When the time comes to step outside your comfort zone for a deal, it’s still a gut call.
In their early days of making deals, I recommend new investors follow a script and make their deals contingent upon finding a buyer. In addition to experience, it helps to have numerous other sources of cash flow (my associates and I typically structure three paydays) coming in to be able to step outside the comfort zone and fund deals.
This is the story of one of my more experienced associates, Bill, who was comfortable enough with the seller and the property in a certain instance to go outside his usual terms.
Straying From the Norm
The property was an expired-listing townhouse in good condition and in a good neighborhood. The seller needed a firm commitment on a lease purchase commencement date from Bill in order to get financing for another home he was buying.
He accepted that, but with a very spacious six-month term to find a tenant-buyer. Bill agreed that if he couldn’t find a tenant in six months, he’d start paying the underlying mortgage.
The real estate agent had been unable to find a buyer on the market for $359,000, and Bill was able to tie it up for a lease purchase of $320,000. That was another reassurance; if he couldn’t find a tenant-buyer, he could sell it outright for at least that purchase price.
To come to a deal took three buyer-seller meetings at the house, but once Bill started marketing with our proven funnel, there was a flurry of inquiries.
Everyone asks us, “Well, if I get a property, how will I know I can sell it?”
The buyer end is not the challenge, as somewhere between 60 to 82 percent of the buyer pool (depending on your area) cannot get financing. This makes your rent-to-own option extremely attractive—you’ll have plenty of buyers.
Coming to Terms
The tenant-buyer in this scenario had some financial issues. When he was pre-qualified, the mortgage-ready date suggested he would need 24 to 36 months, and the deal terms were right at 36 months on Bill’s buy side with the seller.
This was risky, but as long as nothing tripped up the tenant-buyer, the deal could be closed. (If not, there are other options, but those are for another article.)
To compensate for the risk, Bill insisted on a hefty down payment of roughly $40,000 with about $25,000 of that within the first few months and the other $15,000 over the next year.
In the end, the risk was worth the reward of a $78,000 profit all three paydays. Another reward was that the sellers were happy, and the buyers gave Bill a big hug for helping them finally attain home ownership.
Deal Structure Summary
- Lease-Purchase: $320,000
- Sale Price: $369,900
- Term: 36 months
- Principal Paydown:
- Payday #1: $40K down payment ($25K early, $15K first year)
- Payday #2: $9K ($250 x 36 spread)
- Payday #3: $28K (principal paydown and remainder of markup, less deposit down)
- Profit: $78,000 (just under Bill’s average of approximately $110,000 per deal all three paydays)
What’s your level of comfort when it comes to straying from the norm in business?
Let’s talk in the comment section below!