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How Do I Structure A Deal to Sell A Property That Needs Substantial Repairs?

 

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How Do I Structure a Deal to Sell a Property That Needs Substantial Repairs?

Joe: Hey, it’s Joe Crump. I’ve got another one here. This one is another example deal that I’d like to explain. This guy has, “…a seller with six properties that he wants to sell. He’s an investor.” We run across a lot of investors through the Automarketer. You know, they have one ad, one property they’re advertising and then suddenly they say, “Well, I’ve got six others that I’ve got,” so that’s not uncommon. “All these properties are pretty similar, so I’ll just give you one so you can tell me how to structure the deal.” And that makes a lot of sense when you’re, especially when you’re first getting started. Do these one at a time. Say, “Let’s just start with one. I’ll show you what I can do. We’ll put it together. If you like what happens and how it works out, we’ll do the other five.” So keep that in mind.

Joe: “So I’ll give you one, tell me how to structure the deal.” Value is $75,000. The asking price is $55,000. He owns them free and clear. He’s owned them for fifteen years and used them as rental properties. They all need work. This one needs about $8,000. A roof, a furnace, some cosmetic work. It rents for $700 a month. The taxes and insurance come out to $100 a month. This one is vacant. Three of these are vacant, three are rented. He says they rent pretty quickly and when he starts advertising, but he didn’t want to rent them if he was going to sell and he doesn’t have the money to do the fix up. What can I offer him that he might accept? He’s retired, wants to stop being a landlord. Kind of hates it and can’t do the work on them any longer.”

Joe: Yeah, I don’t blame him. I hate being a landlord. I hate to be property manager. Get somebody else to do that work for you. That’s no fun. You’ll be burned out like this guy. If he had somebody else who was managing his property for all these years, it wouldn’t be a big deal. He’d just have them do it. They’d be taking 10% of the income that was coming in, but he wouldn’t have to do any of the work. He wouldn’t be burned out. He’d be able to keep them. They’d be in good condition now because a good manager will take care of the properties. They’ll go back in and do the work when it’s necessary and he will have properties that will be appreciated rather than depreciated which is what he’s got going here.

Joe: So, he’s owned these properties for a while. He’s got a lot of work that needs to be done it. If he’s asking $55,000 and it needs $8,000 worth of work, that means the prices is going to be $63,000 just to get it into a place where he can rent it. If it’s $63,000 and it rents for $700 a month, somebody coming in with $63,000, it’s not terrible income, you know, I’m going the math in my head, but maybe 8% return on investment after paying for principal, interest, taxes, or not, you’re not going to – well, principal, interest – I’m sorry. If you’re paying for it cash, you wouldn’t have principal and interest, you have taxes, insurance and property management.

Joe: And my guess is it’d be somewhere in the 8%, 9%, 10% rate, which is a pretty good return on investment if it’s fully rented. But not great. And so, what can he do to make this work even better? And the better way to do this is to make it, to give yourself more exit strategies and the way you can do that is to get it on terms. So if you got this property on terms for $55,000 and then sold it to an investor, let’s say for $5,000, now you’re up to $60,000. He’s got to put $8,000, he’s going to be up to $68,000. But if his payments are you know, if he’s got rents for $700 a month and he’s got $150 of that taxes and insurance, another $50 for, or $70 for the property management. Now he’s down to $500, you know, let’s say $450 a month, it’s take out $150 of that for himself, so $300 a month is what he can afford to pay on the monthly payment.

Joe: He takes that $300 a month, divides it into $55,000 and that’s going to be the term of the payment, so, if you’ve got $55,000, divided by $300, that’s 183 months divided by 12, that’s 15 years. Now you’ve got a 15-year no interest loan to pay off this property. So, what happens is it pays the property off in 15 years. Or you could put more towards it and pay off in 10 years or 8 years if you put the entire amount towards it. So that would be a great investment for anybody because the entire principal is, every payment is entirely principal so every time you get a you know, make a payment of $300, $300 is profit to you because it’s paying down your principal, even though it’s not cash flow to you. Plus you’ve saved another $150 a month cash flow for yourself.

Joe: And that’s probably the way that I would do it. I would probably want to keep that property. Maybe want to put the $8,000 in it myself. Let’s say I don’t have $8,000 and I want to do this property, then I could sell it to an investor, you know, for the $68,000. I get the $5,000 for myself and the investor has to come with the, I guess that was the original scenario, wasn’t it? I was selling it to an investor.

Joe: So, I can either keep this property myself for the $55,000, make the payments of $300 a month and then I have to come up with $8,000 to fix it, or I could add $5,000 to it, sell it to an investor. He makes payments on the $55,000. I get $5,000 as cash. I walk away from it. He has to put another $8,000 into it. He’s still got a good return on his money because you’ve set up the payment system for him to get all principal, every payment that comes in is all principal. And if you do that, it’ll make it really easy for you to turn around and sell. You might even be able to get $10,000 instead of $5,000 for it because it’s still going to be profitable for him in the long run and all he’s going to have to do is come up with $8,000 to buy this property for the rehab and then you know, the $5,000 for you, or maybe $10,000 for you if that’s the case.

Joe: So, his money into it instead of being $60,000 or $65,000 is going to be $15,000 or $20,000 and there’s a lot more investors out there that have $10,000 or $15,000 or $20,000 to invest than there are people that have $50,000, $60,000, $70,000, $80,000 to invest and they’re a lot more willing to do it on something like this because it’s got so much income coming in that pays itself down over time.

Joe: All right. Hope that helps. Hope it wasn’t too muddled. Thanks now.

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