We’ve done hundreds of deals that we remain in deals through owner financing, subject to existing financing and lease/purchase, or sandwich leases. However, sometimes it is appropriate to hand your buyer back to your seller instead of collecting the standard three payments per deal we teach. In our business, we call this AO (assigned out).
One of the first deals I did on terms after re-engineering the business in 2013 was an AO deal. It was a simple farm in Rhode Island, pictured here.
If the real estate agent couldn’t sell, how did you do it?
I’ve mailed some yellow letters to free-and-clear properties in this one zip code. The seller called me back to say that he bought it for his daughter who is no longer in the house. It was vacant and it was open to terms (lease/purchase in this case).
However, she did say a few things that caused me to use my AO as an exit versus an attempt to stay in. Here are the numbers and details:
- He wanted $220,000 for the property.
- He wanted $1,500 a month, which I thought was all money at the time.
- He didn’t want to give any original credit to me or anyone else.
- He had been working with a real estate agent for about a year and was still working.
He asked if I would be okay with him working with her at the same time he was working with his real estate agent. I said most real estate agents don’t like to do this, but this guy was a friend of the seller, knew me, and was fine with it.
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We signed a lease/purchase agreement with the seller with the understanding that it was unlikely I could stay in the middle as he needed all of the monthly and was unwilling to give up any of the original monthly. So we both knew the plan was to buy one buyer and then hand it back to that buyer. We put up a “Rent to Own” sign in the front yard a few feet away from the real estate agents’ sign.
Within 11 days, we had a deposit from a tenant buyer and the deal was closed. He was a mason who had been driving from home for 11 months but did not call the number on the sign. Why? Because he knew his credit wasn’t in good enough shape yet to get a mortgage and my signature said, “Rent to myself, no bank.”
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I had a house for $235,000 and got a 10 percent down payment. So we split the deposit 50/50, and I was happy to collect $11,750 as one of my first bet deals. The signing with the buyer was done in my attorney’s office and then being handed back to the seller. The house was redeemed on time within 24 months, and everyone was happy. So instead of our standard three payments per deal, we collected a one-time check for the AO and moved on.
These are fine, but keep in mind that you have to do other work if you want to get paid. So that if you make three payments per deal, you create the same “now” cash flow, but also ongoing cash flow and nice back end cash out. This keeps a nice steady cash flow in multiple ways for 24-60 months for every deal you make!
You can see below the average of actual payment days we created for our own deals for 2017. And in 2013, we did too many AO deals—now we only do 1–2 per year.
Below represents approximately 22 deals.
When is the good time to use the AO (Assign Back to Seller) technique?
- In Texas, you can’t midway through a sandwich. so go as many as you can
You can if you’re in Texas (plus subject and owner financing, of course). - If you can’t make a spread or cause to stay in it (sometimes there is no spread but the bigger principle comes down to
Will warrant staying in). - If there isn’t any equity or reason to wait for the back end anyway.
- You are new and nervous about making monthly payments and/or just want to get some immediate cash flow because AO is very easy to convince the seller and thus get under agreement. Of my first 13 terms deals, 12 were AO.
It will pay well to become a master transaction engineer knowing how to navigate any deal that comes your way.
Do you have any questions about the AO method?
Share them in the comments below!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
