What is Creative Deal Structuring and Financing?

I’ve written a weekly real estate investing newspaper column for more than ten years.  During this time, we’ve looked at all kinds of creative deal structures and financing…but what exactly are these? 

The easiest way to tell you what creative deal structuring is, is to tell you what it’s NOT.  It’s not finding a house to buy at fair market value and then going to an institutional lender to get a traditional mortgage.  That said, about everything else is creative deal structuring and financing.

The best deal structurer I know is Pete Fortunato.  He has been one of our three primary real estate investing teachers since 1999.  (The other two are Dyches Boddiford and Jack Miller.)  Over the years, we’ve taken almost every seminar Pete has taught – every time he has taught it! 

Much of our real estate investing knowledge comes from Pete.  My biggest ah-hah Pete moment was seeing a picture of his Benefits House for the first time.  These days, that picture hangs on the wall in front of my desk.  Whenever considering a deal, I look at it and contemplate different ways the deal can be done.

When most investors look at a deal – and I was sure guilty of this – they just see a house.  They don’t see the eight basic parts of the deal: Growth, Income, Amortization, Profits, Management, Tax Benefits, Use and Security.  You can keep all of the parts for yourself, or give/sell/trade one or more of them to someone else in order to structure a better, safer, more acceptable deal.

The key to putting together an acceptable deal is to make sure that it helps the other person move into a better position than where they are now!

To see creative deal structuring in action, let’s look at a deal Kim and I are doing right now.

Kim has had her Lexus since 2005.  Over the years, while going out and meeting with sellers, she’s amassed 210,000 miles on her little white car.  It’s time to get her another one – so we’re looking for a 2011 Lexus.

Instead of trading in her car for a newer one – way, way too boring – we want to find someone who has a house or a mobile home that they no longer want.  We’ll give the seller Kim’s car (maybe something the seller does want) and acquire the home (something the seller doesn’t want.)  In addition, maybe the seller wants payments.  Maybe the seller wants us to make their mortgage payments for them.  We don’t know the deal until we meet with an interested seller.

Once we own the property, we’ll rent it to a good tenant.  Then, we’ll use the profit from the rental to pay the monthly car note.  In other words, the tenant’s rent payments will pay off the house and Kim’s new car! 

Pete says that using cash to do a deal is a sign of intellectual inadequacy and sheer laziness.  He also taught us that if you limit the conduit you use to do a deal to only dollars, you’ll severely limit the quality and quantity of your deals.  He’s so right!