Two School's Of Thought For Creative Real Estate Deal Structuring:
- First, one must do their due diligence and know the MAO (maximum allowable offer) that they can pay for the investment. One must also know their "exit strategy" before ever closing on the deal. If one knows the (1) the "front end" cost and (2) the "back end" method for getting out of the deal, then they are well positioned to correctly structure their deal.
- Second, one must know exactly what the seller needs above and beyond "price." In other words, find out how to give the seller more of what they "need" (example: some money down today and a payoff later) as opposed to simply what they "want" (example: 100% CASH or 100% Financing up front).
In the following scenario a recently renovated home at 123 Parkside shows comparable values (ARV) of around $100,000. The current seller owns the house free and clear. Unfortunately Mr. Seller has recently lost his job of 10 years selling vehicles and wants to move in with his brother to start looking for work again. In this example, Mr. Seller agrees to sell the home for $67,000.
The problem is that like most investors, Mr. Real Estate Investor (REI) doesn't have CASH to buy the property. However Mr. REI does have a few options.
- Mr. REI can get hard money of up to $60,000, but he still needs $7,000 plus closing costs to close the deal. This is exactly what Mr. Seller "wants" which is just $67,000. However he only needs enough money (a few thousand dollars) to move in with his brother across the country to start looking for work again.
- Mr. REI comes up with the creative idea of offering Mr. Seller more of what he "needs" which is $3,000 today (to help him move). Mr. Seller will "deed" the house to Mr. REI, because Mr. REI structures the deal in such a way to pay Mr. Seller what he "wants" ($67,000 TOTAL). This method of creative deal structuring will give Mr. Seller his $64,000 in six months at 0% interest when Mr. REI sells the house to another buyer.
- Explain to the seller their specific options (give them at least two to three options).
- Remind the seller of how long it takes to sell a property in a particular area (either FSBO or with a Realtor).
- Always put an offer in writing (sometimes us a figure like $67,367.59 to make it more "concrete").
- Remind the seller that they will get both what they need ($3,000 today) and what they want ($64,000) if they will be a little flexible.
- Always use the advice of a great attorney when structuring creative deal financing.
For additional information to ideas like the one above, simply enter your name and email address below for timely real estate investing tips, information and cutting-edge marketing strategies to help you become a better investor. You'll receive your FREE real estate investing newsletter. Learn two dozen investor mistakes to avoid. Most importantly, we'll notify you about the up and coming Knoxville investment club meeting.