Many real estate investors talk about the great deal they got at a great price, and then over the next several months, they did a major renovation and either sold the property at a retail price, or maybe they just did a refinance with the hopes of at least getting their capital back and keeping the place as a rental.
Sometimes this can make more sense since the place has just been all fixed up. It might actually be better to keep this newly renovated property, avoid the high taxes on a short-term capital gain, and maybe sell a property you’ve held longer in your portfolio instead.
Maybe the property you choose to sell has increased in value or the mortgage tied to it has been paid down some. If you think about it from a tax standpoint, maybe it’s a property that’s losing its depreciation deduction or one that doesn’t have much mortgage interest to deduct anymore.
Of course, taxes will be less if you’ve held the property for more than a year and a day (long-term capital gain). Maybe you’re even starting to entertain a 1031 exchange option again, if it might make sense.
But these full-blown rehabs and major renovations can also carry an element of risk.
For example, there’s the possibility that repairs may cost more or take longer than expected, the appraisal may come in low, you may have trouble selling the property, or the bank’s terms may be lousy when you refinance. Or what if you run into problems paying back the hard money lender?
All these can be concerns for the modern-day real estate investor. But if you’re just looking for a buy and hold property to expand your portfolio, maybe the best deal isn’t a full-blown rehab. Maybe it’s just a retail deal with some twists.
In fact, some of my best deals were bought as a retail buyer.
What Strategies Make a Retail Deal a Great Deal?
One multi-unit I purchased (as an owner occupant) in my early career was purchased just under retail with a seller assist. I was the realtor (so I received a commission), and I had a lengthy, thorough home inspection. Today, this is one of my best cash flowing properties.
Another time, I bought a property after the listing had expired. I convinced the seller to sell me the property with a 6% seller assist instead of relisting it with a realtor.
Keep in mind, the seller assist enables you to indirectly finance your closing costs. When I think back to the last 30 properties I bought, at least 29 of them had a seller assist. This is extremely important, and whatever you do, don’t let a realtor tell you otherwise. The less capital into a deal (as long as it still cash flows) gives the investor the highest yield. I am so adamant about this point that I’ll even pay over asking price to leave in the seller assist. Yes, you heard me right.
There’s probably no better way to save money on this than having a great home inspector on your team get a repair credit from a seller (to your contractor, of course) or at least get a seller to fix stuff up for you. It’s much easier to convince the seller when a third-party is pointing out the defects and the costs.
Another great way to leverage this is to remind the listing realtor and owner that if they don’t take care of the issues reported in the home inspection in some way, the defects would need to be disclosed to the next potential buyer on the seller’s disclosure. Talk about ammunition in a negotiation.
Ensuring a Deal When There Are Multiple Offers
Sometimes you run into a great deal where there’s the potential of losing the property because it’s such a good buy or it just needs a little low-cost work. So, how can you ensure the deal?
Well, if you are a realtor, you could give up your commission. Now, you may think I just committed a mortal sin by saying that. But there have been many times where by doing so, I got the REO or I got a tight deal to go through. Some real estate investors just don’t think of this. Personally, I would gladly give up a few grand to make $20 to $30 grand on the flip.
One of my favorite strategies to ensure getting a deal is to make a cash offer. This works great when there are multiple offers involved, or if I’m just trying to get the seller to take less.
All you have to do is show proof of funds. I’ve even proceeded to bring a mortgage to the closing table. You should see the shock on the seller’s and realtor’s faces sometimes; it’s great. They’ll say, “I thought you were paying cash.” And I’ll say, “I am. I just changed my mind about how I’m paying cash.”
So, over the years, I’ve utilized these strategies to purchase some of my favorite deals and best properties, which were not full-blown rehab projects that took a lot of money, time, and risk. They were quick, little, bank financeable retail deals with seller assists and repair credits that were rent-ready in less than 30 days. After all, sometimes time is money.
What do you think? Do you agree or would you rather do the rehab work?
Leave your comments below, and let’s talk!