Deal or No Deal?

Posted on May 6, 2013 by

I’m excited. I am using new techniques and they are working!

Where do I learn new techniques? Recently I took training because I know that change is one of the key factors of staying ahead of changes in the economy, the market, and life in general. I chose trainings about lease options and 0% owner financing. Each of these gave me a new in my tool in my belt – a tool to help me to make more money.

But understand, for any scenario to work, I MUST know my plan.

I assume that you want what I want: to maximize my profit potential. So, we are interested only in the properties that will help us do this. We must make choices with this in mind.

Here is a scenario to show you concrete ways of deciding…

Deal or No Deal?

The Scenario

  • The seller wants 120K.
  • The seller owes $115,000 and has been paying the mortgage for 6 years.
  • The house needs $3,000 in repairs.
  • Taxes are $1000 annually.
  • Insurance is $800 monthly.
  • Fair market value is $100,000.
  • Rents in the area are $1,000 a month.
  • The interest rate is 4%.
  • Total monthly payment is $773 (principal, interest, taxes, insurance).
  • Equity is not an option.
  • The difference between asking price and the fair market value is $20,000.

These are the only facts you need to figure out how to structure the deal! The question is How are YOU going make money?

Is this a Deal or a No Deal?

Well, how long do you want to stay in your JOB?

My advice? This is not a buy-fix-and-sell. But it could be a buy-fix-and-hold. As a “Subject to,” lease option, or sandwich lease option, this will work. But it won’t get you enough to leave your job.

As a Transactional Coordinator, I can structure the deal to lease the property for $757 per month and then sell it to a take-out buyer under a lease with an option to purchase the property within 10 years. Over a 5-year period, the principal will be reduced to $100,000. The cash flow would be $227 per month.

If the seller asks for their equity of $2,000 up-front, and you want to make $5,000 up-front, would you be able to convince a potential buyer to give you a $10,000 option fee with payments of $1,000 per month?

Based on my years of experience, here are two possible plans:

Plan A: Sandwich Lease Option

Here, you are responsible for making payments while the property is vacant. The tenant-buyer will make repairs during the two-year option and the one-year extension. You will be making $227 per month in positive cash flow. You will ask the tenant buyer to pay a $12,000 option fee or 10% when they move in. This covers the repairs and gives you future closing costs. The purchase price would be $120,000 on  the day you close.

Plan B: Lease Option with Wholesale Component

Here, the tenant-buyer puts down a $12,000 option fee. $2,000 goes to the seller, $5,000 goes to you, $2,000 goes to option closing costs and repairs. The tenant/buyer’s monthly is $773 per month.

Since I have many years of experience, I can say that Plan A will probably not get you out of your job. However, Plan B would be viable. This is because if the market does not recover, after 10 years the take-out buyer can refinance in the 6th year. With patience, everyone wins.

Would you have known what facts you needed to decide if this is a Deal or a No Deal? Would you have known the possible options that I have presented?

Remember that having a mentor can help you answer these questions. I have the knowledge to help you to make informed decisions—this is why I am a mentor to many people, and I’d like to advise you. I am looking forward to meeting you and helping you on your way to a successful 2013!

Russ HinerRuss Hiner is an active real estate investor, coach and mentor. Russ is currently the leader of the Atlanta REIA Creative Deal Structuring Group and Atlanta REIA Mastermind Group. Russ also teaches several workshops throughout the year on a variety of real estate investing topics such as Negotiations, Wholesaling 101, Wholesaling 401, Real Estate 101, Property Management and more.

Contact Russ Hiner

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