Making the Impossible Deals PossiblePosted on November 6, 2013 by
A realtor asked me to talk about a real-world example of a recent deal we did that demonstrates how we make impossible deals possible. No problem, but I ask one favor: As I describe the homeowner’s situation, BEFORE you read how we structured the deal, think about how YOU would have done it!
The seller had a three-bedroom, two-bath home in Acworth, Georgia. The property needed zero work – it was beautiful! Fair market value was $60,000. His mortgage balance was $92,000 – making him $32,000 upside-down in the property. The home would rent for $850 per month. His mortgage payment was $925 per month – a $75 negative cash flow. At the time, the home was vacant and costing the owner over $1,000 per month. The financial drain was killing him. One last thing: The owner HATED tenants! His last two tenants all but destroyed his investment property.
The owner just wanted done, but he wouldn’t consider doing a short sale or letting the home go back to the bank.
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.
Here’s the agreement: Knowing that I could rent out the property for $845 a month, I leased the property from the seller for $645 per month. 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 $1,000 per month to only losing $280 per month ($925 mortgage payment – $645 rent = $280). This gave him some immediate breathing room.
Next, I fought to lower the owner’s property taxes. His yearly tax bill fell from $622 down to $351 – this saved him $271 in 2013 ($23 per month).
To lower his mortgage payment, I had him apply to the HARP program. After a very short time, the lender approved his HARP application and lowered his payment from $925 to $648 per month.
Bottom line: With this creative deal structure, the owner went from losing $1,000 per month on a house that gave him landlording migraine headaches, to a worry-free property making $25 per month – plus all the tax benefits a rental property spins off. What a swing of fortune!
What did Kim and I get out of this deal? We picked up an extra $200 per month in mailbox money. Plus, the owner gave us an exclusive option to buy his property at some point in the future for the balance he owes on his mortgage at the time we purchase. So with this deal, Kim and I captured amortization, appreciation, management fees, income and profit.
Not bad for a couple of hours of work, was it?
Folks, I wasn’t born knowing how to do this – creative deal structuring is a learned thing. At our October real estate investors meeting, Dyches Boddiford (one of my long-time teachers) and I will be going over this deal – and others like it – in detail!