What Kind Of Deal Should I Accept From A Seller?
One of the most frequent questions I get is “What makes a good deal?”
Here is the ONE major thing you have to know before you accept any kind of real estate deal.
Watch it in this video.
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Read Transcript for “What Kind Of Deal Should I Accept From A Seller?”
“What are your specific requirements for a deal you’ll accept from a motivated seller?” – Kim Banks, Savannah, Georgia
Joe: Well, it depends on the type of deal that I have and it depends on the exit strategy that I have for that deal. You always look at every deal and look at your exit strategy. This is a very, very broad question because you have to understand how the hierarchy of zero down structures work. I created this hierarchy of structures that helps you understand how you should structure any particular deal in any particular situation based ultimately on your exit strategy (how you’re going to make money) so if you understand those things, then it’s not going to be a problem.
Joe: Now, if I do a Subject To deal, I have one set of requirements. If I’m going to do a for rent deal, I have another set of requirements. If I’m going to do a land contract, if have another set of requirements.
Joe: But let’s say that you’re talking specifically about what I consider to be the easiest method of all of these which is the “For Rent Method”. It’s the method that I use to get everybody started with. It may not be the method that you stay with forever because there’s some advantages to doing a Subject To, land contracts, wholesale deals and assignment deals and other things like that, but the For Rent Method is a great one to get started with and start making money with immediately because it’s the easiest one to understand.
Joe: Also, it’s possible to get just about any type of deal and make it work. When I look for a for rent deal, what I look for is a seller who can work with me. What I need in a for rent deal is a property that is priced reasonably close to the market value, and the market rent is absolutely no more than market rent, so it has to be at market rent or below and that the seller will accept those terms. And if they accept those two things, that’s all that matters – it doesn’t matter if it’s a $5,000 property or if it’s a multimillion dollar property – I can do it with any of those types of deals.
Joe: The type of deal that I can’t do the For Rent Method with is properties that are not habitable, so if it’s not habitable, then we have to move it into a different structure and then typically with a land contract. So both of these systems are very easy to do with just about any type of property which means that as leads come into you, you can do deals with every one of those leads that come in.
Joe: Now, you say, ‘What if I get into a situation where the guy has a property that’s worth $350,000 but he owes $450,000 on it that the market rent is $2,000 a month and he owes $3,000 a month on it?”
Joe: Well, you can still do that as long as the seller will work with you (and we’ve done this many times). First of all, we can sell it in those types of markets, for more than it’s worth, because it’s unlikely that the buyer is going to exercise that option. Plus, we cannot get more than market rent so the buyer has to take that negative, so if they owe $3,000 a month and they get $2,000 that means they have to take $1,000 a month negative cash flow on that particular deal. But, taking $1,000 a month negative cash flow is a lot better than taking $3,000 a month negative cash flow if that person wants to protect their credit.
Joe: It doesn’t always make sense to protect your credit, but with a lot of people it does, especially if they have a security clearance or they’re government employees. If they’re on a corporate fast track on any level, they want to get another corporate job or they’re afraid that if they lose their job they need to get another corporate job – the corporation always runs your credit so if you don’t have good credit they don’t hire you so you can’t let a property go into foreclosure like that, so you’ve got to make the payment and it’s going to be a lot easier to come up with $1,000 than it would be to come up with $2,000 especially if they’re employed.
Joe: If they’re losing their property and its going into foreclosure anyway, then they’ve got to look at it as does it make sense to let it go into foreclosure and destroy their credit and get it back three of four years later? (which eventually it will clean itself back up and they’ll be able to go out and get a mortgage again after that.)
Joe: That’s the basic concept of it. You can structure a deal with any situation. What you need to do is understand the structures so that you can make money on those deals. When I go into for sale by owners, there’s very few properties in for sale by owners that can’t do that. Most of the people that are selling for sale by owner are still making their payments. The people that aren’t making the payments are the people that are in pre-foreclosure. So if you’re looking at pre-foreclosures, it’s less likely that you’ll do the For Rent Method with those types of deals.
Joe: Now, some of those might have equity in them but it’s a very small percentage of them. Most people that have equity in those properties – they have time to turn around and sell those properties and get out from under them, or they’ll try a short sale which isn’t a great option for them – it’s being sold to them by a lot of agents because the agent still makes money and the bank makes money but it still trashes the credit of the seller, but if that’s the only option you’ve got sometimes it makes sense to go in that direction. Anyway, I hope that answers the question in one way or another. Alright, thanks.