Understanding “Creative” Deals

Real estate has gotten a bad name and swamped down, basically a red ocean at this point. Everyone sees it as the "The Whale" as far as money goes. It's flashy, top-tier, "if you're in the game, you're a big player." So now over the last few years you've seen a huge boom in both real estate agents and wholesale groups alike, all trying to take home their giant payouts of commission checks and assignment fees.

Now, due to the internet and everyone trying to be the next "Big Dog" in the game, gurus have had to resort to attempting to sell the next big thing. After a few years of wholesale gurus going around showing people how to dig up deals, market, and find motivated leads....course after course, being sold, the whole nine yards....Basically, the internet is saturated with everyone doing everything so long as it has real estate labeled somewhere on it.

Now since Pace Morby has blown up his marketing by branding himself as the creative expert (fun fact, most of the big dogs in the game didn't want this blown out everywhere because it'll saturate the market with bad players and the politicians will change the laws on everyone) the real estate game has taken a huge turn, almost a dive depending on how you look at it.

Pace for example, has grown his massive community by connecting everyone together with lenders (of whom have adapted) and wholesale groups alike. Now what I'm really getting at is that Pace and all of the others going around being gurus have started selling off their ways on creating these complex or un-common ways of structuring deals, some to get out of a tight spot or to squeeze out more cash, called "Creative." This is where things have gotten bad for the investor market.

Building off the statement; wholesale groups, in their quest to squeeze out more assignment fees, have begun to attempt to structure "sub-to / creative deals." Now understand this:

SUB-TO DEALS ARE DELICATE

When I say delicate, I mean these things are people based, not transactionally based. The typical wholesale transaction is basically: the wholesaler contacts seller, beats seller down to a price, sells the contract for cash to end buyer, done. No more contact no worries.

Sub-to deals are a relationship and a motivation basis, this rapport and trust is what builds a good deal for both the seller and the investor. The investor is always working to get the best deal for themselves while the seller wants out of a bad spot, typically foreclosure in most cases. So when you go in and contact sellers with random terms this begins to have a less solid foundation than a peer-to-peer discussion and building a long-term relationship. Since the wholesaler is in this for the assignment, they want to sell their contract and have cash to move on in typically 30 days or less, never to be seen again.

However, you should know, that you as the investor are the one hung out to dry should things with the seller ever go sideways. Yes you may have all of the documents lined up to fully and legally access the mortgage, manage, pay, etc., but that seller can at any point cause hell. They can contact the bank/mortgagor and notify them of the sale or "deed transfer" as it's also called which, in turn, causes the mortgagor to activate their "due on sale" clause, giving them right to either be paid off or foreclose on the property.

Understanding the Barriers

Most of the time what we see in these deals are some serious roadblocks in making these deals quality deals in both the short and the long-term.

Assignment Fees:

Wholesalers are used to gobbling up massive assignments due to discounted cash deals and now that they are out here attempting to structure creative deals or sub-to's, we get into the "Entry Fee" barrier. You'll see all over email campaigns and Investorlift deals where dispo is tossing out "Only 30k entry fee" , "Only 25k entry" then you'll find you still have to pay a TC (transaction coordinator) fee, closing costs, & title insurance in some cases, or even an additional amount to the seller. These don't make good returns for investors. You're trying to sell an investor something they can make risk for reward, yet you are asking them to put up $30,000 of cash on top of a mortgage that can be called due and have X amount of YEARS before they make their return and profit when they could leverage that same amount into a different deal down the road. In short, you have to look at the risk to cash return.

Bad Structuring:

Since everyone is hopping on board thinking everyone wants a good creative deal, you'll often times run into the barrier of the typical seller's mindset: CASH NOW. Most residential sellers want their cash now or shortly thereafter the transaction. This causes many teams to go and create not only bad entries with assignment but bad TERMS. Terms referring to any stipulation, interest, or timeframe of the deal. Often you'll see, X sales prices amortized 30 years 3 to 5 year balloon payment, leaving no equity or out down the road. I personally don't like 7 year or less balloons due to the current market at the time of writing this article since we saw the most inflation in real estate history yet still haven't had any downtrend or recession as almost every market does. There's no room for refinancing and equity to keep the property as a long-term asset or get out from under the mortgage.

Final Statement

Coming back around, everyone is so desperate to keep up in this internet space that good deals are being eaten up by those simply trying to throw deals out in order to keep capital coming in. We've basically moved to a quality over quantity type situation in the market and if we as a whole community are to expand we have to stick to quality before everyone comes plowing their way through selling bad deals to each other. Once things get too widespread and everyone is suffering, remember they always change the laws and it affects everyone doing so.

Several states already changed their legal structures because of wholesaling and Texas even more recently changed their seller finance wrap laws making things tighter on the investors themselves. Once laws are passed they almost never go away and they tend to only get more restrictive.