Bob is a self-employed construction worker who lives in New Brunswick and shortly after I mentored Bob he was presented with a very unique opportunity.
One Land Development Deal, Two Parts
The opportunity was a land development deal that was broken into two parts but each part was conditional upon the other part.
The first part was an 11 acre property which consisted of an older 3600 sq ft house with a garage and a barn as well as two severed lots for $400,000. The value of the house was appraised at approximately $440,000 as is and the two lots had a value of $140,000 each.
- Older 3600 sq ft house w/ garage and barn
- 2 severed lots – $280,000 ($140,000 each)
- Purchase Price for Part 1 (11 acres) = $400,000
This sounds like a no-brainer at this point but the challenge is there is another parcel of land that has to be purchased with this as well, which brings us to part two.
It also has 24 building lots approved by the municipality and another 37 lots to be developed and approved.
- 24 approved building lots
- 37 undeveloped lots
- Purchase Price for Part 2 (80 acres) = $700,000
This portion of the deal still has plenty of costs attached to it in order to make it work and banks typically do not like to deal with development land, especially with an inexperienced investor.
Find The Seller’s Motivation
At this point Bob was very excited because he could see the opportunity but he had no idea how to structure a deal like this.
In addition, most lenders wouldn’t be interested in the deal because of the complexity, so Bob asked for my help and guidance to see if he could acquire this deal.
The first thing we needed to do was understand what was motivating the vendor to sell the property and determine what the vendors real needs are.
It turns out the owners of this property were going through a rough divorce and one of the parties wanted to be paid out quickly and given the complexity of the deal it was not likely to sell any time soon if ever under the current conditions.
So let’s look to see how Bob managed to finance this deal, especially given that Bob has next to no cash and no partner.
100% Financing For Part 1
Bob was able to get 75% of the required funds for the first part which amounted to $300,000 from a conventional bank.
- Bank 1st mortgage = $300,000 (75%)
- Private 2nd mortgage = $100,000 (25% – secured by 2 properties + wood lot)
- Total financing for Part 1 = $400,000
So now Bob owns this portion of the property but he still needs to purchase the second portion and he needs some significant cash to do some renovations and finish the roads.
Bob tried to bring on some investment partners but he was unsuccessful, so he decided to walk because he could not see how he could move forward until I shared with him some ideas.
With these new ideas Bob decided to risk it all and he subdivided his mother’s estate which allowed him to sell her house and two newly severed lots, which provided Bob with the cash he needed to do some repairs to the properties and finish the roads to the point that he could sell some of his lots now.
Seller Financing For Part 2
This was good but Bob still needed to pay for the “step two” part of this deal which amounts to another $700,000.
You might be wondering why anyone would be selling this property with so much potential in it for only $1,100,000.
Remember that the owners of this property were going through a rough divorce and one of the parties wanted to be paid out quickly and given the complexity of the deal it was not likely to sell any time soon and this makes for a great opportunity to do a creative deal.
So because we have a motivated vendor we were able to convince the vendor to hold a mortgage for the full amount of the $700,000 at 7% “interest only” accrued annually with a $100,000 annual minimum payment.
We also jointly agreed that the vendor would receive 70% of any house sales and 40% of any lot sales until the mortgage has been paid in full. The risk for Bob at this time is that he will have to come up with a minimum of $100,000 at the end of one year.
- Vendor 1st mortgage = $700,000 @ 7% interest only
- Special provisions include: $100k minimum annual payment, 70% of house sales + 40% of lot sales until mortgage paid
- Total financing for Part 2 = $700,000
Now we can look at the upside.
Sell Off Parts, Keep The Rest
From part one Bob has a house that is currently worth $440,000 which is more than what the actual purchase price was. With some work on the house (new windows, roofing and refinishing of the floors) the new value becomes $599,000. There are also two lots valued at $140,000 each.
The second part of the deal has two homes valued at $310,000 combined and 24 lots valued from $120,000 to $160,000 and another 37 lots to be developed.
Bob already has one of the homes conditionally sold, a potential buyer for a lot and another home rented out. Now what I would suggest for Bob to consider is to discount the big house and maybe some of the lots in order to sell them ASAP and then pay down the debt as quickly as possible.
For example, if Bob sold the large house for $500,000 and 10 of the 24 lots for only $60,000 then he would own the balance of the property debt free and have his personal cash back out of the deal.
- Large house – $500,000 (after repairs)
- 10 lots for $60,000 each – $600,000
- Total sales proceeds = $1,100,000
- 2 ocean front building lots – $280,000
- 2 homes – $310,000 (combined value)
- 14 approved building lots
- 37 undeveloped lots
- Total property value = $1,820,000+
- Cash left in the deal = $0
Not a bad deal!
Creativity Can Create Deals
So why didn’t someone else take this deal?
Well there were many people looking at the opportunity but most people could not see how to make it work. Often people will only look at a deal from their own perspective and try to figure out how to make it work for themselves.
Once you understand what the vendor truly needs and work towards solving the vendors true needs then you can start to create a win/win situation through creative solutions.
Being creative starts by understanding the challenges for all parties involved and then creating solutions.