“Believe it or not, we’re not in the real estate business, we’re in the problem solving business.”
– Some Real Estate Guru…
On the last two posts in our series on real estate marketing, we discussed getting leads pointed in your direction and processing them at scale through automated lead management.
Now, it’s time to get into the nitty gritty of real estate deal strategy and ask ourselves:
“How can we make money from every possible type of lead?”
That is exactly what we will answer on this post. Additionally, we’re providing the contracts you’ll need to execute these transactions today.
To Get All of these Contract Templates CLICK HERE
Consider this your official operations manual on doing deals.
You don’t need to read all of this up front, but certainly bookmark this page, save it to Evernote, or do whatever you need to do to easily access this as a reference for you and your team.
For a quick refresher, here are the three pillars of real estate marketing:
If you were dropped off in a city you’ve never been before, didn’t know anyone, and had zero dollars, I’m fairly certain this series would give you the knowledge you need to start providing value in that market immediately. Please take action, and enjoy!
The goal of this business is to solve people’s problems. Others describe the main skill-set of investors as “transaction engineering,” which is a nerdier way to put it.
This is the science of doing deals. It’s seeing the chessboard and determining which move will help both the seller AND make you a profit. It’s the fun part 🙂 We’re going to break it down.
The idea is when you’ve successfully generated leads and automatically processed them through a CRM like InvestorFuse, you just need to determine what scenario each lead falls under, and execute the right TYPE of transaction based on these facts.
We’ll organize this guide as such:
Deal Qualification: Is this a lead worth pursuing at all? Yay or nay.
Each of the above lead scenario combinations will be assigned to certain types of offers, which you can download at anytime, just CLICK HERE to get those offer templates:
Types of Offers
In the first part of the “Lead Processing” section of the Pillar Two post, we discussed the system behind processing leads.
To reflect, you do one of the following when a new opportunity comes into your business:
1. Replying to the seller and executing the next course of action
2. Adding to a follow-up reminder or follow-up sequence
3. Disqualifying completely
A lead can be disqualified and opted out if any of the following conditions are met:
By the process of elimination, all other leads will qualify for further processing.
You will work these leads through the system as normal, either adding the seller to a follow-up reminder or follow-up sequence OR replying to the seller and executing the next course of action.
In this instance, we’ll skip through the follow-up and nurturing process, which we go over in Pillar Two, and determine the lead scenario:
You will know a motivated situation when you hear one. Real, human, emotional distress is always involved in a motivated situation. Some motivated scenarios may involve any of the following:
This is not an exhaustive list, but when you are speaking with someone on the phone and you ask them “why are you looking to sell?” you need to determine if they are in a NEED-TO-SELL situation vs. a WANT-TO-SELL situation…feel the difference?
It’s a critical distinction that will determine what type of deal you can structure.
While it’s important to sympathize with the seller as a fellow human, but you also need to wear your transaction-engineering hat and figure out how you can structure a win-win solution for the both of you.
By process of elimination, if the seller is not in a NEED-TO-SELL situation, they are not motivated.
You need to determine if the owner has a mortgage or not. In a first conversation, the only thing you can do is ask, so ask. If they push back, tell them it’s impossible to help you unless I can determine if there’s any equity in their home.
For those unfamiliar, here’s a quick InvestorFuse definition of Equity:
**Equity is defined simply as the After-Repaired Value (ARV) of the home MINUS how much they still owe the bank. Example: The house is worth 200K. They owe 100K to Bank of America. If they sold the house today, they’d make how much??? 100K. That’s the equity, and it’s important to know this number if you’re going to be making an offer to buy the thing….so ask how much they owe!**
The equity situation will fall under these categories:
High Equity: 70% or more…ex: The owner “owns” 70% of the total value of the house, and they still need to pay the bank the other 30%. That’s still pretty good!
No Equity: They owe the bank close to the full amount of the value of the house. So, if they sold the house, they wouldn’t walk away with hardly any money at all.
Under Water: Since market prices fluctuate, the value of the house might plummet. However, there’s still a mortgage in place with a balance that is HIGHER than the value of the house. If they sold the house, they’d need to come up with extra money to pay off the bank balance. Think 2007…This is common, but we’ll discuss how we can fix some of these situations below.
Free and Clear: The owner has no mortgage. If they sold the house today, they’d get the full net (minus closing costs) of the value of the house.
So we’ve determined motivation and equity, now let’s look at the property itself:
Let’s keep this simple and to the point:
Disregarding property location, if the condition of the property was favorable enough that you would let your grandmother live inside, then mark the deal as in GREAT condition.
By process of elimination, if you wouldn’t let your grandmother live inside with the roaches and cat skeletons…then we’ll assume the house is in awful condition.
Great vs. Awful. Make the decision so you can structure your offers accordingly.
We’re now going to break down every type of offer you can make as a real estate investor.
Use the following chart to determine which of the above scenario combinations will apply to each offer type:
**Enter, creative offer financing expert and president of the Tampa Bay REIA, Greg Simpson**:
To Download All of The Following Referenced Contract Templates: CLICK HERE
Cash offers are by far the easiest offers to make. You will typically offer cash when the seller is motivated, and when I say motivated, I mean seriously motivated. They need that cash and a fast closing. They need to get Out Fast (shameless plug)! They cannot afford to wait around for someone to get financing, or they cannot afford to fix the house up to a point where someone could even qualify for financing.
To make fast cash offers, you really need to know your numbers. You must be rock solid on those numbers, because the seller is relying heavily on you to perform. He/she is desperate, in a need-to-sell situation. I cannot tell you how many times wholesalers have brought me deals and have indicated that the rehab would only be $10-15K, when in all actuality, the rehab would be more like $25-30K.
This can clearly kill your numbers, which in turn kills your deal, which kills your reputation with the seller and your buyers. Knowing your ARV is even more important. You have to know what your buyer can sell it for once they fix it up or what it is worth as a rental. If your ARV is off by 10% or more on a fix and flip deal, you will never be able to move that contract.
As a good rule of thumb, I stick to the 70% Maximum Allowable Offer (MAO) Rule. This formula has been around the investing world for quite some time. Some use the 65% MAO Rule, and it will really depend on your market. If you are in a hyper market, you may even have to go up to 80-85% of the MAO formula to get deals done. Let me explain…
ARV x 70% – Repairs – Assignment Fee = MAO
– $20,000 (repairs)
– $10,000 (assignment fee)
MAO is obviously not where you want to start out in your negotiations with your motivated seller, but it is the most you know you can come up to in your negotiations.
When they are motivated, I promise you that you will get them to go lower than MAO. Even if you get your offer accepted at your MAO, you will still make a quick $10,000. Sounds pretty good to me!
Creative financing offers happen when the seller is not in a hurry to make money, but he/she is in a hurry to get the property off his/her hands or books.
These types of sellers have probably heard the term “creative financing” or “owner financing,” but in my experience, you still have to hold their hands through the offer process.
These offers and deals are a lot more complicated, and you will need the assistance of a good real estate attorney to make sure you are not doing anything to get yourself in trouble. There are a lot of laws out there including Dodd/Frank and other local and state laws that you want to be sure to abide by.
Owner financing can take place in situations where the seller may simply be tired of dealing with tenants and toilets. They might also just be looking to just unload the burden of having to pick up rent check every month. Either way you’re still looking for motivation.
These deals, in my opinion, are the best deals out there. Most often these houses don’t need much work, or very little at all. Sometimes they need a ton of work.
In other times the house could be a complete tear down. In any case, the seller simply wants out from the house, but doesn’t need the cash now. They’re OK with waiting a few years, or 30, to get their money.
There are several reasons for that with one of them being for tax purposes. Lookup long term capital gains taxes vs. short term capital gains taxes for more information on that. Your CPA should know what that means, and if he/she doesn’t it’s time for a new CPA.
Essentially in an Owner Finance deal the seller now becomes the bank. This is a huge selling point for offering an Owner Finance deal. I use the line “has the bank ever replaced the roof on your house? Has the bank ever come and fixed a leaky faucet in the kitchen sink? I didn’t think so, and neither will you if you and I can agree to terms for buying your house.”
It’s usually that simple.
A lot of times you’ll reach the point of wanting to offer owner financing because your cash offer is so low it’s insulting to them. If the seller comes back with a groan about my cash price, I usually have a quick comeback to the effects of “yeah I didn’t really think you’d like that, however I can pay more for your house if you’re willing to take terms, or payments, for your equity.”
This usually sparks enough interest to get the conversation started on how you structure your owner financing deals.
Let’s go back to our cash offer and show the difference between that and offering owner financing.
In our cash offer we offered them no more than $40,000, right? So if the seller is asking $75,000 for their house we could tell them we’d be happy to pay you a lot closer to what you’re asking for if you’d sell it on terms, or payments. *
Note: You may need to have the assistance of an amortization chart if the seller insists on getting interest on their financing. I use Zillow’s here: https://www.zillow.com/mortgage-calculator/amortization-schedule-calculator/
But let’s say for simplicity your seller is good with 0% interest (trust me if they’re motivated they’ll do it).
Here’s how your offer would look:
Purchase Price: $75,000
Monthly Payment: $208
Length of Term: 30 years with a 10 year Balloon
Whoa, whoa. What’s a balloon?? A balloon payment is simply that at the time of the balloon the entire amount of the loan is due. Balloon payments are a great negotiation tactic with the sellers to get them to accept your offer.
This means that you have up until that time to build equity in the house, and set yourself up to get more conventional financing if you choose to do so. Another reason it is great for negotiations is that it sometimes will get you out of having to put any money down to execute the deal. This can save you tens of thousands of dollars if you decide to do several of these deals.
A lot of investors do a cash-out refinance to pull out the equity they’ve been building, and use the excess to go get another deal, and you’ve made a killing in rent over the course of of your term.
So why is that such a good negotiation tactic? It is telling the seller that you are guaranteeing that they’re going to get their money and not have to wait 30 years to actually get it. And let’s be honest, a $208/month payment does not look very sexy to a seller, but a balloon payment in 10 years will get them pretty excited.
Balloon payments do not have to be any specific length of time. It is really up to you and the seller to hash that out, but I wouldn’t go any less than 5 years.
By doing this strategy you’ve only had to come out of pocket $20,000 for the repairs the house needs (and maybe less since rentals don’t need all the fancy finishes that fix and flips do), your attorney’s fees, and some closing costs. So you got a house for about $23,000 that is worth $100,000. Not a bad day at the office!
Cash for keys is one of those very gray areas in real estate investing. It usually comes about when the seller is in foreclosure and they’re simply planning on letting the bank take it back. If the house doesn’t need much work to get it rent ready you can give them “cash for keys”, sign a quit claim deed, and then the house is yours.
You then fix it up enough to get it rent ready, and if you choose to do you can fight the bank foreclosure. By doing this you’ll have a short term rental that can be a cash cow for a short period of time. You’ll also incur some real estate attorney fees along the way. This strategy was very popular during the financial crisis of 2008-2012.
I personally feel this offer strategy is not for the faint of heart, nor is it for the novice investor, so tread lightly here.
Subject-to deals are also very complicated, yet simple at the same time. Before I go any further I will tell you right now that you MUST have an attorney who is extremely familiar with Subject-to deals (ask me how I know…).
These are great deals for all parties involved, but it takes some serious hand holding again, and it takes a lot of education on your part. You have to be able to explain all the moving parts of these deals.
In essence Subject-to deals are today’s version of assumable mortgages, except in these cases the mortgage actually stays in the seller’s name (insert *GASP* here). That is going to be the hardest part to explain to these sellers.
The reason we do “Sub-to” deals instead of assumable mortgages is simply that mortgages are almost alway non-assumable anymore. Very few mortgage companies and banks allow for that anymore, so we have to make an offer “Subject-to” the underlying mortgage these days.
The reason you’re going to offer Subject-to to your seller is because they have little to no equity in their home. They may even be upside down in the value of their house.
By selling their house Subject-to they are immediately getting debt relief. This is the main reason they called you in the first place. Either they can’t sell their house because they don’t have enough equity to pay real estate commissions and closing costs, or because something else has happened in their lives and they can no longer make the monthly payment anymore.
Remember to keep reminding the seller they’re going to get debt relief in a matter of weeks, not months. You are just solving their problem
For you to be successful in doing Subject-to deals you must be purchasing houses with mortgage payments BELOW fair market rent.
The reason for this is for setting up your future tenant up as a tenant/buyer on a lease option agreement (more on that to follow later.) If you’re buying Subject-to and the mortgage payment is more than market rent be prepared to be coming out of pocket every single month to make sure that mortgage is paid.
In Subject-to deals it’s important to get ALL the information from the bank. You can do this by getting your seller to sign an authorization to release form so that you can receive mortgage amounts, payment history, etc.
**Risk of Subject-to deals** –
In almost each and every mortgage done in the past 20 years there is a clause in it called the “due on sale clause.” The due on sale clause makes everyone that does these deals a little nervous because when you do a Subject-to deal, the seller is actually selling you the house.
And because of that the seller risks the bank calling the entire balance of the loan due. This can be a scary thing, but it would be shocking to see the bank actually due that these days.
The banks, believe it or not, are not in the foreclosure business. They are in the banking business which means all they really care about is whether or not that mortgage payment is being made each and every month.
These deals happen more often than you think. You just have to be poised to solve their problem when no one else could. These deals can be very lucrative and a great way to start building wealth with very, very little money. But remember, don’t do these without an attorney!
Short term lease options are simple and easy to do. Essentially, you are structuring a lease to rent the property with the OPTION to purchase it at a later date at a pre-determined price. Think Rent-To-Own. They come about when a seller is motivated to sell, the house is pretty, and they’re OK with not getting their money today.
The benefit to lease options is again similar to Owner Finance deals except the terms are much shorter and you have the Option to buy at the end of the term.
If at the end of the term you decide not to buy the house you don’t have to. Another benefit to the seller is that they’re not responsible for repairs anymore like in Owner Finance deals, but they’re only not on the hook for a short period of time.
Most short term Lease Option deals are anywhere from 2-5 years. The longer the better for you. Again you’ll need to agree on a price for the lease that’s much lower than rental rates so that you can turn a profit especially since you’re now responsible for repairs (more on that under Sandwich Lease Options).
These are also great ways to build wealth with basically no cash out of pocket.
Long term lease options are an alternative to Subject-to deals if you can’t get the seller to either understand how they work, or if they’re not willing to risk the due on sale clause.
By doing a long term lease option on the house instead of Subject-to you’re essentially setting yourself up for executing the option only when the property has come out from being underwater and now has some equity for you to gain.
Sandwich Lease Options are essentially part of your exit strategy when you buy houses on Lease Options (unless you like being responsible for repairs like a traditional landlord).
I, on the other hand, don’t like getting calls from my tenants about toilets being clogged and other nonsense that they come up with. By setting your tenants up as tenant/buyers the responsibility is pushed to them just like as if they were buying a house and using traditional financing.
I love two very important things about Sandwich Lease Options:
This is important to understand because if you have either a long term lease option or an owner finance deal you can get a new non-refundable deposit every 2-3 years! And in the off chance that they do execute the option that still works out great for you too.
Here’s why if they execute the option you still win: Their buying the house at the anticipated future value of the house. Let’s refer back to our original offer for Creative Financing.
Purchase Price – $75,000
Monthly Payment – $208
Repairs – $20,000
Total Investment – $20,000 (plus closing costs)
When you set up your Sandwich Lease Option here’s how I would structure it:
Purchase Price in 3 years – $125,000
Monthly Lease Payment – $950
Potential Profit if the Tenant/Buyer executes the Option – $56,712!
Damn! Maybe I should start doing more of those myself! Do you see why so many people do Lease Options as their primary investment strategy? How many of those until you’re financially free?
For more education on lease options and how to WHOLESALE these agreements, make sure to check out these great resources from Joe Mccall.
A Sweat-Equity deal is where the house is in need of a lot of work and you’ve negotiated a deal with the seller on any of the creative style offers (creative financing, sub-to, LO, etc.) and agree to fix the property up on your dime.
You’re going to get a great deal on the property and you’re going to put in the hard work and sweat to get the equity out of the house. However, the seller doesn’t necessarily know that it won’t be you that actually does all the work, right? That’s the job of your tenant/buyer instead 🙂
These types of offers to the sellers should be made as a last resort to get the deal done. These deals are done so that the seller walks away with at least something on a Subject-to deal or Long Term Lease Option. How you set it up is by giving them a mortgage to be in second position in a small amount of say $5,000-10,000 when you sell the house again in the future.
The good part for you is that if you never sell the house you’ll never have to satisfy the mortgage, and if you do have to pay it you’re paying it off with the equity you’ve built up over the years of owning the house.
Ahh my least favorite kind of offer, yet is one of the most profitable. Short sale offers are there for you to use when a seller calls you and is upside down in their mortgage, and have missed a bunch of mortgage payments (usually 6+).
By getting in front of them and not letting them hit the MLS you can control the purchase price a lot easier than when the masses are able to see it and create a bidding war on the open market. When doing Short Sales be sure to again have a great real estate attorney, a great Short Sale Negotiator, and a great Realtor that thoroughly understands the process.
Yes, I said you’ll have to work with a Realtor to get the job done because every bank requires the property eventually gets listed on the MLS. By having the seller in your pocket at this point, as soon as your Short Sale Savvy Realtor lists the property they already have an accepted offer from you within minutes of listing it 😉
Short Sales still can take forever even with the right power team in place to handle them. At the time of this article I’ve had one with Bank of America and has been going on for the past 8 months or so. The only reason I’m OK with that is that there is a $15,000+ payday in it for me on the back end of this deal once I buy it.
So the only requirement here is you work with a realtor in your market that has the infrastructure to help you negotiate the short sales. If you have that, you can help the sellers who are under water.
**Short sales almost always come with a deed restriction and are not assignable contracts (at least in some areas). Investors will need to either warehouse them (close on them) for 30-90 days, or, more preferably, buy them with a land trust or LLC and sell the land trust or LLC. Email firstname.lastname@example.org for more questions about this.**
Some of your sellers will just want to traditionally list it vs. receive your low cash offer.
Want to make 50% referral commissions instead of the typical 25%? Book the APPOINTMENT for your realtor rather than just emailing them the lead and hoping for the best without ever following up…
By getting access to a trusted realtor’s available schedule and booking the appointment with the seller while you have them on the phone is a sure-fire way to tee-up a listing agreement when they go to meet the realtor.
You simply say “this property isn’t ideal for our company’s acquisition strategy, but we work with a realtor that specializes in homes just like yours that will absolutely get it sold for you. Would you like to schedule a time to speak with them at the property?”
At this point, you’ve already pre-sold the listing for your realtor, so that’s why you can ask for 50%, and you are drastically increasing the likelihood of a listing agreement vs. the traditional, more passive lead “hand-off” that you’re probably used to. Do this instead, just make sure you work with a rockstar realtor that you know will do everything it takes to get the thing sold.
Caveat: In order to legally receive referral commissions from realtors, you also need to be a licensed realtor. Otherwise you may run into some issues if you’re trying to be sneaky and get referral payments in the form of “Marketing Consulting Fees” or something like that. Please discuss this with the realtor you decide to work with as their brokerage may have different policies for this.
I hope this guide helps you break down all of your investment lead scenarios in an actionable way. Use this as a resource for you and your team to execute more deals. And don’t forget to get these contract templates so you can hit the ground running.
To Get All of these Contract Templates CLICK HERE
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