Knowing how to creatively structure a purchase offer may be old hat to you, but as a lender, have you ever thought about constructing an advanced creative L-O-A-N that allows you to capture BOTH a portion of a property’s cash flow and appreciation in addition to interest and points?
Warning: Hang on tight! Your eyes may bleed! Your brain may explode!!!
Kim and I teach a two-day deal structuring seminar called What Box?. It’s not just about learning how to use Structure Stacking to make written offers. What Box? is also about ADVANCED creative structuring whether you are the buyer, seller, lender, borrower, landlord, tenant, etc. It’s a one-of-a-kind seminar that’s geared for EXPERIENCED real estate investors.
Let’s look at a loan Kim and I made a few months back. In addition to getting 13% interestwith 4 points rolled in to the note, we also got a secured option to purchase 10% of the property for a $1,000 strike price (which we paid up front) anytime in the next 50 years (you read right, 5-0 years)!!!!
First thing to know, many investors are aware they can use one of their self-directed retirement accounts to invest in real estate. The question is, did you know you can use more than one of your self-directed accounts when making a single loan to a real estate investor or flipper?
Raborn, a local realtor, called. He had a client, Melfin, who wanted to buy a small mobile home park in Rome, Georgia. Problem was his client was having trouble securing financing. Thus, the call.
I liked Melfin from the get-go. He’s a hardworking, successful business man from Calhoun, Georgia. He wanted the park to help him achieve his goal of financial freedom.
Problem: He didn’t have much experience with landlording and had no experience with trailer parks.
Just like Dyches Boddiford agreed to look over my shoulder when Kim and I bought our first mobile home in 2008, I agreed to advise Melfin about how to operate his first trailer park. In addition, we agreed to fund his deal.
The sale price was $145,000. Melfin was putting down $16,000 (about 12%) and needed to borrow $129,000.
We agreed to lend Melfin $128,000, 10-year amortization, no balloon, 13% compounding interest, with 4 points rolled into the note, with monthly payments of $1,986.31, and with an anytime call built in to the note. The collateral would be the mobile home park. And yes, Melfin signed the note personally.
So far so good. Pretty much a standard hard-money loan.
But wait a second, Melfin needed $129,000 to do this deal. We only loaned him $128,000. He was short $1,000. What’s a body to do?
At the time of closing, Melfin agreed to sell us an option to buy a 10% interest in his property anytime within the next 50 years. This option would be secured to the park via a security deed that would be in second position behind our first position secured promissory note.
The cost (strike price) to exercise this option was $1,000.
Wait, it gets better. The option consideration was $1,000. All of the option consideration would apply to the property’s strike price. This meant that at the closing table, we paid Melfin $1,000 for this option, and if/when we exercise our Option, we don’t owe Melfin any more money because 100% of our $1,000 consideration applied to the $1,000 strike price.
With our purchase of Melfin’s option, he now had the funds he needed to buy his mobile home park. ($128,000 loan + $1,000 option consideration fee = $129,000).
Kim and I did have a small problem. We didn’t have all of the $129,000 needed to do this deal.
To fund this deal, we created a paper trust. This is a type of trust that holds things like promissory notes and option agreements.
The beneficiaries of this trust were Kim’s self-directed solo 401k, my self-directed solo 401k, my roth IRA, and my self-directed HSA (Health Savings Account). We also brought in two investor friend’s self-directed IRAs. Together, we amassed the $129,000 needed to do this deal.
What do you think, was this a good deal? Would YOU do this deal? Do you know how to creatively structure an offer like this? Would you like to take a glimpse behind the curtain to see the innerworkings of this deal?
More importantly, when YOU’RE lending, have you ever thought about acquiring an option to purchase an interest in the property on which you’re loaning?
Think about this: If you learned how to do the above creative structure, how much would it be worth to you? Said differently, if you don’t learn how to do the above creative lending structure, how much will it cost you in the years to come?
By attending the What Box? 2023 Seminar, you’ll see much of the paperwork that memorialized Melfin’s loan. For the record, you probably won’t see this creative structure taught anywhere else, by anyone else.
What Box? is a one-of-a-kind ADVANCED creative deal structuring event. To learn more, CLICK HERE: go to https://billandkimcook.com/what-box-seminar/
Feel free to call Bill with questions.