Below is a short interview I did with my friend and client Blake. It shows that creative deals come and go, but the ones that come, you need to pursue with passion. Check it out. Excuse the grammar please!
Peter: Blake, thanks for letting me interview you on this deal. I know it was a tough one for you. But my hats off to you for being so diligent and hanging in there. Creative deals aren’t easy to do, but the reward always seems to go to those who don’t give up.
Blake: And Peter, thanks for your help too…I must have called you at least a hundred times!
Peter: So Blake, give me some background on this deal.
Blake: Sure ok. 3 units, all three bedrooms 1 bath units, 2-story, brick building, fully occupied, decent neighborhood, needs some roof work, and the seller owned it free and clear. Oh yeah, it was listed for three months or so. Didn’t sell because of the registered sex-offender home business next door. Can’t blame them. It’s kinda creepy.
Peter: How did you structure the deal?
Blake: Owner financing with a master lease agreement. I could it no other way because of the situation next door, plus I didn’t have the 20% my bank wanted for the down payment. You know at first, Brian didn’t want to do a master lease and I couldn’t understand why. But soon enough, I found out that he just didn’t understand how it worked. So that was a lesson itself Peter to tell your clients, don’t assume that the agent understands what a master lease is. Once I explained it to Brian, he was all aboard, especially after I told him that he would get his full commission. What really helped too was the owners of the property owned it free and clear, no mortgage.
Peter: How did you convince them to do the master lease with you?
Blake: It wasn’t easy Peter. This is where Brian came in as my helpful agent. Again, it really helped that Brian understood the master lease because he was able to explain it to the sellers as a viable option to sell a problem property. Plus, they wanted out badly.
Peter: How badly?
Blake: The sellers don’t live here in town. They’re out-of-state people. I come to find out that they didn’t even know about the house next door until one of their tenants called them and threatened to sue them for not telling them. They and several other tenants demanded their rent returned and deposits. It was one big mess. This was supposed to be that owner’s retirement investment, you know, build equity and income every month. The owners actually used that income to live off of, so their motivation was high. They needed a solution quick. I think attorneys for tenants got involved too. What a mess.
Peter: So, what was your offer?
Blake: Full price with a master lease for 2 years, take over his mortgage payments and management. I think two things got me the deal. First, I agreed to pay him a monthly payment on top of his mortgage payment as a way for him to feel he’s not losing out on all his income he needs to live on. Secondly, I agreed to fire the current manager who lived on the property, he was useless and a troublemaker in my opinion, and do the management myself. I would also give him a report every month of how the property was doing, digital pictures included. This was Brian’s idea since master leases can be risky for the mortgage holder or seller. I agree with that.
Peter: What did you do for a down payment and Brian’s commission?
Blake: I got a little creative with the down payment, thanks to you Peter. My offer was 10% down with two options on how I pay him that. First option was to pay him 5% down at close minus credits for security deposits, rents, and repairs, and then he would get the other 5% at the end of the master lease, 2 years. Second option was to give him no money down, but give him a 10% bonus payment, on top of the purchase price, at the end of the lease, also increase his monthly payments by 1.5 times for the first year.
Peter: He took the first one, huh?
Blake: Yeah, he did, and I expected him too. I like your strategy of giving him an option with really not giving him an option of me putting down a lot of money. Cool idea and it worked just like you said.
Peter: What about Brian’s commission? Who paid for that?
Blake: Again, I had to get creative here. I had the owner pay half of the commission, the 1.5%, out of the down payment I gave him, then I had Brian put the other 1.5% back into the deal as ownership interest. His 1.5% bought him a 5% ownership in the deal. So, at the end of the lease, Brian will be getting 5% of the profits. If everything goes right, according to my calculations, Brian can triple his commission. And if everything goes south, Brian get’s his 1.5%.
Me: How’s the property doing today?
Blake: It’s doing fine. Both of those problem tenants did move out, the owner had to pay for their moving expenses and sign a release. I advertised on Craigslist and got people right away to move in. I disclosed to them who their neighbors were and they were fine with it. I was worried that the insurance would go up because of that, but it hasn’t. So, all is well down there.
Peter: You ever talk with the owner?
Blake: Every month I send him a couple of pictures, a copy of the check for the mortgage, and a quick note with stuff going on, that’s about it. Other than that, he’s just happy to be out of a bad situation and making a little money still.
Peter: Blake, good job and thanks for sharing this deal or “ordeal” with us.
Blake: You bet. Have a good one Peter.