Creative Deal Structure Game — Pros and Cons

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  • This is another deal that I actually did. I’m sharing it because these are the REAL LIFE kind of situations you will run in to and it will help you learn what to do. This is a LONG one… hang in to the end!

    There are always pros and cons about which way to structure offers to purchase and what exit strategy to select. Even though there is no one right answer, there are always consequences for the path you select.

    Looking at the list of properties coming up for foreclosure one jumps out. $8500 owed on a house worth at least $150,000. It is a second? No, it’s the first mortgage. So, I jump in my truck to head over to the house. It looks vacant but the house is full of furniture that I can see through the windows. There is no mail on the porch and the grass has been mowed, so obviously, someone has been there recently.

    I talk to the neighbors who tell me the owner has moved to an assisted living home but they don’t know which one. I look up and call every assisted living home in the area until I find where the owner is. I find out she’s a 90-year-old lady who had a stroke and cannot talk. I get the next of kin information. But before I call her..

    I always carry “supplies” in my truck which include contracts, Deeds, yellow paper, markers, and tape. I made a big sign with yellow paper that says
    then tape it to the front door. I know any rookie investor (actually most investors) will see the sign and stop chasing the lead.

    I get in touch with the owner’s daughter and tell her I’m interested in buying the house. She says it’s not for sale.

    I tell her it is going to a foreclosure auction in 3 weeks. She thinks I’m making it up.

    I offer to come over to show her the foreclosure notice and we can call the bank to verify the looming foreclosure.

    We call the Trustee representing the bank, sure enough, it is being foreclosed unless $1500 in back payments are made before the auction.

    The daughter tells me her son was getting the money to make the house payments. But, after calling him, she finds out he was spending it on drugs instead.

    I offer to buy the house again but she refused. She is sure her Mom will get better soon and want to come back to her house.

    So, I did something crazy. I said listen, I’ll pay the $1500 to catch up the back payments if you’ll give me the first rights to buy the house when you and your Mom decide to sell later. We wrote up a little handwritten agreement. No price mentioned. No notary. Nothing recorded. Just a handshake. I sent her a receipt when the payment was made.

    I keep in touch with her every month to ask how she and her Mom are doing.

    Four months later, I’m sitting in a hotel room in Tampa after a Jack Miller seminar. The phone rings. It’s the daughter and she askes if I’m still interested in buying the house. I said sure. Then ask the magic questions… if you could get all cash and close in a week, what’s the least you would take.

    She says $25,000.

    Sometimes you need to know when to stop negotiating and just say ok. I told her I was out of town but could meet her at the house at noon the next day to sign a contract to purchase the house with closing scheduled for 7 days later even though I know I can close in 5. I told her that she can take whatever she wants out of the house and I will take care of everything else. She took one box of family photos.

    The house is fully furnished (even a piano) and there’s a car in the garage and a lot of tools.

    The house was easily worth $150,000 but it obviously needed some foundation work (estimate $15,000) and another $25,000 to get it in tip-top condition.

    And to make matters worse, it is a 1-hour 30-minute drive from my house… one way.

    So, here’s the WHAT WOULD YOU DO PART?

    Remember, there’s no one right answer. But there are pros and cons regardless of which path you take.

    When you write what you would do, talk about what the pros and cons are. And remember to tell us your exit strategy.

    Next Saturday, I’ll tell you what I did. I picked the WRONG path and you’ll learn why.

    Not very creative but I would sell to a local fix and flipper investor for 65K and move on. In my market it is 70% of ARV minus costs of repair and holding costs.

    Interesting deal.

    I’d try to find a local investor to buy me out. 1:30 is outside of my comfort zone any more. I might consider carrying some paper for a higher price, perhaps $90K, giving the new owner the opportunity to fix and be well under market when done.
    Of an all cash deal at $65 like Wede would do.

    I’ve had a few similar, out of town, foreclosure. With one I joint ventured with another investor to do the rehab and we’d subtract their rehab cost, and split the upside after an agreed upon strike price, when we sell to a retail buyer. My investor doubled their money, and I got a much better net price and did no work.

    First, let me say that putting the sign on the door saying the house wasn’t for sale is brilliant! I have never thought of doing something like that before, but believe me it will be going into the ole brain bucket for future use 🙂

    Regarding the deal, I think I would do this one pretty standard. I would pay cash for the house and repairs or use a private lender. Once it was finished I would just refinance it and pull all of my cash out and have what sounds like a really nice house with about 80K in it after closing costs etc. I would then rent it out with a possible lease option to purchase at 165K (possibly more, wasn’t sure what the appreciation rate was) in 3 years with a 10K option fee.

    I would have none of my own money in this after I refinanced, probably have cash flow coming in each month on the rent, get 10K as an option fee, and then if it was exercised in 3 years I would get cashed out for almost 100K in long term capital gains! Plus given that it was sold on lease/option I hope I wouldn’t have much management on it since I was an hour and half away. I am hoping I could push that back on them as the up and coming “new owner” in a few years.

    Some of the things I have done in the past in similar situations –

    1) I have paid cash for the house, moved into it (no matter how much work it needs), since it is far from my house, and rented out the house I was living in before. Now I can orchestrate the work that needs to be done, sell the furnishings and the car, and when the house is rehabbed, I would either sell it or rent it.
    2) I called a contractor who is a financial friend and offered him a stake in the profit in exchange for the work.
    3). Do the foundation work, re-fi the house to get my cash back, and finish the rehab, again for rental or for sale.

    Jan, good idea to move in. If you live there for several years, you’d qualify for IRC 121 which means the profit would be all tax-free!

    There are some other ways to solve this one that has not been mention yet. What are some other ways to handle this one.

    Hi Jackie,
    Because it is furnished, it made me think of Airbnb possibly or furnished rental, so…
    Install wireless internet and blink cameras to secure the property and monitor the work progress. Install smartcode keypad for entry.

    Hire structural engineer to report type of structural work needed. Give report to foundation contractor. Hire general contractor to oversee the rehab. Schedule work to be completed within 6 months. Pay contractors in thirds as work is completed.

    Run test ads to see if property is a good Airbnb or lease option candidate. Based on feedback set exit strategy.
    If Airbnb- hire cleaning company to handle cleaning between stays. Provide extra linen for clients.
    If lease option Tenant buyer look for highest lease option candidate.

    I have not had a deal like this before. Interested in what your solution was and what you learned from it.

    Good ideas Mary. Some cities have restrictions about AirBnb so that needs to be researched too.

    Here in Panama, a new ordinance was passed in Panama City that AirBnb cannot be for less than 45 days. The hotel association was successful in getting that passed.

    This weekend, I will post what I did and the lessons I learned.

    Every house tells a story and every house has a lesson! That’s another way we can all learn from each other is to share the stories and the lessons we learned!!

    Hi Jackie!

    I’ll take a crack a this:

    If it was me I would just to a Highest Bidder sale for highest down payment or HBS for CASH to a local handyman that wants a deal.

    Current Situation: Bought for $25,000, plus $40k for fix up. Total $65K Can Sell for $150,000.

    Do a Highest Bidder Sale starting at $65,000 (“Handy Man Special”). Say you sell at $80,000 at HBS.

    Can Do $30,000K Down finance $50,000 at 6%. say $325 payments. When the person does sell you get $50,000.

    Or Just Do Highest Bidder Sale for Cash.. Sell for $70k Make$45K and be Done!

    Pro for HBS CASH:
    Big Cash payday upfront
    No headaches just sell for cash, don’t have to fix anything
    Can do quick $5,000 clean up and get more at HBS
    No more back and forth checking on house

    Pro for HBS Down payment:
    Not have to deal with property 3 hrs total back and forth away
    Can Get Your Money back upfront and get back end money and cash flow in between

    Cons for HBS Cash:
    Can’t Keep cashflow
    Maybe Missing good opportunity to keep
    No one buys the property

    Con for Down payment HBS
    Risk of Handy Man not making payments and selling house
    Risk of Handy Man wanting to keep if he wants to move in…then you only make cashflow
    Still have to deal with house if nothing got done and handyman can’t make payments

    Hope that helps!


    Have any of you had a similar deal? What did you do?

    When I got this deal, my first inclination was to buy it, then re-sell it for $70,000 with seller financing to an owner occupant or rehabber. That is what I SHOULD have done. I would have made more money and it would not take any of my time.

    But what I actually did was team up with a trusted friend/rehabber who lived in the area. We agreed to split the costs of repairs and share the profit 50/50 after I got my initial investment back. He would manage the entire project and get the house sold.

    But 15 days into the rehab, his wife died leaving him with three young children to take care of and total devastation.

    So, I had to step in to finish the rehab and put up all the money for the rehab. Even though I did all the work and put up all the money, he still got 50% of the proceeds over my expenses.

    Lessons learned I would have made more money and not been involved if I had just sold it. Once my friend’s wife died, I should have sold the house immediately to avoid the trips to the property and the expenses and TIME it took to rehab.

    When I found a buyer, and their mortgage company inspected the house, they wanted me to rip out all the wiring but instead, I had each outlet pigtailed with copper wiring.

    Less FAST CASH is better than more SLOW CASH.

    Thank you for sharing your story. It shows me that when unforseen changes happen, a fresh look at exit strategies must happen, and selling to a new rehabber was the new best solution.

    Yes, when you find a property like this there is an inevitable thinking about “less quick cash vs most slow cash”. I’ve done these kind of pre-foreclosure deals dozens of times. I found by trial and error the fastest way to get the “most possible cash in a short time” is wholetailing.

    1. You close the purchase by reinstating the loan and taking the title subject to the mortgage (with a title policy to make sure your profit is insured).
    2. Clear out all cabinets, take off all curtains & blinds, haul away the trash from inside the house and the yard, rake the yard, trim overgrown shrubs
    3. Stick it in the MLS advetising it as a fixer-upper “as is” at a somewhat discounted price but not the wholesale price.

    In some extreme cases when the property wasdamagedand/or filthy to the point of disgusting, I even did the demo too before listing it in MLS. Ie., removed the baseboards, tubs, vanities, kitchen cabinets, toilets, doors & trim, light & plubming fixures, etc. I.e., prepped the house for a rehab.

    MLS is the place where unsophisticated buyers, both investors and occupants, are looking for distress properties. The listing attracts the most qualified people to bid on the property. The MLS therefore establishes a fair market value for the property. You got to give yourself some time to get the highest and best offer. Since you closed, unlike a wholesaler you’re not limited by a short time period.

    It works the same for vacant lots. I once bought a lot on the cheap and thought I’d be lucky to get it sold for $80K or so. This was some 6 years ago. There were no prior sales of lots in the area anywhere near that price. I ended up putting it in MLS at $80K and sold it for $125K. There were 15 offers. If I just offered it to a friendly builder, I’d probably get $80K for it. Unless you put it in MLS you won’t know what the actual market value is.

    I found that the range of offers you’ll get on houses varies wildly. From wholesalers who’ll try to offer less than what you paid, to rehabbers who want to fix and flip, to landlords who want to do minor fix up and rent it out, to owner-occupants who want the house for themselves. I found that on $200-$300K bread and butter houses I’d make $30-$40K more with wholetailing than I would with wholesaling or just by selling to a known rehabber or investor.

    That, of course, presumes a reasonably active market with plenty of buyers actively looking for fixers to buy at discounts. I found that in most cases I got an acceptable offer within 2-4 weeks.

    I had one case when I was wholetailing a $560K waterfront fixer. This property that was in a horrible condition, but set on a lot with spectacular views of the lake with direct access to the water. It took 3-4 months to get an offer from a bona-fide buyer who wanted this waterfront property for himself and had the resources and capacity to rebuild it. The difference between the price he paid and the highest “rehabber” offer was over $100K. It was worth it to hold out that long.

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