paid me rent. I’m responsible for the ﬁrst $50 of repairs each month, and the owner is responsible for the balance of repairs.
I was able to ﬁnd a great tenant within three weeks. The owner went from losing $1,100 per month to only losing $300 per month ($900 mortgage payment – $600 rent = $300 monthly loss). This gave him some immediate breathing room because it doesn’t hurt as much to lose $300 as it does to lose $1,100 per month.
To lower his mortgage payment, I had him apply for a HARP loan. After two months, the lender approved his HARP loan. This lowered his mortgage payment (principal and interest) from $755 to $450 per month – a savings of $305/month.
I also had him shop his homeowner’s insurance with my insurance agent. This lowered his yearly policy from $1,005 to $590 – a savings of $35/month.
Finally, I fought to lower the owner’s property taxes. His yearly tax bill fell from $700 down to $351 – a savings of $29/month.
Bottom line: In three short months, the property owner went from losing $1,100 per month to making $70 per month. A very big ﬁnancial swing, wouldn’t you say? And this doesn’t include the tax beneﬁts the owner receives by owning rental property!
Now comes the part of creative structuring that takes this deal from good to great.
When I met the owner, I didn’t want to buy his property because it was $25,000 upside down. Write this down: It’s OK to help someone out of the quicksand, but it’s not OK to take their place in the quicksand.
That said, I didn’t want to buy the property at that time, but I didn’t say I never wanted to buy the property.
Here’s how we creatively structured the rest of the deal: The owner agreed that if I would rent his property and take away his landlording headaches, he’d give me an option to buy his property at any time within the next seven years for the balance of his mortgage at the time my option was exercised.
Think about this: In 2013, when we did this deal, the real estate market was still beaten down, but it was just starting to climb back up. Over the course of the next seven years, what would happen to the fair market value of the property? It would go up, right? And what would happen to the mortgage balance? It would go down, right?
Do you see what this purchase option allowed? It allowed time to eliminate the $25,000 negative equity and turn it into positive equity. It allowed me to capture this property’s appreciation and the amortization. And remember, with an option, I had the right to buy, but not the obligation to buy, which makes this a very safe deal for Kim and I.
Folks, I wasn’t born knowing how to do this – creative deal structuring is a learned thing. Be sure to learn from seasoned, been there-and-done-that investors. Learn the language of creative deal structuring and funding. Remember: All deals are possible!
By Bill Cook