Real Estate Deal Structuring
For Creative Real Estate Investors
Real estate deal structuring refers to the process by which real estate investors arrange and re-arrange the financing (and trade) terms of a property purchase such that both buyer and seller walk away satisfied.
For many investment property buyers, the goal of real estate deal structuring is to acquire control or ownership of a property for no money down, or next to nothing down.
On the other hand, a home seller’s primary goal may be to try to get as much up front money as possible and the highest price overall that they can get.
Without any mitigating circumstances, the average seller would not be willing to consider any terms of sale other than, “100% of asking price, settlement in 30 days or less”.
If you’re new to real estate investing and creative real estate financing, you probably find it difficult to craft deals that simultaneously satisfy your seller, and guarantee you profits.
Part of the difficulty has to do with the fact that no two real estate seller situations are exactly alike. No two sellers have identical needs (or wants).
The only reliable way to negotiate deals that consistently get accepted is to build rapport, and determine whether your services are indeed the best solution for the seller.
Using something like a real estate deal structuring questionnaire as a general guide to your fact finding will help you determine the seller’s “must haves” and differentiate them from their more expendable terms (or the “like to haves”).
The range between the “must haves” and the “like to haves” is the wiggle room within which your real estate deal structuring must take place.
Working with this framework, you may find that you can't take care of a seller's "must haves" without making the deal an unprofitable one.
Pre-requisites of Win-win Real Estate
Here are few conditions that must be present or fulfilled before you can hope to structure a mutually beneficial real estate deal:
- In-depth knowledge of seller’s wants and wishes regarding their property.
- An understanding of your maximum allowable offer, the price above which you will not be able to make a profit or structure an attractive deal for your buyers (if you’re a real estate wholesaler).
- Learning how to give sellers more than one way to sell you their property. Making “option” offers rather than just “one-price” offers.
Sample Real Estate Deal Scenarios
Let’s say Ian Investor found Harry Homeowner who has listed his house “for sale by owner” at a list price of $100,000 dollars.
Assume that Harry has a neighbor (Nancy Neighbor, who hates Harry by the way), who has decided to undercut Harry and has listed her property at $95,000 dollars.
Ian investor has decided to make offers to both Harry Homeowner and Nancy Neighbor, but he finds that they are facing two different circumstances.
Harry Homeowner decided to sell his house because of a job transfer and an immediate need for $5,000 dollars within the next 3 weeks. His mortgage balance is $30,000 dollars. He learned from a real estate agent friend of his that the average days on market in his area, is 90 days. As a result, he may be open to some non-traditional purchase terms.
Nancy Neighbor on the other hand, also has a mortgage balance of just $30,000 dollars, but is in no hurry and has no extenuating circumstances affecting the sale of her house. As a matter of fact, she’s prepared to keep the house on the market for up to 8 months, and she’s also prepared to pull the property off the market after that time if the house does not sell.
How would Ian the investor get all this information?
The real estate deal questionnaire!
If you're not really, really digging into the seller's mindset, life situation,and finances, you're not very likely to structure a mutually beneficial agreement.
Using the questionnaire with Nancy would tell you that Nancy is not in the market for your services. What I did with “Nancys” who would come to me is that I’d advice them to seek a competent real estate agent, and refer them to a real estate agent in my network (if they asked).
For Harry Homeowner, I recommend the “option” offer rather than making an offer that he can just say “yes” or “no” to.
Purchase price: $60,000 dollars
Upfront payment: $5,000 dollars within 3 weeks
Seller financed balance: $55,000 zero payments, zero interest payable in 12 months.
Purchase price: $45,000 dollars closing in 2 weeks
Of course these are just representative figures to give you an idea of what I mean by deal structuring. It’s important to note that the rules concerning these sorts of seller financing transactions vary by state and local area.
DISCLAIMER: I am neither an attorney, nor an accountant. Please see a competent attorney and/or accounting regarding these matters.
Hopefully, the next time you are faced with a real estate deal, you’ll be better equipped to construct a win-win for yourself, your seller client, and your buyer clients.