“What if a seller wants way too much for their property?”
This was a question posed by one of our associates, and while it is a simple one, it’s worth addressing because sometimes you have to step outside the normal box to get a deal done.
In this case, the seller was in the real estate business and wanted an assign out (AO) deal. In an AO deal, we contract with the seller via our lease purchase agreement like we normally would, find the buyer, and assign the buyer back to the seller. We keep 50 to 75 percent of the buyer’s deposit (and call it payday No. 1) for our effort, and we’re out.
But the issue in this particular instance was that the seller’s expectations were too high for the market.
Now, the reason I was able to do 11 or 12 of these deals in the first six months of my terms business is that AO deals are cut and dry and easy to explain to the seller. The entire appeal of an AO deal is its simplicity; there’s no risk or payment commitments on your part as an investor and no cost to the seller.
You take the property to market for a few months (or whatever terms you agree to, but at least three months is a fair timeline) and see what you can get for the seller. You literally start at their number, plus your markup.
What to Do When a Seller Expects Too Much
If you think you can move the property but the seller expects too much, it may be best to agree to the deal and see where it goes for a month. That’s not to say you should waste your time or theirs, but gauging the market can either reward you with a buyer or give you some evidence to put the seller’s expectations in check. Then, you can go back to adjust the price.
So when you start with the seller, you communicate openly and let them know they’re above market. You can tell them you’ll try, but you may come back to them for an adjustment. Of course, there’s typically more to the script, but you get the general idea.
The key is to set realistic expectations, which are tempered by the market itself. Just remember: comps don’t lie. Let sellers know you don’t set the comps, so the market really dictates the parameters of a sale. When you communicate that, you take yourself out of the equation and show them you’re on their team.
The market can return two likely outcomes:
- The buyer comes in, qualifies well with the rent-to-own criteria, and gives you the deposit. Then, you follow the AO deal and give a percentage to the seller, keep your percentage, and onward you both go.
- The market responds with crickets for 60 to 70 days. You’ve still got another month, so why not go back to the seller and ask for a reduction and extension? Propose adjusting the monthly (not the total) by as little as $100 to $150, which to most sellers won’t be a big deal but will invite more buyers into the conversation.
Explain to the seller that you both wanted higher terms, but that was pushing the market. Again, it is best to be transparent and set realistic expectations with them. Remind them that if you can’t sell their property under the new, re-negotiated terms after 60 days, you will end the deal and return the house to them. After all, it’s you who is spending time, money, and resources, and you will only do that if you think you can get it done.
When to Try Other Options
Now, let’s address some more nuanced scenarios. In some cases, you want to do an AO even if there’s no equity or no spread (or both), so all you can do is collect your first payday (or a portion of it) and give the property back to the seller.
There are also circumstances where you can complete a sandwich deal without a monthly spread. We have properties right now with little to no spreads that we stay in as a sandwich. We keep these deals because they either have a big backend or a huge principal paydown monthly.
For instance, a property may only yield $50 a month for payday No. 2, but the payday No. 3 promises to be greatly increased by the paydowns and mortgage payments you’re making— so it’s well worth staying in the middle.
When to Move On
In general, if a deal has no profit centers, take your AO fee and move on. If you’ve explored different ideas for terms and can’t find any, there’s no need to overcomplicate a deal with those expectations. The appeal of an AO deal is supposed to be its simplicity.
The other time you may want to do an AO is if it’s a high-priced property, along with a high monthly mortgage, and you worry if your buyer defaults that it could be a challenge to keep up the monthly payment.
Now, we have 50 to 60 properties at any one time, so our second paydays alone can handle any empty homes. But when new and with higher end, you may go the AO route.
Do you have any further questions about AO deals? Have you encountered sellers with unrealistic expectations about price?
Let’s talk in the comment section below!