How can we structure this deal?
In the summer of 2010, I was blessed to have a sure-enough successful husband-and-wife real estate investor team take Ashley and me under their wings. They have a passion for giving and enjoyed teaching aspiring and established investors alike on how to creatively structure deals. Without them, Ashley and I wouldn’t be where we are. That passion lives on today as they travel around the country teaching on the same topic. Their names are Bill and Kim Cook, and they are just wonderful people.
At that time, Bill and Kim were doing a monthly REIA (Real Estate Investor Association) event at their personal home situated on a 20-plus acre horse farm in Adairsville. The name of the REIA was called REIA Rancho, and the memories I have of being on the ranch bring back immediate nostalgia and a great big smile. For some reason, you always felt like you were coming home when you went up to the ranch.
It was there that I really got introduced to creative deal structuring. Bill would say that all deals are possible. What he meant by that was that you could do any deal and make it profitable if you found the right structure to make it happen.
He would take a white board and write some information about a house on it in front of the 40 people huddled up in the living room. He would then ask us how to structure the deal for that house. People would ask questions and give their input. And by the time we were through, there were at least three ways to make the deal happen.
I learned so much from the exercise.
I’d like to do the same for you on a house I went to last week. But since you aren’t here to ask questions, I’ll take the lead and write as I think out loud.
We’ll call the house Cottonwood. It’s a late 60’s, three-bedroom, one-bath ranch. Currently, it has a mortgage against it with a principle balance of $28,000. The mortgage payment for principle and interest is $390 a month, and the interest rate is 11.25%.
Rehab wise, it could use new windows. The HVAC, roof and septic have been updated. It has hardwoods throughout, but there was leak around the water heater that has caused some damage. At 1,100 square feet, I’d say the rehab would run $17,000 to flip or $5,000 to rent.
The after-repair value on this house is only $60,000 due to location and age. But it would rent for $700 a month.
The seller is selling because they don’t want to keep making two payments. They’re open to any kind of offer and really just want to be done with it. They asked if we could give them payoff for the house.
So the first question we need to answer is “Is this a flipper or a keeper?”
For me, there is not enough meat on the bone to flip this house. If it were in a better location, I may consider it. But not in this case.
So how could we keep it?
This deal isn’t good enough for me to pay cash. That being said, a subject-to deal is possible. That’s where you buy a house and leave the seller mortgage in place after the closing. The house would only cashflow around $100 a month. That’s not a lot to take on a debt with an 11.25% interest rate. But it’s still doable, especially since I forgot to mention there’s only nine years left to pay on the mortgage.
Another thing is that it’s on the outskirts of my area. I’m not sure if I really want it. So how could I test drive this deal to see if I do? It could be done with a lease option.
What if I leased the property from the seller at a rate equal to the mortgage payment with the right to sublease the house? I could then rent it for the $700 and increase the cashflow to closer to $300 a month. I could get an option to buy this house, subject-to the existing mortgage for a time in the future after I feel comfortable with the property. And If I don’t, I can walk away at any time.
That seems safer, more profitable and is just one of the many ways we could structure this deal.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.