While speaking at the Creative Real Estate Online Convention in Atlanta last March, I met Steve at my round-table discussion. During a brief chat after the meeting, it became obvious that Steve is bright and ambitious.
A few months later, Steve telephoned me to discuss the possibility of buying a mobile home park in Georgia, near where he lives. After several telephone conversations and reviewing some of the details, it appeared that Steve had found a park with lots of upside potential. More importantly, the seller appeared to be highly motivated.
The seller started by asking $495,000 for the 69-space park. He had accepted a cash offer of $350,000 from someone else, but the buyer couldn’t raise the money.
Steve agreed to make a firm offer to buy, subject to having thirty days to investigate the feasibility of the park. Using one of the forms from my book, I drafted the offer and emailed it to Steve. Knowing from experience that “nothing gets the attention of a seller like all cash,” we decided to make it a cash offer of $250,000.
The owner countered with $300,000. Steve made another offer of $275,000. The owner agreed to accept $275,000 cash plus a $25,000 mortgage. Steve held firm and assured the owner he wouldn’t pay more than $275,000. Reluctantly, the owner accepted the offer.
Steve had done his homework and I was able to verify his findings. We spent two full days evaluating the property, the local market, zoning and permit requirements, and discussing how we would raise the money and how management, fix-up work, and marketing would be handled.
After agreeing to proceed, I designed a plan and got Steve’s approval, prepared a sales presentation and the appropriate documents. Working with some of my investors, I was able to convince two of them to send us $280,000 cash ($275,000 to buy the park plus $5,000 to cover closing costs). The investors never saw the mobile home park before sending the money–and may never see it.
Why would people buy real estate without ever seeing it? There are two important reasons:
1. It’s because they have done business with me before and they know that they can depend on me to deliver; and
2. Because I also did my homework and presented them with a plan that gives them the “best of both worlds.” It is a net lease with an option to buy, and here are the advantages:
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Steve and I personally guarantee that the investors will receive a net cash income each month.
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They even know in advance how much their growth will be. Since Steve will turn the park around and, together we contributed $40,000 for improvements, they can be assured that we will exercise our option to buy. When the option is exercised, the investors will receive the agreed monthly increase in price–with a two-year minimum.
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As the sole owners, the investors will be entitled to all depreciation deductions that will provide tax shelter for most of the income. When the option is exercised, they will be entitled to long-term capital gains treatment, which results in lower taxes on the gain.
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The investors have very little risk. Most risks are eliminated when property is purchased for a price below market value and held free and clear of debt. Yet, the value of the park will increase as a result of $40,000 in capital improvements, fix-up work, higher occupancy, and better management. And, finally, Steve and I are personally obligated to pay all operating expenses, in addition to the agreed amount of cash return to the investors.
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The investors have absolutely no management responsibilities. Steve and his on-site assistant are responsible for fix-up work and management.
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The total yield, especially after taxes, is greater than passive investors would normally expect from a safe, management-free, income-producing asset.
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And, the investors even have a reasonable degree of liquidity. It wouldn’t be difficult to borrow money or sell an interest in a free and clear property that is net leased.
There are, of course, financial reasons why Steve and I would want to enter into this type of venture. Here are some of the most important:
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When entering into the long-term net lease with an option to buy, it was much like buying the park at a low cash price, but with little or nothing down and interest only. After paying operating expenses and lease payments, we get to keep any income that is left. To fill the vacancies, we will buy, set-up, and sell mobile homes in the park. This will generate more income while increasing the value of the park.
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The $40,000 Steve and I will spend on fix-up work and improvements, along with a lot of work on the part of Steve and his helpers, is expected to add about $200,000 to the value. Any increase in the value of the park (less the increase in the option price) will accrue to the option.
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When the park is resold, all the gain is expected to be tax-free. This is achieved by arranging for our Roth IRAs to own the option. Profits left in our Roth IRAs will be able to compound, tax-free thereafter.
To further protect the investors, as well as ourselves, land trusts were established and liability insurance was obtained.