We have done hundreds of deals whereby we stay in the deal by way of owner financing, subject to existing financing, and lease/purchase, or sandwich lease. Sometimes it’s appropriate, however, to assign your buyer back to your seller instead of collecting the standard three paydays per deal we teach. In our business, we call this an AO (assign out).
One of my first deals done on terms after I re-engineered the business back in 2013 was an AO deal. It was a simple ranch in Rhode Island, pictured here.
If the Real Estate Agent Couldn’t Sell, How Did You Get it Done?
I mailed some yellow letters to free-and-clear properties in this one zip code. The seller called me back to say he bought it for his daughter who is no longer in the home. It was empty and he was open to terms (lease/purchase in this case).
He said some things, though, that led me to use our AO as the exit versus trying to stay in. Here are the numbers and the details:
- He wanted $220,000 for the property.
- He wanted $1,500 per month, which I felt was all the money at the time.
- He did not want to give any principal credit to me or anyone else.
- He had been on with a real estate agent for approximately one year and was still on.
He asked if I’d be alright with working with him at the same time he kept it on with his real estate agent. I said most real estate agents don’t like to do that, but this guy was a friend of the seller, knew of me, and was fine with it.
We signed a lease/purchase agreement with the seller with the understanding that it was not likely I could stay in the middle given that he needed all of the monthly and was not willing to give up any of the principal monthly. So we both knew the plan was to procure a buyer and then assign that buyer back to him. We placed a “rent to own” sign in the front yard a few feet away from the real estate agents’ sign.
Within 11 days, we had a deposit from a tenant buyer and the deal was closed. He was a mason who had been driving by the home for 11 months but didn’t call the number on the sign. Why? Because he knew his credit was not yet in good enough shape to get a mortgage and my sign said, “rent to own, no banks.”
I had the home on for $235,000 and got a 10 percent down payment. So we split the deposit 50/50, and I was happy to collect $11,750 as one of my first terms deals. The signing with the buyer was done at my attorneys office with everything then being assigned back to the seller. This home cashed out on time within 24 months, and everyone was happy. So instead of our standard three paydays per deal, we collected a one-time check for an AO and moved on.
These are fine, but keep in mind that you have to go do another if you want to get paid. Whereby if you create the three paydays per deal, you create the same “now” cash flow but also create ongoing cash flow and nice back end cash outs. This keeps a nice stead cash flow in many ways for 24–60 months for every deal you do!
You can see the averages below for actual paydays created for our own deals for 2017. And back in 2013, we did a lot more AO deals—now we do 1–2 per year only.
Below represents approximately 22 deals.
When is a Good Time to Use the AO (Assign Back to Seller) Technique?
- In Texas, you cannot stay in the middle by way of a sandwich. So go do as many AOs as you
can if you’re in Texas (as well as subject to and owner financing, of course).
- If you cannot create a spread or reason to stay in (sometimes no spread but huge principle pay down
would warrant staying in).
- If there’s no equity or reason to wait for the back end anyway.
- You’re new and nervous about committing to a monthly payment and/or just would like to get some immediate cash flow going because an AO is much easier to explain to a seller and thus get under agreement. Out of my first 13 terms deals, 12 were AO.
It will pay you well to be a master transaction engineer understanding how to navigate any deal that comes your way.
Do you have any questions about the AO method?
Share them in the comments below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.