Buying property the right way can help you remove hurdles in a deal.
There is no doubt that you will face complications in your property deals which would make you want to throw your hands up in despair. But no!
Sometimes difficulties in a deal can become a source of additional profit. Hard buying may not turn out to be your most profitable story, but there is something to be said about saving a bad deal.
With my company, we try to find upside in these situations – for example, by making a fourth pay day out of it.
What to Do When a Deal Doesn’t Work Out—Twice
One instance I remember was when we bought a house that had two different buyers after one defaulted.
In 2015, we put an expired inventory under contract for $263,000 using a sandwich lease. The purchase price was what he owed, and we agreed on terms of nine years remaining to allow time for the market to potentially appreciate and for the principal to come down.
A “subject” deal is better when the seller owes on the property, but in this case, they didn’t want to give up title (either for tax benefits or out of general inconvenience).
Connected: How I Profited on a 2-BR Home by Switching from a Sandwich Lease to Subject Two
We sold this property to a buyer for $329K, but they ultimately defaulted. The combined payments were:
- Payday 1: $12,000
- payday 2: $10,800
- About $300/month. x 36 months
- Pay Day 3: $16,200
- $450/mo. Principal Paydown x 36
- Keep in mind there was no markup because we didn’t redeem it yet – we resold.
- Total: $33,000 in profit from the first two tenant-buyers
However, the net on property No. 2 was closer to $4,800 because the property was vacant at the time and we had to pay to maintain it. We paid for it with the spread created by the other deals, so it wasn’t really out-of-pocket expense.
By having some deals with predictable payment days, you can create a safety net for events like default. Despite your best efforts to follow every best practice and properly vet your buyers, things will still happen. From time to time, buyers will have what I call “life events”.
third time’s the charm
Because this position involved a nine-year tenure with the seller, with several years remaining when it happened, we had plenty of time. When we buy a property or when there is a lease purchase where the loan starts at about what it is worth, we want two things to happen: the principal goes down and the market trend goes up.
Both of those things happened, and we were able to sell it to our third tenant-buyer for $359,000. After our principal payment, the balance on the mortgage was roughly $246,800.
This new buyer created the same $300 monthly spread in payday number 2 as before. As the market grew, the principal payment increased as well, but we’ll keep $450 in this example for easy comparison.
Connected: How to get out of a bad real estate deal
Obviously, third time’s the charm.
Here’s a recap of deal number three:
$6,000 today + $14,000 over the next 36 months (nonrefundable deposit)
$300 x 36 = $10,800 in spread
$450 x 36 = $16,200 (principal payment)sale price: $359,000
Purchase: $246,800
advanced payment: $20,000
Extra Premium: $92,200
The $92,200 in premium, $16,200 in principal paid, and $10,800 in spreads combined for a profit of $119,200 on this deal. In addition, we had already received $33,000 from the first two tenant-buyers, so the property netted us $152,200 in total payment days.
So what if tenant number 2 defaults? We still had plenty of time left, so at the end of that term, we could sell it conventionally – or better yet, hire another tenant-buyer.
However, our program is designed to help buyers reach the finish line, so we do whatever we can within our system to promote it.
In this instance, we dealt with a default yet we were able to structure a deal to our advantage (despite some obstacles along the way). When a deal falls through or is interrupted by a major life event, it’s important to remember that a change in circumstances can be countered with a change in terms.
And in some cases, it may be time to break the normal rules of a deal and find something that benefits the seller, the end buyer, and you.
Have you ever experienced a deal gone sour? How did you handle it? How did it work out?
Share your story in the comments below.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
