What Does Creative Deal Structuring Look Like?

Since 1999, Kim and I have continually learned from Pete Fortunato how to creatively structure and fund our deals – without going to banks!

The BEST real estate investing meeting we attend is the weekly Real Estate Exchangers meeting in St. Petersburg, Florida.  It’s creative deal structuring and funding at its most pure.

Here’s an example of a deal that was put together at yesterday’s meeting.

Rich has a SUV that he’ll sell for $3,000 cash.  Pretty straight up deal, right? 

Pete offers to trade his Nissan truck for Rich’s SUV.  But Rich doesn’t want a truck; he wants $3,000 cash!  Does Pete have a hearing problem or what?

Here is a classic example of Use What You Have, To Get What You Need, To Get What You Want. 

Upon seeing that Pete’s truck is on the block, Kevin offers to give Pete a note in exchange for the truck.  Note terms: $150 per month for 18 months then a $1,050 balloon (total paid will be $3,750).

Mark, another exchanger, offers to buy Kevin’s $3,750 note for $3,000 cash.  (For you financial calculator wiz kids out there, what is Mark’s yearly yield on this investment?  The answer is below.) 

Back to Rich; remember Rich?  He just wants $3,000 cash!  Here comes the magic of creative deal making.

Rich accepts Pete’s offer.  Rich get’s Pete’s truck and Pete gets Rich’s SUV.  Only one problem: Rich doesn’t want a truck – Pete’s or anybody else’s.  He wants $3,000 CASH!

Remember Kevin?  Kevin DOES want Pete’s truck and has offered to give a $3,750 note in exchange for Pete’s (now Rich’s) truck.  And remember Mark?  Mark has offered to buy Kevin’s $3,750 note for $3,000 cash.

Rich sells Pete’s (which is now Rich’s) truck to Kevin in exchange for Kevin’s $3,750 note.  Then Rich sell’s Kevin’s $3,750 note to Mark in exchange for $3,000 cash.

This all began with Rich telling the exchanger group that he would sell his SUV for $3,000.  Did Rich get what he wanted?  He sure did!

Let’s look at why each player agreed to this deal.

Rich said yes because he got what he wanted: $3,000 cash.

Kevin said yes because he got what he wanted: a truck that he could afford.

Mark said yes because he got what he wanted: a note with a 23.42% yearly yield.  (N = 18; I/YR = ?; PV = -$3000; PMT = $150; FV = $1050.  When you solve for I/YR you get 23.42% yield.)

But why did Pete say yes?  What did Pete get?  Sure, he got a SUV.  But if you know Pete, you know he doesn’t give a flippin’ honk about a car – any car!  A car is nothing more than a conduit to use to help make a future deal. The two most important things Pete got by agreeing to this deal are 1) The joy of helping to facilitate this deal.  2) More importantly, he built allies!

Doesn’t it make sense that Rich, Kevin and Mark will want to return the favor by helping to facilitate a deal for Pete at some point in the future?  Gary Johnston says it best: Real estate investing is a TEAM sport!

Did this deal structure make sense to you?  If not, why not?  Are you hanging around the right people?  And by “right,” I mean been-there-and-done-that investors, and not those self-proclaimed TV gurus. 

One last thing: I’ve not asked Pete about this, but I already know his answer.  Anybody need an SUV?  It is a fact that he’ll exchange out of the SUV into something he likes more in a New York minute!  What would he like more?  Why not call him and find out?  I promise it will be one of the most interesting conversations you’ll ever have in your life!