Terms Deals: The Good, The Bad, and The Ugly

The key to creating successful terms deals is knowing what to do when things get ugly.

In my real estate coaching business, we try to be as transparent as possible. We don’t like to tell our Associates that every deal they make is going to work perfectly—because that’s simply not the case.

The reality is that most deals go off without a hitch. But sometimes, life happens and things don’t work out the way you had planned. It’s inevitable.

So, in this post, I’m going to show you the good, the bad, and the ugly parts of a deal that didn’t turn out as we had planned.

Develop a good relationship with your local realtors!

We originally found this home through a realtor in our area. People in the terms business sometimes act as if realtors are “the enemy,” but that is not the case! I always tell my Associates to develop relationships with the realtors in their area. Here’s why…

If you reach out to realtors and explain what you do and what you’re looking for, nine times out of ten they’re not going to understand you. They’ll be standoffish because they fear that you’ll be taking business from them, and they probably can’t wrap their head around what exactly how you’re doing these deals.

They may even be a little jealous...

That’s fine. This process is still worth doing because one out of those ten realtors will get what you’re doing and they’ll send a few deals your way every year. In our business, we’ve found that we can expect between two to six deals per year from the realtors we’ve developed good relationships with.

Think about that—two to six deals per year from one person! If you develop a few of these relationships, you could be talking about a dozen or more deals per year that are just dropped into your lap. There’s no reason not to do this!

So, make sure to develop relationships with realtors—it will pay off in the end. And now, let’s get into the specifics on why this deal went south and how we handled it.

Turning a defaulted buyer into a STRONGER buyer

One problem you may run into with terms deals is having a buyer default on the house. You should always bring your buyers through a vetting process to lower the risk of this happening, but even if you have the most thorough vetting process in the world, it can still happen.

But don’t worry about it. Because if you set your deals up correctly, you’ll always be able to pivot.

In this deal, we had a buyer default on the property because of a financial issue. When the buyer left, we owed the seller $277,975 to be paid on or before the end of the term. This might sound terrifying to some people, but if you structure your deals correctly, there’s nothing to worry about.

We use a specific agreement with all our associates. In this agreement, it says that you are responsible for the mortgage in the event that the buyer defaults. Now, your agreement also says that you can assign the home back to the seller—so you can always back out if you need to... But it is in everyone’s best interest to get the deal done, morally and ethically. It’s just generally good business practice.

In some cases, you might need to make one or two mortgage payments in between buyers. That’s fine, because the Paydays in the end will be well worth it. If you have the right lines of credit available to you, those mortgage payments will be no big deal and you’ll be able to pay them off right when you get a new buyer into the home. There have been a few occasions where we had the seller help when it suddenly went empty, and they were fine.

In our case, we paid one mortgage payment while we transitioned buyers. But once we got a new buyer in, the three Paydays more than made up for that one mortgage payment.

As mentioned above, we owed the seller $277,975 on this deal. We were able to sell this house for $329,900—so that should give you a pretty good idea of why this was all worth it in the end.

Let’s get into the Paydays…

Paydays and lessons learned

Payday #1 was a down payment of $36,000 from the buyer. Now, let’s think about this for a second. We paid one mortgage payment on credit, but the next month we had $36,000 in our pocket. Even if it went to two or three payments, we still would’ve been fine. This is why we tell people not to worry about one, two, or even three mortgage payments. It’ll all work out in the end.

Payday #2 was the profit from the outgoing and incoming monthly payments. In this case, we are on a 24-month term. Our payments to the seller were $1,816 per month and we were charging the buyer $2,220. That’s a decent spread of $404 per month or $9,696 over the course of the term.

Payday #3 was, of course, the profit on the sale plus the principal payments we’d been making every month. We owed the seller $277,975 but we sold the house for $329,900, which is a profit of around $52,000. When you remove the down payment, that’s right around $20,000. We also ended up paying down the principal on this house by around $4,920 over the 24-month term. So that gets tacked on to Payday #3 as well.

In total, between all three Paydays, we’re looking at $66,542 in profit on this house. Not bad for a deal that some people might have abandoned.

Now, there are two things to remember on this deal…

1. This house came from a realtor! It literally fell into our lap, and it was all because we had cultivated that relationship. I suggest you do the same.

2. The buyer defaulted! We had to pay one mortgage payment during the transition, but that’s nothing in the scheme of things. With a $66,000 Payday at the end, it was all worth it.

So, what’s the big lesson here? DON’T PANIC! If you set your deals up correctly, are using the proper forms, if you have the right lines of credit, and if you have faith in the process...you’ll always find your exit strategy.

Do you have any stories about a term deal that got ugly? How’d you make out in the end? Were you able to turn it into a BETTER deal? I’d love to hear about it.