Solve the Puzzle. Craft a Deal. Part 1

     All deals consist of many pieces that can be arranged and rearranged. Many deals are not obvious at first glance. The more strategies an investor knows, the more creative they are, the better their chance of finding a combination that works. It is a puzzle. I like puzzles. I like them best when the solution puts money in my pocket.

     This deal was hiding in plain sight of hundreds of investors but it wasn’t there for very long. I belong to several REIAs (real estate investor associations). One of them has an electronic bulletin board where members can post their deals. I usually glance at the e-mails that announce changes to the board but don’t usually spend a lot of time on them. I was online when this update was released. It didn’t look like a great house but it was less than 5 miles from my home. It was priced well—if it did not need much work. It might be a good rental but I have been selling off my rental properties lately. I recently sold a property that is only 4 blocks away to another investor on a land contract. She has been growing her portfolio (she has purchased several of my rental properties). Maybe she would like another.

     I call the wholesaler who posted the listing to see if I could take a look at the property. I could and did within a couple hours. The house is alright. Nothing great. It is one of the lesser houses on a pretty good street. Unfortunately, an even lesser house is across the street. The house itself wasn’t bad. It hadn’t been updated in a while but there were no major defects (Some observations: an old a/c condenser, deck could use some attention, a bit of a musty smell in the basement, evidence that a bowed basement wall had been repaired). It was obviously occupied and it was being kept in reasonable condition. It wouldn’t pass a white glove test but there weren’t any obvious health hazards.

     I call the wholesaler again to get some more information. What is the story on this house? I learn it is a pre-foreclosure. The seller has a very limited time to sell before this will go to the sheriff sale. To complicate matters the seller is going through or has just gone through a difficult divorce. The husband is still living in the house. The limited time means both the seller and the wholesaler are motivated to sell this house.

      I call the investor who bought my rental and describe the situation. I am willing to fund this deal on a land contract similar to our last deal. She is interested. Of course, she wishes to view the property and will be in the neighborhood the next day. Her impression is similar to mine. It isn’t a great deal. We know the seller will be getting a small payment at closing and they will need to clear some legal liens left over from the divorce. We will probably need to reduce the seller’s payment but since this is quite time sensitive the motivation is there to make that happen. This still doesn’t make the deal strong enough for my investor/buyer and if it isn’t strong enough for her it doesn’t work for me.

      What would strengthen the deal? How about finding a tenant right away who would take the house with minimal rehab? Well, the husband (seller) is living there now. He has to live somewhere after this house is sold. What was his mortgage payment? My end buyer has a conversation with the husband. He is interested in remaining in the house, will sign a two year lease at a rate that makes sense, and does not require any repairs be made. (This last item reassures me that the house is in sound condition.)

      Personally, I would prefer the seller not remain in the house but my investor/buyer is comfortable with this and it will be their house in short order. They would be taking the risk that the tenant (seller) default on the rent payments. I have had several transactions with my buyer lately. I am confident that they would make their payments to me even if the tenant had to be evicted.

      So now we have a house that would cash flow for my buyer from the moment they take possession which is approximately 5 minutes after I take possession. We both feel there is some equity in this deal at our purchase price but because the house had recently been marketed at a significantly higher price without any success neither of us thinks we should place the house back on the market for a while. My investor/buyer may be able to document the rent stream and place this house on the market again in 6 to 18 months as a turnkey rental to capture the equity. I would be essentially financing the deal. I would receive the interest rate of the land contract and a small step up in price from my purchase price.

      The way the deal stood now it was workable—it would be profitable. I would add a clause to the land contract adding a fee if my buyer resold the house within a year to compensate me for the short term capital gain tax I would incur. This would constrain my buyer a bit but she plans a long hold so it won’t cause my buyer to change their mind. Is there a way to make this deal better?

      There might be. I will cover that in the conclusion to this blog entry. This is the link to Part Deux.