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This week’s creative deal structuring game:
Mary calls to ask how you can help. Her Dad passed away and she inherited 24 rental properties plus her Dad’s house. She lives about 2 hours away from the rentals but they are in the same town where YOU live. They are all rented, in good condition, and there is no mortgage. The houses are rented for $1200 to $1500 each. Her Dad managed the properties and even did most of the maintenance. She’d like to keep them but knows nothing about rentals houses, leasing, or maintenance.
What would your offer(s) be?
I would start by asking her what specifically she wants to keep. Does she want to keep the actual properties themselves or is she interested in keeping a steady cash flow coming in each month. If it is the later I would propose a lease/option arrangement to start which would give us a chance to work together for a year or two.
At the end of the 2 years we decide together to eliminate those properties that are under performing (perhaps do a sandwich lease/option with existing tenants) and exercise your option to purchase the properties you want to keep, but with seller financing so she continues to get her monthly income. This gives her the option of working with you for a couple of years to see how a long term relationship would work and gives you a chance to evaluate all the properties and tenants without committing if something doesn’t work well.
If she says she wants to keep the properties and has no interest in selling them I might propose a master lease type of arrangement if I enjoyed doing management work, but again this would have to have some type of exit strategy in the future. I would not want to do this without some option to purchase in the future, preferably with owner financing.
Let’s assume she’d like to keep the houses – at least for now.
What kind of split would you try to negotiate with a master lease?
Would you get an option for part of the upside?
Remember that the initial deal is only the start of negotiations.
You could start with a master lease then negotiate seller financing later. Once the owner is more comfortable with you making payments on time and doing what you said you would do, they are much more open to seller financing.
Anyone else care to put some “pretend” numbers to this one?
I would propose a performance master lease. I would tell her I will pass to her 85% of all rents collected and she needs to do nothing with the properties.
I agree with Don. Depending on the type of homes, I might do a mix of performance and fixed master lease to increase cash flow. Starting out master leasing and building a strong relationship I feel is key in optimizing this opportunity.
Any other ideas for this one? We start a NEW Creative Deal Structure Game tomorrow.
Some things to consider for this one:
What if you did the master lease (for the cash flow) but you gave/SOLD a “Financial Friend” the option for the upside (equity) for building goodwill for future projects. Or visa versa?
Selling the option could be an infusion of cash.
Remember that real estate has a lot of moving parts. You can take one part of all parts in any transaction.
I would pull out the David Tilney story of lore: I’d fix master lease the houses for 35 years (including a FROR to buy them) or lease/option each house for 10 years.
For the fix master lease, I would offer 60% of rents to her.
For the lease/option, I would offer repairs up to $100/mo as the option as well as coordinating larger repairs (which she would pay for above the stop loss, but not have to do anything other than write a check. The lease would be a performance based master lease which passes 85% to the owner.
Either way, she would absolved of management or maintenance. Twenty five houses is a great portfolio booster. I would have zero interest in selling quality SFHs that are getting quality rents.
I would procure an option that gave me the right to structure and sell the properties are in individualized basis, they would be sold on a performance based option.
I would guarantee the seller a fixed amount and also guarantee that, all maintenance, taxes, insurance and other costs would be maintained.
Many places options are recorded on title but I think with my purchase by option I would want to Mark the title of each of the properties. Perhaps individually and perhaps conjunctively depending on the sellers desires.
Certainly finding out what seller and for taxable income on the properties would give me a basis of where to start with my price for the seller. When selling, this would always be a charge that I would collect from my buyers, There are so many people that can’t qualify and the market is full of people look for opportunities with options.
Over the years on my own properties I have utilized options and procured interest on the unpaid balance of the sales price during the term, and only about 15 to 20% of the options actually taken.
When marketing the properties I would do an installment contract for option, this giving me an interest rate that might or might not be realistic to many conventional buyers, but if I’m able to procure the sellers, authority to purchase in each of the cases I would wrap that authority into the option and record that option to Mark the title, whereby giving me a spot that is recorded on the title of that property, because should there be any legal action. I would then be, treated just like an owner or seller in the event of any legal action.
I would certainly work out the same type of transaction as often as possible and be able to market properties at a rate of interest between my purchaser and myself it would give me some income interest income on an annualized basis over and above what I might achieve in equity buildup. Over the term of the contracts.
As you and I have talked I have done this many times with various different properties and have a couple currently that I’m thinking of doing the very same thing with but this time. Perhaps even employing an agent to do all the marketing, the agents costs would be inclusive in the purchase price. The property buried in the cost of that property.
Certainly setting up a collection account with an independent third-party could and would protect myself as well as the seller and give them peace of mind that I was very serious about helping and protecting their position.
Dan Butler, Portland, Oregon
Lots of great feedback on this one. I’d love to see more people participate
Let’s keep the creative juices flowing with another Creative Deal Structure Game..
Jackie, I received the email saying that the 24 houses are in my town, and that the Owner lives 2 hours away. Well, I met a woman who matches this description outside the County Offices when we were both paying a stack of property taxes in January. She appeared to be upset and overwhelmed at property tax time, which I can understand, so I reached out and asked if I can help. We exchanged contact information on scraps of paper that I have misplaced and she may have misplaced my contact information as well. We were going to meet for coffee and talk, Jackie, will you please reach out to her, give her my contact information, and ask her if she will share her contact information with me again? I will discuss all of these options with her, see what she wants to do, and contact the forum contributors if she chooses their ideas? Thank you!
This is a “pretend” scenario for an exercise in creative deal structuring.
It’s unfortunate that you lost the person’s contact info who had a similar situation. Lessons learned!
I would go back to the courthouse and see if the clerk remembers who the lady was. My guess is that the clerk will.
Do make this a life lesson and never allow someone forget who you are , and more importantly always hang onto their contracts! Or you can plant a seed in their head and make sure they never forget who you are!
Would you ever let that happen again?
Quite often I loan money and I tell people that I am in the deal for their benefit. When you help someone else, they tell other people you are how you helped and in return those referrals come back to you over and over.
To your success,
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