Before Starting Surgery, Learn the Anatomy of a Deal
In butcher shops it’s not uncommon to see a chart of a cow on which all of the cuts of meat are diagrammed. The idea is that you’ll have a better understanding of just what you’re ordering when you buy. I look at possible real estate deals the same way. If I were to chart the “cuts” on a house, ten of them might include (1) Equity appreciation, (2) Tax benefits: (a)Depreciation write-off, (b) Section 121 Tax-free sale proceeds, (c) Section 1031 tax-free exchanges, (d) Amortization write-offs (3) Loan Pay Down, (4) Liquidity and Leverage via low cost loans, (5) Options, (6) Income from (a) leases and (b)sandwich lease; or from (c)installment sales, (7) Profit from (a) short term flips, (b) long term gain from sales, (8) Personal or Business use, possession, and/or occupancy, (9) Fixer opportunities, (10) Equity Sharing with Investors. I’d try to structure both my acquisition and sale to give the minimum number of these “cuts” to a buyer, or leave them with a seller, and carve off the rest for myself by negotiation.
If you can learn to perceive all the variable benefits of transactions, buying and selling at a profit amounts to much more than simply trying to bet the best price. See if you can figure out how I profit from the following:
A. I’ll willingly give you any price you want so long as I don’t have to pay you until I’ve sold the character to net 110% of that price; or
B. I’ll give you any interest you want so long as I can buy your house at a low price and pay you off in complete when I sell; or
C. I’ll sell you my house for less than I paid for it, if I can keep an Option to buy it back for exactly that same price anytime I want in the future; or
D. I’ll pay you the highest rent in town over a five-year period and pay for all repairs and maintenance so long as I can sub-lease the character; if you’ll give me 125% credit for every dollar that I use against today’s buy price; or
E. With a large equity, I’ll make your payments while you live in your house rent-free if you’ll give me a credit based upon top fair market rents for you equity; or
F. I’ll pay you the top retail price, if I can pay half now, and the balance in a single payment in ten years with zero interest and zero payments; or
G. I’ll put a new roof on your house and buy you a car if the fair market value of is counted toward a 10 year Option on your home at today’s appraised price; or
H. I’ll pay your kid’s 4-year college tuition and you can continue to live in your house in return for 125% credit against today’s price for every $1 that I use; or
I. I’ll buy you a $250,000 insurance annuity for life commencing at age 65 if you’ll deed me your free and clear $250,000 house today; or
J. I’ll pay your hospital bills in return for equivalent equity in your house; or
K. I’ll lease your house, pay all costs, and pass on to you all the rents, if I can have half the profit when you sell the character in no more than five years; or
L. I’ll give you a $10,000 zero-payment Private Line of Credit to use to pay off credit cards in return for $20,000 credited against an Option on your house today.
I’ve done all the above. In every example the seller accepted the offer because I was solving a problem that was more important than his home equity. In just about every example where you take the time to discover the true personal reason — other than merely a desire to make a profit on a sale — why an owner is selling, you can negotiate better while you buy and sell at a greater profit.