A couple of months ago I was approached by someone who wanted me to invest in a fixer-upper deal that he had found. On the surface of it, it was a good deal. The house could be bought for about 60% of current value, and fixing it up would be profitable. At the last minute, the institutional lender had reneged on the loan and with just two days before the contract expired, there was no time to reapply with another lender. Nor was there time for me to be able to do any due-diligence, assess the local market where the house was located, check out the costs of rehab, etc. Still it seemed like an opportunity. What could I do? What would you do?
I like to test the claims of those who are trying to convince me to put up all the money for a proposition by seeing how much they will bet on their own deals. Normally, I ask them to sign a promissory note with personal guarantees, and to pledge all their interest in the pending deal, PLUS PUTTING A MORTGAGE AGAINST THEIR PERSONAL RESIDENCE. When the rubber meets the road, most of those who would speculate with somebody else’s money at no risk themselves slink off to the sidelines.
In this case, getting a mortgage prepared and signed on a personal residence that was already highly encumbered didn’t offer much in the way of additional security, particularly when I couldn’t check out the deal thoroughly. So, in lieu of a mortgage, after getting the other party to place his residence into a Land Trust and transferring 100% of the shares of this Trust to me as additional collateral, I used the money that would otherwise have been loaned to BUY a long term OPTION on the personal residence which gave me the right to buy the house at the remaining loan balance anytime during the remaining loan period. Thus, if I waited until the last month of the loan, I’d be able to buy the residence in question for the price of a single payment plus what I had advanced to make the deal happen.
Under the terms of the Option, the current owner – and only the current owner – would have the right to buy the Option back for a price which would have returned all my investment and given me my choice of half of the profits derived from the deal or 11% interest on the money I advanced. Next time we’ll delve into all the aspects of this transaction to see why this was a good way to proceed.
