Years ago, I learned a very valuable lesson when I was broke and had little money to buy and repair houses. That lesson has been of great help to me over the years. Back then I rarely had down payment money, so I had to come up with a way to buy a property without having to shell out the down payment when I closed on the property. It took some thinking, but I eventually came up with a technique I still use today when possible.
Recently I was in a negotiation with a seller who was selling a nice house that was in a good area of town. This seller, like most, wanted all of their money at closing and none of my questions were going in the direction that I wanted to go. The seller was selling a rental property that she had been collecting rent on that far below market rent. The seller didn’t want the tenant to be forced to move out if they were to sell the property. The tenant had been renting from this owner for years, and if she raised the rent, she felt guilty forcing the tenant to have to move to another location and be forced to pay a higher rent the tenant couldn’t easily afford, so she kept the rent low. She knew if the tenant were to move out she would have to spend time and money repairing the property before putting a new tenant in and was happy getting what the tenant was paying each month.
Having seen this situation many times, I had found that when you find an income property that needs considerable work done to it, and the rent is low, you will usually find an owner who is complacent and doesn’t want to upset the applecart and spend money when they don’t need to. When a rental property has been paid off for a long time, it is an opportunity for you to rent the property for a fair market rental amount that can give you a much larger cash flow each month.
When you find a seller with an income property where the seller knows they haven’t kept the property in excellent condition, they may not like it, but if you lower the price you wish to pay for the property they can understand. They know I will have to spend a lot of money to fix the things the seller failed to do. Because of this, I know it will take me a few months to get rent coming in to make my monthly payment to them when I negotiate seller financing terms.
When you find a seller who has a property like this, I always negotiate into my deal a moratorium of payment for several months to give me adequate time to fix the property and get a new tenant in the property. If I am successfully negotiating a moratorium on the payment for several months, I can use the down payment money to help do the repairs to the property. If I can get the property fixed and rented in just a couple months, it will allow you to take in rent for the down payment when it is due.
Not every seller will agree to postpone getting a payment but why not ask? What do you have to lose, absolutely nothing? When I find a property that needs considerable work done to it, and I can get seller financing terms, I always try to negotiate not having to make the first monthly payment for several months. When you are short of money to make a down payment, or you don’t want to make a monthly payment until the property has been repaired and rented, asking for a “moratorium on payments” for several months in your purchase agreement is always a good way. Doing this will help you come up with some or all of the money you need to get a new rental property.
I still do this every time I find a rental property that needs considerable work done to it, and I think you should too.
Be sure to listen to my weekly Podcasts called “The Real Deal Real Estate Podcast with Larry Harbolt”, and if you haven’t already signed up to receive my podcasts, please do and leave me a note about what you would like to learn more about. Go to www.LarryHarbolt.com and check out my lessons and courses.
Happy Investing,
Larry Harbolt
