So – what about the title of this article?
I bet many of you are thinking I’ve lost my mind. Come to think of it, you are probably more right than not, although this has less to do with real estate and more with my in-laws…
Yes my friends, I do indeed believe that there is a time to steal and a time to pay more than you know the asset to be worth. As I’ve said before, the essence of creative finance is our ability to see what others can not. To most real estate investors, getting a “deal” is strictly a function of paying a low purchase price. Not to me, because while a low price is never a bad thing, I recognize that price is only one piece of this puzzle; it is only one of the negotiable terms which add value in a transaction, and focusing solely on the price can lead us to ignore possibilities which exist elsewhere.
Furthermore, an open mind and a willingness to pay more than your competitors so long as you receive value in excess for doing so does in fact position you favorably relative to those competitors. Is not this what we want – an edge over the competition? Well – let me tell you, all they are looking for and at is how to get a steal on the purchase price; that’s because this is the only way they know to make money. You take equity at the time of purchase off the table, and vast majority of your competitors drop off the face of the Earth – lost, confused, and unable to find a way. Not us…
Allow me to assure you that the journey of thought I will be taking you on in this article is not simply some silly academic exercise. I have in fact paid more for property than I knew the property itself to be worth on occasion; turned out pretty well for me – believe me. Starting out with not much, as I did, and assembling a portfolio within 7 short years of 28 units with gross rental income of just under 200k and Cash Flow of about $40,000 – while under 100% financing at the front door, requires some perspective. I’d like, if you will let me, to share with you some of what I see. Here we go…
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Ease of Access Through Seller Financing
So – real estate investing is a cash intensive sport. We all know this and nobody disputes it. Qualifying for loans is difficult, and so is coming up with down-payments. Therefore, common sense dictates, at least I hope that it does, that any and every tool which has the capacity to alleviate the burden of financing indeed has value and we can expect to pay for it.
While far from being the only tool, owner financing is likely the primary tool in this department, specifically for the beginner investor. The absolute great advantage of owner-financing resides in the fact that all of the terms of purchase/sale (and I mean ALL) are totally negotiable – this is powerful indeed…
Let’s say you are looking to buy a 4-plex that is reasonably worth $150,000. In order to finance it conventionally as a non-owner occupied investment property you would most likely need at least a 25% down-payment; likely 30%. This puts such acquisition out of reach for a lot of you – doesn’t it?
Now – there are some people out there who would say that if you don’t have the money for the down-payment, you shouldn’t be looking to buy this building in the first place. Personally, that’s some of the stupidest thinking I’ve ever heard of. Putting your hard-earned money on the table in general is best described as investing for dummies. The reason we study and learn is precisely so that we can bring value to the table without needing money. I don’t know a single syndicator who puts their money in the pot (at least not much), and for the life of me I don’t get why smaller investors feel so committed to putting money down (i.e. putting money at risk). If the deal is good enough you shouldn’t have to bring much dough to the table, and if it’s not good enough you shouldn’t be doing it…
You make your own call on this, but I prefer to find deals that don’t require such a down-payment, but there is usually a price to pay elsewhere – most often a higher purchase price.
Question: Would you pay $165,000 for this 4-plex knowing that it’s only worth $150,000 if that meant that your required down-payment would be 5% in lieu of 30%, and that you wouldn’t have to deal with a bank on the rest?
Answer: Obviously, all of the usual metrics would have to be acceptable at the higher price-point, but I would pay $15,000 for the benefits represented by owner-financing in this case. In fact I have, and it cost me less than $15,000. Would you…?
Owner-financing is not at all the only way to go, but likely the best way for a beginner. Now – you are not likely to get this done on an MLS listed property, and you might have to learn a thing or two about negotiation, but this is very doable in the world of owner-financing and it can be highly advantageous for both sides indeed.
You’ve heard me and others repeat many times that real estate investing is a relationship business. This is a powerful statement indeed once you truly understand what it means – do you understand what it means?
Just in case, allow me to give you my thoughts. What “relationship business” is code for is that if someone likes you, trusts you, and believes in you, they will be willing to open doors for you that otherwise would be shut – period! And this applies to sellers, buyers, and financiers alike…
Question: If you had reason to believe that the seller of this 4-plex has capacity to become a private lender to you on other acquisitions and that this 4-plex is your “test”, would you pay an extra $15,000 for the possibility?
Question: If you knew this seller to own other property that eventually will be in-play, would you pay $15,000 for the relationship?
Question: Would you finance a little 3/2 house with a 20-year commercial portfolio note at 7% while the going rate is around 5%, if it required no money out pocket and if you believed that this lender is capable of doing hundreds of thousands of dollars with of deals for you and this little house was you “price of joining the club”?
Obviously all of this is relative and the deals must work, but if so – would you pay?
Answer: I have done all of the above. You didn’t think I got to where I am without paying the price of entry, did you? And yet – here I am…
In my brand of real estate investing I search for terms and not bricks and mortar. Let me say that again – I search for terms and not bricks and mortar. As a consequence, I would willingly give on the purchase price if other terms in the transaction compensate and exceed that value. In my experience, mine is a rare perspective indeed because it requires a higher degree of awareness – you must see past the immediacy. However, an ability to see that which others can not certainly can and does provide for competitive edge…
Thanks for reading guys. So – would you ever overpay?
Photo: Tax Credits