Never Thought the Seller Would Consider This Offer!

[Austin Hughes]

I recently went over the analysis of a very unique property with a fellow investor who is very intelligent and has helped me out with numbers. It is a combination of a small hotel and some houses that are all on the same lot. It is very unique.

After talking it over with my investor friend, we realized that while it was well under the tax appraisal, the price was just too high for the amount of risk involved.

The reason the property was so risky, is because it is all short term tenants with NO SIGNED LEASES. (Even though some people have been living there for 9 years.) It is currently positively cash flowing, but barely any. This is because the vacancy rate is 40%.

While I have a bunch of great ideas in my head of how to get it filled quickly, there is no way to eliminate the risk that it won't work....or is there?!

I went back to the seller, and she was absolutely firm on the price. Instead of parting ways, I thought of a creative solution.

In a nutshell, this is what I offered: 1. I get an exclusive option for three months to purchase the property at your asking price (which cash flows very well if it isn't more than 10% vacant.) 2. I will market for tenants to increase your income during that time. 3. If my methods prove to be effective, and I get it rented out fully, I will purchase the property.

Now my only risk is the minimal expenditures I will have for marketing! If they don't work out as well as planned, she will at least have more exposure and tenants, and I won't have lost much. If it works out, then I've got a heck of a cash cow at a discount, and it is already cash flowing from day one.

This is the offer that I sent to the seller. (address has been changed.)

While the property has potential, the current risk is too great for me to purchase it at any price above $200,000. However, if some of these risks could be minimized, I am comfortable paying any price up to what you are asking, at $265,000.

For the property at 1212 Hughes Street, the terms of my proposal are these:

• I will have the exclusive option to purchase the property within 2, 3, or 4 months. (Whichever length of time we agree upon.)
• If I exercise the option, I will purchase the property for $250,000, $257,500, or $265,000. (Whatever price we agree upon.)
• During the period of which I have the option to purchase the property, I will be doing two things:
  • Marketing for new tenants at increased rentalrates to raise the income of the property.
  • Forming a partnership with investor(s) to purchase the property.
• During this time period, you will still be the owner of the property and pay for typical repairs, as the property manager sees fit. (I will not request a remodel or extensive work. Only what is needed to make the units livable.)
• All extra income generated through my marketing efforts during this time will go to you, as the owner of the property. I will receive no benefits from the increased rents unless I exercise my option to purchase and become the owner.
• The property manager will not have to change his current routine or job, except for handling increased traffic of new tenants.

This plan is beneficial to both of us, because it allows me to minimize the risk involved with purchasing the property, while you enjoy increased rents for a few months. This option period also allows time for the property to generate extra cash flow, making it more attractive to other investors who will pay you the agreed upon price, and allow you to get out from under the debt owed on it.

Get back to me when you feel the time is right.

Thanks,

Austin Hughes

What do y'all think? Let me know.

[Marvin McTaw]

Hi @Austin Hughes. You're correct that you've mitigated some risks but you're also letting all the benefits accrue to the seller for your hard work. If I were in your shoes, I don't know how I would have felt about essentially working for the owner of the property for free. 

Depending on where the numbers were actually at, I probably would have agreed to purchase it at their price (if you think it's ultimately reasonable) and just structure it accordingly. For example you could finance part of the purchase price in a promissory note that pays off in several years. You could also do seller financing and maybe structure in deferred payments (e.g. payments start in six months after you've had a chance to improve the property ), low cash payments or interest only payments. That way you would get the benefits (and risks) of ownership.

I feel like you also run the risk of the owner backing out of the agreement because your work has substantially improved the NOI of the property. Regardless of whatever paperwork they might sign, people can sometimes be fickle and the question becomes: do you really want to have to send a demand letter or take the person to court to enact your unilateral right to buy the property?

In any scenario, I think it's great that you're getting out there and making offers and working to get deals done. I just don't like the risk you are taking on for the potential return. I just think there are better ways to mitigate your risks and still get the cash flow you want.