Re: Here’s an example. (Long) - Posted by Scotty
Posted by Scotty on May 21, 2000 at 16:41:00:
Here’s a novel idea. Don’t do the deal. Leave this one for somebody else since this fish isn’t big enough to nourish you.
You know, I wasn’t going to respond to your post and then I got to thinking. What you had to say was just poison and could well discourage some people, and by stating I wouldn’t build an investment strategy around this I may have done some folks a disservice as well.
The biggest problem with the ‘real estate investor’ is not that he has too many deals on his plate, but rather he doesn’t have enough deals or never even does a deal in the first place. I’d like to illustrate why 99% of the people that read this forum should never walk away from this deal. I’ll call it the reality check.
Let’s have a little fun with Leon from North Carolina since he started this thread. I don’t know what Leon does for a living, but let’s pretend he works at a plant there in Carolina making a pretty good wage as compared to the general populace since he is a member of a union and pulls down $20 bucks an hour before taxes and union dues. Assuming he doesn’t work any overtime his gross pay for the week is $800. If he worked 10 hours of overtime he’d make say another $300 gross. So far is this a pretty good analysis of Joe Sixpack across America that works for a living?
Since this is my story I’m going to continue to make stuff up as I go along. I’ll play your game and take it a step further. Let’s say that after taxes and closing costs there is NO money left in the deal for Leon to walk with at closing. All he was walking with was a $5000 note at 12% over say 10 years. If you calculate that payment it comes out to $71.73 per month. I am also going to make some other assumptions. I am going to estimate that when push comes to shove Leon is going to have about 10 hours into this deal. Double it if you want to, but it doesn’t materially affect the numbers.
Tell me how you think this coversation would go. Leon goes to Mrs. Leon and says, "Honey, I need to work some overtime this month. I can do it pretty much to my schedule. It will be about 10 hours worth. Instead of time and a half at $30/hour and having it show up on my paycheck they are going to pay me $500/hour and spread it out over time. They are going to pay a pretty good interest rate until they just pay me the balance in a lump sum in about 3 years when they rework their finances. Now this overtime isn’t regular, but I could probably get it every couple of months. What do you think Mrs. Leon is going to say? How do you think this would effect the lives of most Americans if over a year’s time you increased their monthly disposable income by $500-600 per month?
Remember, Leon has no hard dollars in the deal save a newspaper ad or whatever other marketing he might do. He has no risk, other than the guy doesn’t pay the second mortgage and he forecloses and does this all over again. When he sits down with the homeowner to talk turkey his search time and even his visit to the house to look at it are sunk costs. At that point you simply have to decide…do I want $5000 maybe as this stands or do I walk with a for sure nothing?
Now as I indicated you might use this to roll someone into a strategy that was more favorable, or then again maybe not.
Your point about taxes is valid, but you can’t really factor that in since your tax bill is a function of both income and expenses. This may actually improve their tax situation since now they can start writing off some of their everyday expenses that they wouldn’t have been able to otherwise. They now operate a business out of their own home and drive a company car at least part of the time.
The fact of the matter is you may be able to still make this deal better for Leon and have him walk with some cash in his pocket. I think it was Chester Karras that said 'You don’t get what you deserve, you get what you negotiate". Do you think if you went back to the seller now that you had a buyer in hand and told him flat out I have a buyer in place ready to go, but in order to make this deal fly I need a little better price from you he might move a little bit? Who has never when dealing over an inexpensive used car fanned the $100 bills across the hood to entice someone? If he wouldn’t move on price do you think you might get him to assist in the most nebulous term in real estate, closing costs? It isn’t all that uncommon to specify seller to pay all closing costs or at least to have them split evenly between the parties. How did you structure the deal with them in the first place? You might even be able to lower the closing costs if you knew what you were doing. We also originally said that this was being sold right at fair market or appraised value? What is keeping you from selling above FMV since you are offering owner financing? So you carry it back in a larger note. It is still more dollars in your pocket. You also start building a buyers base of the people that for whatever reason you didn’t get into this property that may have you find something else that works for them.
I think the bottom line here is why are you walking away from money unless you are simply so busy you can’t devote any time to it? For most people opportunity cost simply does not come into play. If you’ve already made it or just have to have a bunch of cash on the front end of a deal then keep looking for glass slippers that fit Cinderella. I guess I don’t have a problem making a little pumpkin pie if the coach doesn’t turn out to be what I thought.