Want to Succeed in Real Estate? Focus on Solving Problems.

[JScott]

Posting this for any investors who are looking for some inspiration for putting deals together...

Last year, I published a book on real estate negotiation. One of the central tenets of the book is about how real estate is -- at its core -- about solving the problems of those involved. I thought I'd post a story about a transaction we completed today that started out pretty complicated, but got a lot easier once we focused on the problems of those involved and getting those problems solved...

Last November, I purchased a 38 unit complex in Columbus, Georgia with two partners. After about a year of stabilizing the property, fixing it up, getting out the bad tenants, getting in good ones, etc., we decided now was the right time to sell to maximize our IRR (the measure I prefer to evaluate returns).

We got a great offer on the property, but unfortunately, there were three big problems that the parties to the transaction faced that derailed the negotiations for several weeks:

1. We only have about a year's worth of financials on the property, making it difficult for a new buyer to get a loan on the property for another year or so (most banks want two years of financials). Our buyer didn't think he could get financing short-term and didn't have enough cash to purchase the property outright.

2. One of our partners had another lucrative opportunity, and wanted his cash out as soon as possible.

3. The other two partners (myself included) didn't need their cash out immediately, but I personally didn't want to invest any additional money into the deal at this point.

We weren't surprised that the buyer wouldn't be able to get financing for another 14 months, so we offered seller financing for about 60% of the purchase price (the rest he'd put down as cash). He had a big down-payment, so he was happy to go this route. Offering seller financing to the buyer would solve Issue #1 above.

But, as mentioned above, one of my partners really wanted his cash now, so seller financing wasn't a good option for him. But, my other partner and I decided that we were willing to buy out the third partner at a discount -- he would get all his cash now and we'd get some additional profit down the road when the buyer paid off his note. The third partner was happy to trade off some loss of profit in return for his cash now. This would solve Issue #2 above.

Unfortunately though, buying out the third partner required me to invest an additional several hundred thousand dollars into this deal. I was happy keeping my original investment in the deal to hold a note for the buyer, but I didn't want to invest anything additional.

So, I turned around and offered an investor friend of mine an opportunity to make me a personal loan at a good interest rate, secured by note we were offering to the buyer. My investor friend had cash and was looking for cash flow, so he was thrilled to make the loan.

I will take the loan from my investor friend, use it to buy the equity from the third partner who is willing to sell at a discount, use the monthly payments from the seller financing note to pay my personal loan (I made sure the interest payments coming in and going out were equal), and in two years -- when the apartment buyer refinances and makes a big balloon payment on the note -- I collect all my profit from the deal...with no additional money out of my pocket. Issue #3 solved.

Ultimately, it was a win/win/win/win/win -- the buyer gets short-term financing until he can refi with a bank; one of my partners gets the cash he needs immediately; my other partner is happy to invest additional cash for the discounted equity and the note payments; I get some additional profit in two years (and a higher IRR!) without any additional out-of-pocket investment; and my investor gets to park some cash for nearly risk-free cash flow for two years.


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[Brian Christel]

Posting this for any investors who are looking for some inspiration for putting deals together...

Last year, I published a book on real estate negotiation. One of the central tenets of the book is about how real estate is -- at its core -- about solving the problems of those involved. I thought I'd post a story about a transaction we completed today that started out pretty complicated, but got a lot easier once we focused on the problems of those involved and getting those problems solved...

Last November, I purchased a 38 unit complex in Columbus, Georgia with two partners. After about a year of stabilizing the property, fixing it up, getting out the bad tenants, getting in good ones, etc., we decided now was the right time to sell to maximize our IRR (the measure I prefer to evaluate returns).

We got a great offer on the property, but unfortunately, there were three big problems that the parties to the transaction faced that derailed the negotiations for several weeks:

1. We only have about a year's worth of financials on the property, making it difficult for a new buyer to get a loan on the property for another year or so (most banks want two years of financials). Our buyer didn't think he could get financing short-term and didn't have enough cash to purchase the property outright.

2. One of our partners had another lucrative opportunity, and wanted his cash out as soon as possible.

3. The other two partners (myself included) didn't need their cash out immediately, but I personally didn't want to invest any additional money into the deal at this point.

We weren't surprised that the buyer wouldn't be able to get financing for another 14 months, so we offered seller financing for about 60% of the purchase price (the rest he'd put down as cash). He had a big down-payment, so he was happy to go this route. Offering seller financing to the buyer would solve Issue #1 above.

But, as mentioned above, one of my partners really wanted his cash now, so seller financing wasn't a good option for him. But, my other partner and I decided that we were willing to buy out the third partner at a discount -- he would get all his cash now and we'd get some additional profit down the road when the buyer paid off his note. The third partner was happy to trade off some loss of profit in return for his cash now. This would solve Issue #2 above.

Unfortunately though, buying out the third partner required me to invest an additional several hundred thousand dollars into this deal. I was happy keeping my original investment in the deal to hold a note for the buyer, but I didn't want to invest anything additional.

So, I turned around and offered an investor friend of mine an opportunity to make me a personal loan at a good interest rate, secured by note we were offering to the buyer. My investor friend had cash and was looking for cash flow, so he was thrilled to make the loan.

I will take the loan from my investor friend, use it to buy the equity from the third partner who is willing to sell at a discount, use the monthly payments from the seller financing note to pay my personal loan (I made sure the interest payments coming in and going out were equal), and in two years -- when the apartment buyer refinances and makes a big balloon payment on the note -- I collect all my profit from the deal...with no additional money out of my pocket. Issue #3 solved.

Ultimately, it was a win/win/win/win/win -- the buyer gets short-term financing until he can refi with a bank; one of my partners gets the cash he needs immediately; my other partner is happy to invest additional cash for the discounted equity and the note payments; I get some additional profit in two years (and a higher IRR!) without any additional out-of-pocket investment; and my investor gets to park some cash for nearly risk-free cash flow for two years.

Good to hear you guys were able to come up with a good exit plan.

Actually in the process of looking at smaller multifamily properties that fit somewhat of a BRRRR method to recoup my initial investment.

I'm looking in the Huntsville market but is there any reason you chose Columbus besides for the number working out ARV?

Do you generally prefer do to flips like this or hold units for consistent cashflow?

 

[JScott]

I'm looking in the Huntsville market but is there any reason you chose Columbus besides for the number working out ARV?

We're finding that most of the decent multi-unit deals these days are in tertiary markets. And when you're dealing with 20-80 unit properties, the management part is the hardest part, so you want to have a team on the ground that can manage that.

Columbus met both of those criteria, as both my partners were in Atlanta, about 90 minutes north of the property...

Do you generally prefer do to flips like this or hold units for consistent cashflow?

The two exit strategies serve complete different purposes within a portfolio. Flipping is great to generate chunks of non-tax advantaged cash; rentals are great for tax advantaged passive income. So, we do both, but for completely different reasons.

Since the market has heated up, we haven't been doing nearly as many flip deals, but we try to be opportunistic, and will pursue any deal that makes sense, whether flip, rental, note, etc.

 

[therealmark]

Thanks for sharing. This is a perfect example of how every "problem" is really an opportunity. You just need to look at it in the right light.

 

[BrandonS85]

And Something else to consider is that MANY RE markets are extremely inefficient, ESPECIALLY those tertiary markets (Which is where I do all my business). The more off the beaten path you get, competition dies down, competitors become extremely inefficient, etc.

I was asked to potentially 'help' implement systems in a local large property management company. They are running 160+ rentals with multiple full time staff, all the while I manage my own 86 rentals myself with a 5hr/wk secretary who mails checks/collects bills. My efficiency allows me to take on properties others can't make money on, which allows me to really reap rewards. Same goes for multi-families where people have a hard time putting together a management package or workflow system.