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Opportunities Are Found; Deals Are Structured

Opportunities are Found; Deals are Structured

Folks new to real estate investing think deal structuring is a pretty cut-and-dry, unimaginative process. You find a house, make an offer, apply for a mortgage and then buy the property. Simple, right?

If it was so easy, why would an investor waste his/her time and money joining a local REIA (Real Estate Investors Association) or attending real-world, how-to-structure-it-creatively seminars?

I think Pete Fortunato, one of my long-time teachers, says it best: "Opportunities are found; deals are structured."

Let's look at how we took an opportunity a local bank recently brought us and structured it into a deal.

The bank had foreclosed on a property in Calhoun, Georgia. It was a cedar-sided, three-bedroom, two-bath ranch that had been built in the early 1980's. The house was in a good, solid neighborhood. It needed a $10,000 rehab. The bank said that a few years before the property had appraised for $140,000.

At the property, Kim and I discovered the house was vacant, the doors were locked and the key was nowhere to be found. The only way in was through the "investor door." In other words, my 50-year-old butt had to shimmy through a teeny, tiny unlocked kitchen window, fall into the sink and then crash onto the floor. Kim howled as I slammed face first onto the tile with a loud thud!

We determined the CARV (Conservative After-Repaired Value) of the property was $95,000.

Now, stop for a second. How would YOU structure this deal?

Here's how we structured it:

We began with our exit strategy - what we would do with the property after buying it. We would rehab the property and then either: 1) Sell it for $70,000, or 2) if we didn't immediately find a buyer, lease-option the property to a tenant-buyer. If the tenant-buyer made on-time payments and took good care of the property for 13 months, we'd owner-finance the property to the tenant-buyer with a 30-month call built into the Note.

Now, for our offer to the bank:

We'd buy the property for $40,000. We also needed to borrow $10,000 to pay for the repairs. Because we were $50,000 light of having the $50,000 we needed to do this deal, we'd do a Deed-for-Note deal with the bank.

With a Deed-for-Note deal, the bank gives us the Warranty Deed (ownership of the property) and we give them a $50,000 Note secured by the property.

Here are the Note terms we requested: A 20-year amortization with a 5-year balloon. Monthly payments (principal and interest) of $300/month at 6.01% interest. A built-in 2-year loan extension with pre-agreed-to terms and conditions. Also, we wanted the Due-on-Sale clause removed from the Security Deed.

We asked the bank to pay all closing costs, as well as for an owner's title insurance policy.

Is this similar to your deal structure? Do you still think deal structuring is a cut-and-dry, unimaginative process?

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