Deal or No Deal?

Posted on May 1, 2013 by

I’m excited. I am using new techniques and they are working!

Where do I learn new techniques? Recently I took training because I know that change is one of the key factors of staying ahead of changes in the economy, the market, and life in general. I chose trainings about lease options and 0% owner financing. Each of these gave me a new in my tool in my belt – a tool to help me to make more money.

But understand, for any scenario to work, I MUST know my plan.

I assume that you want what I want: to maximize my profit potential. So, we are interested only in the properties that will help us do this. We must make choices with this in mind.

Here is a scenario to show you concrete ways of deciding…

Deal or No Deal?

The Scenario

  • The seller wants 120K.
  • The seller owes $115,000 and has been paying the mortgage for 6 years.
  • The house needs $3,000 in repairs.
  • Taxes are $1000 annually.
  • Insurance is $800 monthly.
  • Fair market value is $100,000.
  • Rents in the area are $1,000 a month.
  • The interest rate is 4%.
  • Total monthly payment is $773 (principal, interest, taxes, insurance).
  • Equity is not an option.
  • The difference between asking price and the fair market value is $20,000.

These are the only facts you need to figure out how to structure the deal! The question is How are YOU going make money?

Is this a Deal or a No Deal?

Well, how long do you want to stay in your JOB?

My advice? This is not a buy-fix-and-sell. But it could be a buy-fix-and-hold. As a “Subject to,” lease option, or sandwich lease option, this will work. But it won’t get you enough to leave your job.

As a Transactional Coordinator, I can structure the deal to lease the property for $757 per month and then sell it to a take-out buyer under a lease with an option to purchase the property within 10 years. Over a 5-year period, the principal will be reduced to $100,000. The cash flow would be $227 per month.

If the seller asks for their equity of $2,000 up-front, and you want to make $5,000 up-front, would you be able to convince a potential buyer to give you a $10,000 option fee with payments of $1,000 per month?

Based on my years of experience, here are two possible plans:

Plan A: Sandwich Lease Option

Here, you are responsible for making payments while the property is vacant. The tenant-buyer will make repairs during the two-year option and the one-year extension. You will be making $227 per month in positive cash flow. You will ask the tenant buyer to pay a $12,000 option fee or 10% when they move in. This covers the repairs and gives you future closing costs. The purchase price would be $120,000 on the day you close.

Plan B: Lease Option with Wholesale Component

Here, the tenant-buyer puts down a $12,000 option fee. $2,000 goes to the seller, $5,000 goes to you, $2,000 goes to option closing costs and repairs. The tenant/buyer’s monthly is $773 per month.

Since I have many years of experience, I can say that Plan A will probably not get you out of your job. However, Plan B would be viable. This is because if the market does not recover, after 10 years the take-out buyer can refinance in the 6th year. With patience, everyone wins.

Would you have known what facts you needed to decide if this is a Deal or a No Deal? Would you have known the possible options that I have presented?

Remember that having a mentor can help you answer these questions. I have the knowledge to help you to make informed decisions—this is why I am a mentor to many people, and I’d like to advise you. I am looking forward to meeting you and helping you on your way to a successful 2013!

Russ HinerRuss Hiner is an active real estate investor, coach and mentor. Russ is currently the leader of the Atlanta REIA Creative Deal Structuring Group and co-leader of the Atlanta REIA Mastermind Group. Russ also teaches several Atlanta REIA Workshops throughout the year on a variety of real estate investing topics such as Negotiations, Wholesaling 101, Wholesaling 401, Real Estate 101, Property Management and more.

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