How to Make Your Deals Economy Proof

You can’t rely on the market to make a profit—instead, use lessons from these two examples to economy-proof your deals.

these two examples to economy-proof your deals.

Every real estate professional’s biggest fear is a recession. It happened in 2008 and, as we all know, it can happen again. It’s a risk you can’t ignore, and it prevents many people from getting into the world of real estate in the first place.

But what if there was a way you could make your deals “economy proof”? We structure our deals so that we aren’t depending on the economy to make a profit, and in some cases, we can virtually eliminate any risk from an economic downturn.

Don’t believe me? Here are two deals you can model that are, for the most part, economy proof.

Deal #1: The value of renegotiating

We often remind our associates that every deal you make can be renegotiated. When we do sandwich deals, we’re able to renegotiate at every point—from when we put the house on the market, to when we finalize the deal, to the end of the term.

This allows us to make changes if the economy takes a hit. It also allows us to change deals down the line to make them more economy-proof—like we did in the following example.

In this particular situation, we had an owner-financing deal that was written for four years with principal only payments. Every Christmas we would give them a little bit down on the principal and they would extend it a year because they liked the cash flow. We liked it too, because it gave us more principal paydown and we simply utilized Paydays from other deals to pay for it. Money well spent!

Recently, we proposed another option to them. We said, “Hey, December is coming around and we could extend this for another year like we’ve been doing… But what if we added interest and pushed this term out to 10 or 15 years?”

A few days later, they forwarded us an email from their accountant. In the email, their accountant had outlined every single advantage of this proposed change. They offered to keep the same payment but instead of it being principal only, we’d add a 4.5% interest rate to it and kept the payment exactly the same.

We said sure…but we had one condition. They’d have to extend the term to 15 years.

Sure enough, they responded the next day and said, “Let’s do this!”

So in the end, we took an owner-financing deal that was already extended to six years (from four), and pushed it out to 15 more years. That makes this a 21-year deal.

Now, why did we do this? Because it made that deal economy proof! When you have a deal that extends over the course of 21 years, do you care about a blip in the economy? Of course not, because you’re getting continuous cash flow across those 21 years and you have plenty of time to make changes if needed.

And trust me, the longer the term, the less headaches you’ll have.

Deal #2: Removing the risk from your end

In this deal, we had a few hiccups. But even though we could’ve backed out, we kept going and renegotiated to remove the risk from our end. Here’s what happened…

In the middle of a sandwich lease term, we lost our buyer. We were still within our terms with the seller, so we went to resell it with a realtor. But then, we encountered another problem—the septic system failed.

We had a few options. We structure our agreements in a way that allows us to give the house back to the seller at any time, so went back to the seller and said, “Look, we could give this back to you… But we’d prefer not to. We’d prefer to repair the septic and get another buyer in the home.”

And then we presented two options:

1. We could extend the same sandwich deal we had for three years.

Or…

2. We could buy the home subject to the owner’s two existing loans and continue to make payments in his name.

He didn’t want to deal with this property anymore, and we explained that the second option would detach him liability- and title-wise but his name would remain on the loans. He went for it, and at the time of writing this, we literally closed it this week.

So, in this case, we took a simple sandwich lease and turned it into a house that we own forever. From there, we have a bunch of options. We could put a rent-to-own buyer in it and turn it around in two to three years, or we could turn around and sell it on owner financing longer term.

We’re probably going to do the latter, because it will totally remove risk from our end. We don’t need to worry about the appraisal in three years if the economy changes. We don’t ever need to worry about the market because they will own the home and we’ll put it on a 20 to 30 year note. So all the risk is on them, not on us.

These are just two examples of how we’ve made deals that are virtually economy proof. If you’re in real estate, the economy is just something you have to deal with—but if you structure your deals correctly, you can limit the risk drastically.

So, are your deals economy proof? If not, how are you going to change them?

Remember, we are not attorneys or accountants—you should seek out proper professionals in your area.