Not all real estate agents are investor real estate agents. Just the other day, I was trying to explain this concept to a young man in my office who’s looking to buy his first property.
First, I told him that it makes sense to sit down with a mortgage broker to get pre-approved for a mortgage before trying to go out to look at properties with a real estate agent. Otherwise, he might as well be window-shopping.
Then, I explained the importance of working with a real estate agent who commonly works with investors to help them find deals. As many of the experienced investors know, all real estate agents are not created equal.
Finding an Investor Real Estate Agent
Of course, finding the right real estate agent is easier said than done. For example, in my old office, there were approximately 150 real estate agents, and I believe only two of them were true investors. The average agent primarily sells homes to owner occupants, whose idea of investing in real estate is all about their primary residence and maybe a vacation home.
Keep in mind, the majority of agents are really not real estate investors. Most are salespeople who make most of their money from real estate commissions and not by investing in real estate. I know this because at one time, I was one.
Your best bet for finding an investor real estate agent is through word of mouth (referrals), but sometimes REO agents may be good, or you may find some at real estate agents associations.
This type of agent may be able to suggest different buying strategies (for example, utilizing a seller assist) that maybe you overlooked or hadn’t thought of yet.
Why a Seller Assist Makes Sense
An investor real estate agent would always–yes, I said always–push to utilize a seller assist in most circumstances when making an offer where there’s a mortgage involved, even if that means going in at full price with the assist still intact. All one has to do is see a sample of the numbers:
Sales price = $100,000 rent = $1000/month
Mortgage payment = $850 a month PITI (Principal, Interest, Taxes, Insurance)
Cash flow = $150/month
This property, purchased with 5% down, will run around $13,000 total cash required at settlement. So this means that with $150 a month in positive cash flow multiplied by 12 months, you’re making approximately $1,800 a year, and if you divide that by the total investment amount of $13,000, the deal is yielding a return of approximately 14% before any maintenance or management costs.
Even if a buyer paid over asking price (with up to a 6% assist) up to $106,000 total sales price, that would net the seller the same net proceeds as full price, and the total cash required would drop to around $8,000 ($14,000 cash required to close minus $6,000 from the seller assist).
Cash flow would be a little lower since the mortgage amount is a little higher. The monthly payment will go up slightly, but keep in mind, your tenant will pay it back, you’re keeping the mortgage interest deduction, and you’re able to finance $6,000 of the total cash required over 30 years.
In this example, with $120 month in cash flow multiplied by 12 months, you’re making approximately $1,440 a year, and if you divide that by the total investment amount of $8,000, the deal is yielding a return of approximately 23% before any maintenance or management costs.
As you can see, this yield continues to rise the less total cash that an investor puts up, as long as you still cash flow after PITI. Indirectly, the seller’s assist is allowing you to finance part of your closing costs. This strategy works on owner-occupied properties as well. That being said, not all real estate agents push this strategy.
Why Real Estate Agents Fight the Assist
I’m not really sure why this occurs other than they either don’t understand why the seller’s assist helps the buyer. They never really crunched the numbers, or they just think it’s a harder sale to make to the seller. But at the end of the day, it’s all about what the seller nets, and if the buyer’s agent can sell the assist, they’ll usually make a little more commission, too.
What Can Be Part of the Assist?
As previously stated, you can try to get an assist for up to 6% of the sales price. The assist can go towards anything that is a prepaid expense of the buyer(s). Examples of prepaid items are taxes, insurance, private mortgage insurance, prepaid interest (points), etc.
You can even have the seller pay the buyer’s transfer taxes, and it should still be acceptable to the bank. Also, check with your accountant, as the buyer may still be able to write off the transfer taxes regardless of who pays it.
One thing to keep in mind is the higher the sales price, the larger the assist. For example, when you get up to around 6% with the seller assist, or if the price of the house is higher, you may not be able to use all of the assist, as you may have more in assistance than you do in prepaid items. In some cases, it may be better to take a little lower assist with either a larger repair credit or a lower sale price offer.
So if there’s a mortgage company involved, you have to play by the rules. On cash deals, the assist isn’t as advantageous because your closing costs are minimal, unless it’s a cash deal where you don’t have quite enough cash to pay the purchase price and the closing costs combined.
As you can see, the seller’s assist can be a very powerful tool when purchasing an investment property that’s in good enough condition to obtain a mortgage. This means a property that doesn’t need to be rehabbed before turning it into a rental.
So, here’s an example of a typical deal that I’d like to invest in to accelerate my rental portfolio. Usually, I go after an affordable, bread-and-butter, blue-collar home that has a large audience of potential tenants. Obviously, I want at least a $300/month cash flow before PITI.
I’d write an offer fairly close to asking price with a 3% to 6% assist and a home inspection. I would always leave in the seller assist at all costs, and I love buying an estate or a house like my grandmom’s (functionally obsolete). By this, I mean houses that are totally functional and don’t need much work, but may be more suited to renters over owner occupants and may not be modernized.
Then, I would utilize the home inspection in the hopes of getting some repair credits, and along with my real estate commissions (since I kept my real estate license), I often purchased homes that cash flowed with very little cash out of pocket.
Some of these deals were even better than full-blown rehabs, especially if I was forced to leave equity in the property or if the project were to take several months to complete, refinance, and rent.
So, have you utilized a seller assist when purchasing your investment properties? What are some of your favorite seller assist deals?
Let’s talk in the comments section!