Putting Together Creative Real Estate Deals

Putting Together Creative Real Estate Deals

By: William Tingle

I got a call from one of my coaching students recently who was getting ready to pull the trigger on his first sub2 deal.

For the uninitiated, sub2 is where you buy a house and leave the seller’s mortgage in place with you just taking over the payments on the existing loan. You then make payments on that mortgage until such time as you either refinance the house, pay it off over time or sell the property. Some call it “buying subject to.”

My student was looking for some guidance on how to set up and properly use a land trust to take title to the property at closing which is a fantastic method of taking title for privacy purposes, among dozens of other reasons. We talked about how all of it worked and what he would need to do to put it together with a sub2 deal and different forms he would need.

While we were chatting, he said, “Man, you seem to know everything about this. I just hope I can figure it all out one day.”

I told him not to worry, I didn’t create these concepts on my own. I have spent tens of thousands of dollars on real estate training and coaching and though some courses and training were better than others, even the worst of them had value. I always learned something new. I told him that anyone who plans to rock it as a real estate investor needs to plan on budgeting for education and training as an ongoing expense.

We continued talking and he asked me where I had learned about how to do sub2 deals and if I bought houses any other way.

I said, “Of course I buy using other methods! This ain’t no one trick pony, you know!” I then shared with him a story about a deal we had just completed where I worked with a seller who was desperate to be rid of a real estate nightmare.

The house had originally been bought as a personal residence. He had lived in it for over 15 years then bought a bigger home and thought he would just turn this one into a rental.

Normally, this is a great way to get into the real estate business but there was one problem. Actually, there were several but the primary one was that this guy had no idea what he was doing.

When we spoke, this guy had just finished evicting his 6th tenant in less than 3 years. By the way, none of them had gone quietly. He found us through a mailing we do to landlords filing evictions. We get these leads from the courthouse each month.

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When, as I always do, I asked why he was selling the property, he told me that being a landlord was “the worst job on the *&^%ing planet and that he just wanted that *&^%ing house gone.”

Our seller owned the house free and clear and was asking $40,000 for the house. He needed 10k for a new business he was starting.

We offered to purchase the property for the full $40,000 he was asking, payable in 12 equal annual payments of $3,333. We would make these payments to him on December 1st of each following year. To get him the $10,000 he needed for his business, we agreed to prepay the first 36 month’s payments (plus $1.00) which totaled $10,000.

The seller happily accepted our offer, and we added another deal to our portfolio.

My student seemed astounded and asked what in the world made me think of creating such an unusual offer and what’s more, why would a seller actually take it?

I explained to my student, there were several reasons this worked for the seller and myself.

1. I gave the seller his full asking price without trying to beat him down at all on price. Price is often times a seller’s stickiest point of contention. If you can find a way to give them their price at the start, they are much more likely to bend on any other terms you present. Of course, the deal has to work to be able to do this. A full price offer also immediately warms the seller up to you and creates a less adversarial environment right away.

2. By timing the lump payment towards the end of the year, it gives a seller cash at the holidays. This is a time when most people are short and a nice sum coming in at that time is always welcome. We always try to structure larger cash payments in November or December of the year. In addition, if we are thinking about paying any kind of note off early, we try to target this toward the same time of year for a discount. Plus a large cash chunk seems more attractive than a paltry $278 a month.

3. Next, with our offer, we will not have any payments on our new note to the seller for 3 years. Doing it this way gave him the money he asked for now and gave us no payments for 36 months because we did not call this large first payment a downpayment, we made 36 payments up front. Doing it this way will allow us to recoup our cash before we make our next payment in 36 months. In addition, if you noticed, we are paying 0 interest on the full term of the note.

4. Lastly, this house, cleaned up with paint and carpet, is easily worth 75 to 80k. We are literally buying this for half price. With the subordination and substitution of collateral clause we put into all of our contracts, we have options. Fix and rent, fix and owner finance or fix and retail which would put 30 to 40k in our pocket while we still make payments as the note is moved to another of our properties.

My student about fell off of his chair. He said, “That is incredible! I have got to learn to do all this stuff! Can you teach me?”

I said, “Stick with me, buddy. We’ll go places.”

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