Should I Be A Transaction Engineer?
I’ve heard many people state that in real estate investing we need to be a ”transaction engineer”. I totally agree with that, but I want to throw in a variable. If you are an engineer that designs bridges, would you design a bridge that is supposed to support a 50,000 pound vehicle with mud and paper?
Exactly. That’s my point, we need to be transaction engineers, but we also have to have the proper materials available to us. Without them we are simply going to fail.
What I’m getting at is the different types of deals we choose to target for our business.
What Type Of Real Estate Deals Should I Target?
There are multiple different types of sellers to target and in this post I’m going to talk about three specific things:
- Absentee owners (also called non-owner occupied houses)
- Houses with a specific amount of equity
- Houses with little to no equity
I’m going to discuss these three different types of deals and the pros and cons of each. This will help you decide what type of deal/motivated seller that you want to target and give you a much better chance of having success.
What Is An Absentee Owner?
Let’s talk about absentee owners first. An absentee owner is simply somebody not living in the house. They could live out-of-state or even in the same town, but they don’t live in the house. There are various reasons for this. Maybe it’s a rental. Maybe they had to move and tried to sell it but couldn’t. If it’s a rental, it may or may not have a tenant in it. If it does not have a tenant and it hasn’t for some time, this could potentially be a great deal.
Let’s say a homeowner had to move out of state for family or a job. They thought it might be a good idea to rent their house, so they stick a tenant in it. 18 months go by and the tenant vacates. The homeowner tries to put some craigslist ads out and might even hire a company to try and rent the house, but the previous tenants may have left the house in disrepair. Because it isn’t in the best condition, the rental agency is having a hard time getting a new tenant. And what if the homeowner doesn’t have the financial ability to make any repairs. Do you see how this homeowner might become very motivated to sell the house after one or two or three months of having to pay the mortgage out-of-pocket? That can put an incredible financial strain on someone who isn’t equipped to handle it.
Now that I’ve given a great example of why a non-owner occupied house can be a great potential deal, let’s talk about the second part of the equation. The equity.
Is It A Good Deal If It Has Equity?
Maybe the home owner has owned the house for 12 or 15 years and they have been paying down the mortgage. What if there’s only a 40 or 50% loan to value, which means if the house is worth $200,000 there would only be $80,000 or $100,000 owed on it.
With equity like that, the homeowner is in a position where they are suffering from making monthly payments but might not be able to sell it right away because the house is in disrepair. This is where we can really create a win/win situation with the homeowner.
Instead of listing it on the market and paying all of the real estate fees associated with the sale if it sells, we can put a deal together that makes sense for the seller. Including putting a nice chunk of money in his pocket while at the same time putting a nice chunk of money in our pocket as well.
This type of scenario creates a fantastic deal for a wholesaler, a rehabber or even someone who wants to buy and hold on terms. These are my favorite kind of deals.
Now let’s talk about the second part – minimal equity.
Is It A Dead Deal If There Is No Equity?
If that same house is worth $200,000 but there is $180,000 owed on it, it definitely isn’t an attractive deal to put together like I mentioned above. However, these can still be a very sweet deal and the homeowner will be very motivated eventually. With that slim amount of equity they will not be able to sell it using an agent typically. If your market is a solid market or even a market that is increasing in values, you can put together a terms only deal and many times just take over the payments on this house. You could owner finance it to an end buyer who is willing to do repairs and price it in a manner that makes sense for everyone based on the terms you offer and the appreciating market.
The other way to tackle a house like this is by doing a short sale. If the homeowner is either in default or is certain that they are going to go into default, a short sale might be a great way to set up this deal. We can talk about short sales in another segment, but an example would be getting the bank to take less than what is owed for the total payoff. The bank might be willing to take 150,000 instead of the 180,000 that is owed and by doing that it creates a nice spread for you where the deal makes sense.
We have done a lot of short sales, and when you get the method figured out, they are a very lucrative way to do real estate.
Do Good Deals and Do Good Deeds
Hopefully this article gives you some insight on a few ways to tackle a perspective deal. The bottom line is to not get in over your head and always minimize your risk. Make sure that you have an out if things don’t work out according to plan. At the same time, make sure you’re keeping that homeowner’s best interest in mind. Although you have no obligation to do so unless you are a licensed agent of some kind, stringing a seller along and not providing a solution in the end simply isn’t a fair thing to do