As a real estate investor, it’s important to exercise due diligence but also remain flexible. If you refuse to be flexible, you’ll likely miss out on some deals.
Couple due diligence and flexibility with a mentor or advisor, and you’re in even better shape.
This was illustrated perfectly when one of our partners was putting together her second deal. The sellers were a young couple in Tucson, Ariz., who were moving out of town. They had listed the house, but it was later canceled by the Realtor. Instead of listing the house again, this couple took us up on our offer.
Finding a Middle Ground
The sellers were very set on selling the house for $200,000, so we worked out a deal to pay the balance of the mortgage and the equity that they would receive at the end. This made both us and our sellers happy, which is always important in a deal.
When buying, the price broke down to $173,450 for the actual purchase and $26,550 for the equity. We set it up as a sandwich lease. Our payments ended up being $1,350 per month for 24 months (actual mortgage payment). We also worked in a cushion to take the deal to 36 months if needed, but we based all numbers on the 24-month agreement.
We charged the tenant buyers a monthly rent of $1,662, leaving a spread of $337. We called that payday No. 2.
As with all of our deals, we create three paydays (cash now, cash monthly, and big backend cash-outs when sold). This property followed that same formula:
- Payday No. 1 is the down payment from our tenant buyer. In this instance, because we were able to be flexible, this payday came in the form of large payments spread across 24 months that totaled $22,200. Sometimes it’s all up front, but more often it’s over time.
- Payday No. 2 comes from the spread between our monthly payments to the bank and the monthly rent we collect from the buyer. For this deal, the amount was $337 per month for 24 months, which works out to a total of $8,088. Think about creating $300 to $1,000 per deal for the second paydays only. What would that do to your monthly cash flow, lifestyle, and bank account?
- Payday No. 3 comes from the backend cash-outs when the property is sold. When we go to list this house, we expect it to sell for $219,900. The backend revenue will total $24,533. Keep in mind, the third payday also includes all principal paydown from the mortgage we pay monthly.
Creating a Win-Win Scenario
When considering all three paydays together, this deal created a total profit of $54,000—pretty typical for this specific partner. She later revealed that she was trepidatious about the couple she sold to; their credit history wasn’t great and other indicators suggested they weren’t exactly the most responsible.
Fortunately, they turned out to be amazing. The wife was pregnant at the time, approaching her due date when we signed all of the paperwork. She and her husband now have four boys under the age of 13 and a fifth from a previous marriage. They had a lot on their plate, but they really stepped up and ended up being fantastic to work with.
I have to say, the positive energy produced by helping buyers and sellers come together to create positive scenarios like this one makes this job a pleasure.
The moral of this story is to be open to negotiating. Had we not agreed to pay them the equity on this deal, we would have missed out on a profit of $54,000.
If you can be flexible but still ensure a deal will be profitable, you will open yourself up to a whole new world of possibilities.
When was a time flexibility paid off for you? Have you ever missed out on a deal by being inflexible?
Leave a comment below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.