Seller/Exchanger Motivation Scale
As a Seller of real estate, what are you willing to do to close the transaction and move on? In a strong Seller's Market the top half of this chart dominates। In a declining or "soft" market, the mid portion begins to show influence। In a Buyer's Market, the lower portion dominates। Each Seller's indivdual circumstances will ultimately determine their level of motivation।
As a real estate investor, I have utilized many of these techniques
Won’t sell - Exchange only - Wants to do a 1031 exchange to avoid paying capital gains taxes.
Price firm (All cash or cash to loan) - The traditional method used by most real estate brokers.
Price firm (Cash and paper to loan)- They feel the need to receive their price, but will be flexible enough to put the deal together.
Price soft (Cash and paper to loan) - Are flexible with price and willing to find buyers who may not be able to qualify for conventional financing.
Paper for Equity - Willing to be the banker and know they can use the paper to exchange, or use as an option, sell the paper, and use it as a down payment for other property.
Will take free and clear land for equity - They use the land as a bank for their money, it doesn’t cost much to hold and they know it most likely will go up in value over time.
Anything of equal and verifiable value - Very flexible method to move out of a property that may be out of your area or you just don’t want to bother with it anymore.
Anything of value for equity - Very flexible method to move out of a property that may be out of your area or you just don’t want to bother with it anymore and are even willing to take a loss.
Will walk from equity - The property is costing you money, may be in foreclosure, or may be behind in payments, etc.
Will pay to walk from equity - The property is costing you money, may be in foreclosure, or behind in payments, to settle a divorce or partnership, etc. Most likely reason is it will give you peace of mind.
If you are competing against foreclosures, short sales, and an increasing inventory of available homes for sale, what are YOU going to do to attract a Buyer?
Tuesday, July 21, 2009
Saturday, July 18, 2009
Brainstorming for Condo, Part II
48 hours have passed (plus or minus), so here goes:
BTW - this scenario occurred before the market collapse for condos in Florida, and just like Old School Rap (you didn't think I'd let you forget that one, did you) Old School Real Estate investing principles never go out of style - just, adjust you numbers accordingly. (My numbers reflect the original answer given to this investor previously).
The Seller wants to invest in real estate, needs/wants some cash, and is willing to owner finance a portion of your purchase. Why not assist them in starting their investing future with this unit? You can offer to do a Lease with Option to Purchase, a “Split Funding” deal, or an “Equity Participation” venture, to name a few.
A. Lease w/Option: You negotiate a purchase price with the Seller at a pre-determined time in the future. You put down a specified dollar amount as down payment on the purchase price. You execute a Lease w/Option to Purchase and pay a monthly rental amount. At the designated point in time, you execute the purchase of the property at the pre-negotiated price. For example: Purchase price of $110,000 (factors - current estimated value, needed repairs, anticipated future profit margin, closing costs). $7,000 down payment, $700/month rent, purchase price of $110,000 (minus $7,000) in 2 years. Since this is to be your primary residence, “holding cost/rent” is not been factored in. Also appreciation is not factored. In doing your homework, you would have discovered if Leasing/Renting is allowed in the condo complex. A fair deal.
B. Split Funding: You negotiate a purchase price with part of the money due at closing and the remainder due in the future. For example: Purchase price of $120,000 (factors - current estimated value, needed repairs, appreciation, closing costs). $60,000 1st mortgage, Seller held 2nd mortgage for the remainder due in 3 years. 2nd mortgage has no payments and is a single payment lump sum balloon. 2nd mortgage may or may not include accrued interest (negotiable), but should not have any payments (remember, the condo monthly maintenance fee will likely increase with title transfer). If the Seller wants monthly payments on the held 2nd, you can reduce the overall purchase price, increase the time frame that the 2nd balloon is due or lower the amount of the 1st mortgage. The property appreciation between closing date and the due date of the 2nd mortgage is you anticipated profit margin. The Seller gets their price, you get your terms. A fair deal.
C. Equity Participation: You negotiate a lowered purchase of the property, factor in a profit spread for yourself and agree to share any amount above that amount with the Seller in the future. For example: purchase price of $100,000. Your initial (future) estimated profit spread of $12,000 (factors current estimated value, current needed repairs, and closing costs). Combined “costs” equal $112,000. You agree to share with the Seller all proceeds above and beyond a sells price of $125,000 when you sell the property (3-5 years). Your 2nd estimated profit spread is $13,000 (spread from $112,000 combined cost to split adjusted price of $125,000, PLUS a percentage of the proceeds above $125,000. Potential profit to you: $25,000 plus a share of the appreciation. (The upfront amount, the sales price participation point and split percentages are all negotiable). Seller gets a larger lump sum of cash up front and a share of the appreciation. A fair deal.
In Summary, sometimes with a willing Seller, you can walk then through the deal and show them the “nuts and bolts” of the transaction and your exit strategy. The key is to make a fair offer and then demonstrate WHY it is a fair offer. It is very difficult to defend a “lowball” offer if you walk someone through the transaction. Many Real Estate Investors would not walk the Seller through the transaction under any circumstances. They would explain the offer, but not their exit strategy, anticipated profit margin or how that margin is obtained. Explaining the inner workings of the transaction is up to you. However, you have identified a Seller with an interest in knowing more about RE investing and they have what you want – the property AND the willingness and flexibility to owner finance. How you choose to gain their trust, purchase the property and develop a possible friendship is ultimately up to you.
BTW - this scenario occurred before the market collapse for condos in Florida, and just like Old School Rap (you didn't think I'd let you forget that one, did you) Old School Real Estate investing principles never go out of style - just, adjust you numbers accordingly. (My numbers reflect the original answer given to this investor previously).
The Seller wants to invest in real estate, needs/wants some cash, and is willing to owner finance a portion of your purchase. Why not assist them in starting their investing future with this unit? You can offer to do a Lease with Option to Purchase, a “Split Funding” deal, or an “Equity Participation” venture, to name a few.
A. Lease w/Option: You negotiate a purchase price with the Seller at a pre-determined time in the future. You put down a specified dollar amount as down payment on the purchase price. You execute a Lease w/Option to Purchase and pay a monthly rental amount. At the designated point in time, you execute the purchase of the property at the pre-negotiated price. For example: Purchase price of $110,000 (factors - current estimated value, needed repairs, anticipated future profit margin, closing costs). $7,000 down payment, $700/month rent, purchase price of $110,000 (minus $7,000) in 2 years. Since this is to be your primary residence, “holding cost/rent” is not been factored in. Also appreciation is not factored. In doing your homework, you would have discovered if Leasing/Renting is allowed in the condo complex. A fair deal.
B. Split Funding: You negotiate a purchase price with part of the money due at closing and the remainder due in the future. For example: Purchase price of $120,000 (factors - current estimated value, needed repairs, appreciation, closing costs). $60,000 1st mortgage, Seller held 2nd mortgage for the remainder due in 3 years. 2nd mortgage has no payments and is a single payment lump sum balloon. 2nd mortgage may or may not include accrued interest (negotiable), but should not have any payments (remember, the condo monthly maintenance fee will likely increase with title transfer). If the Seller wants monthly payments on the held 2nd, you can reduce the overall purchase price, increase the time frame that the 2nd balloon is due or lower the amount of the 1st mortgage. The property appreciation between closing date and the due date of the 2nd mortgage is you anticipated profit margin. The Seller gets their price, you get your terms. A fair deal.
C. Equity Participation: You negotiate a lowered purchase of the property, factor in a profit spread for yourself and agree to share any amount above that amount with the Seller in the future. For example: purchase price of $100,000. Your initial (future) estimated profit spread of $12,000 (factors current estimated value, current needed repairs, and closing costs). Combined “costs” equal $112,000. You agree to share with the Seller all proceeds above and beyond a sells price of $125,000 when you sell the property (3-5 years). Your 2nd estimated profit spread is $13,000 (spread from $112,000 combined cost to split adjusted price of $125,000, PLUS a percentage of the proceeds above $125,000. Potential profit to you: $25,000 plus a share of the appreciation. (The upfront amount, the sales price participation point and split percentages are all negotiable). Seller gets a larger lump sum of cash up front and a share of the appreciation. A fair deal.
In Summary, sometimes with a willing Seller, you can walk then through the deal and show them the “nuts and bolts” of the transaction and your exit strategy. The key is to make a fair offer and then demonstrate WHY it is a fair offer. It is very difficult to defend a “lowball” offer if you walk someone through the transaction. Many Real Estate Investors would not walk the Seller through the transaction under any circumstances. They would explain the offer, but not their exit strategy, anticipated profit margin or how that margin is obtained. Explaining the inner workings of the transaction is up to you. However, you have identified a Seller with an interest in knowing more about RE investing and they have what you want – the property AND the willingness and flexibility to owner finance. How you choose to gain their trust, purchase the property and develop a possible friendship is ultimately up to you.
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