THE BEST DEAL EVER
In the summer of 2014, I made contact with the out-of-state owner (absentee landlord) of the semi-detached twin connected to the rental property I purchased a few months earlier. What resulted turned out to be my BEST DEAL EVER.
APRIL – I purchase my first rental property. [optinlink text=”CASE STUDY INCLUDED” id=”6″]
MAY – Owner of the twin reaches out, negotiations ensue.
JUNE – BEST MONTH EVER, let’s get into it –
Fortunately for us, I handled most of this deal via email so we don’t have to rely on my memory (thank GOODNESS). The initial conversation and most of the actual negotiations happened over the phone, but since I try to consummate each phone conversation with an email, we’ve got the PLAY-BY-PLAY:
WHEW! Yes, I censored all those emails manually… VAs send me your resumes!
What wasn’t covered in the email string was the seller’s reasoning for working with me on a tricky deal. He had some of the typical problems you’ll hear from absentee landlords:
- couldn’t keep up with maintenance
- tenants weren’t properly vetted, rent was regularly late
- hiring a property management resulted in negative cash-flow
The previous tenant was recently sent to jail and the property sat vacant. This used to be the seller’s family home but when they had to move for work the market value was substantially less than what they paid. They tried to hold it until the market improved but the property was losing them money every month.
LEASE TO OWN AGREEMENT
Yes, the secret sauce to this amazing deal. A straightforward contract that put me in control of the asset without a substantial investment. We hashed out the details over a few phone conversations. Most importantly, I required a sublet clause. This would allow me to sign a secondary lease with a subtenant of my choice. I wasn’t planning on moving into the home so I needed to make sure the contract gave me the legal authority to monetize the asset.
Here were the terms we came up with:
Down Payment: $2,500 (due upon signing – July, 1st 2016)
Purchase Price: $190k (this is what I would need to eventually buy the property)
Monthly Payment: $1,400 (easy negotiation, this is what the previous tenant was paying)
Other details: $400 monthly reduction to the purchase price for every $1,400 monthly payment. Auto-renewal after one year at $1,500 per month.
After we were in agreement on the terms and fully committed to the deal I started marketing for a tenant. I will eventually owe you guys an article about my tenant marketing/vetting process, I created a buzz and was able to lease the house for more than the asking price!
ARBITRAGE FTW. THE BEST DAY EVER
July 1st, 2014 was an EPIC day for my investing career. In the morning, Andrew and I each signed and scanned the Lease Option giving me the ability to re-lease the property to my own tenant. Next, I wired the $2,500 down payment plus $1,400 for my July lease payment.
That evening I had an appointment scheduled with the most qualified tenants I had interviewed. We had already agreed on a one year lease at $1,700 per month. My new tenants came to the meeting armed with a $3,400 check: security deposit and rent for July. After reviewing together and signing on the dotted line I was now earning a $300 spread over the Lease Option, without even one month of vacancy!
Arbitrage (typically the simultaneous buying/selling of an asset to exploit inefficiencies in pricing) can be applied to many scenarios. In real estate, it’s most effective when the “trader” is able to add additional value (or perceived value through marketing). In this case I took a small risk signing the lease personally because I knew the property could earn more than $1,400 per month and I had confidence in my marketing and negotiating abilities to execute. The deal I negotiated was essentially how wholesalers operate but instead of assigning the contract to an investor, I took the deal down myself.
CHANGE OF PLANS
In my emails I proposed paying off Andrew’s loan in January 2015 but that didn’t work out as planned. Instead, we got creative.
After 9 months, I had paid down $3,600 of my $190k lease. I still owed Andrew $186,400. He owed Bank of America $180,800. I had attempted assuming his mortgage but BOA wouldn’t work with me. One big risk I took on this deal was to assume that BOA wouldn’t enforce their due on sale clause which would have allowed them to demand the payoff in full. From my experience in the secondary market, I was 99% sure the bank wouldn’t investigate a performing note. No exception here.
Instead, we decided to bring my balance due to parity with his mortgage and increase my monthly payments to the amount due to BOA. I would keep a one-month reserve maintained in an escrow account for Andrew’s peace-of-mind and I would forward $1540 each month to reimburse his mortgage expense.
As a bonus to this, I had Andrew execute the deed to my name. I’m now on the books with a $5,600 acquisition. Tax break on the purchase and since I don’t plan on selling the property, I won’t get hit with a massive capital gain tax.
I began shopping around for a lender but quickly ran into an issue. They needed 6-12 months seasoning on title before they would consider refinancing. This extended our timeline even further. Fortunately, Andrew and I were on good terms – I was always prompt with payments and tried to make the process as easy as possible for him.
We bide our time for another year and then wrap it all up.
TO BE CONTINUED