Just because you can, doesn’t mean you should
Iwas talking to an investor friend recently who was facing a conundrum. You see, he had become very specialized in one area of real estate. And the strategy he’d been using to buy on auction platforms, do minimum rehabs and resell, was no longer working. Referencing the book by Spencer Johnson M.D., my friend said, “My cheese moved.”
As we talked more, he was exploring the idea of learning creative deal structuring tactics so that he could become a “deal architect.” I very much encouraged this idea.
You see, Ashley and I built our investing business solely on the back of creative deal structuring strategies. This was out of necessity for us since we couldn’t qualify for traditional bank mortgages, and we didn’t have the funds to purchase investment properties ourselves.
We were blessed to have access to the teachings of some of the greatest and most creative deal structures on the planet. People like Jack Miller, Peter Fortunato, Dyches Boddiford and the man who taught me most of what I know, Bill Cook.
We went to and devoured every seminar we could. Then we’d come home and pore over the manuals to solidify the newly found deal structuring concepts. And I have to say, that extra effort paid off.
I can’t tell you how many times I’ve been sitting at the seller’s kitchen table and heard the voice of one of my teachers reminding me what to do. I often call them after I leave the sellers house to thank them for sharing their knowledge, which, by the way, is a great way of letting your mentors know you appreciate them. Thanking them at the class is one thing. Thanking them after you put their concepts into action is another. And it means a lot more because it lets them know their teaching efforts are making a real difference.
Let’s go back to becoming a “deal architect.” (As a side note: This is a Johnny-come-lately term. I like it, but it sounds like a guru is trying to take a familiar term and revamp it. I can tell people are doing this more as I get older. They take a familiar concept and try to make it sound more fancy. Take the term intermittent fasting for instance. When I was a kid, we just called that missing breakfast. Over the past few years, not only has it become a widely recognized term, but thousands of books and videos have been published on the subject. Go figure.)
So why would one want to become a deal architect?
That’s simple. It makes you a better real estate investor who can solve more problems and get more deals done. The reason for this is that every deal structure concept you learn is another tool for your investor toolbox. But having multiple strategies at your disposal also helps you evaluate your deals and make them more profitable.
Here’s an example for us to explore: We were meeting with a seller who had a doublewide for sale on two acres. To make a long story short, the sellers had a contract fall through and they were counting on the funds from that sale as down payment money for their next home.
So, we struck a deal where we would buy the place, give the sellers the funds they needed for their down payment and take the house over subject-to. This made them happy and gave us a good deal because the mortgage only had a little over four years left on the note to pay. But was this the right structure? A subject-to deal was attractive because the mortgage could be paid off in four years. But when I got home and went over the numbers with Ashley, she pointed out that the house would not cashflow because of the monthly payment amount. This could be a dangerous situation, especially in our current environment.
We went back and forth on multiple ways to structure the deal for maximum cashflow. In the end, we contacted one of our private money lenders who made us a long-term, interest-only loan that freed up our funds and made the house cashflow well.
Just because you can do a particular deal structure, doesn’t mean you should because deal structures aren’t one-size-fits-all. But by having multiple strategies we were able to make this deal safer and much more profitable.