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When Structuring a Deal, Solve for Awesome

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Some people have singular criteria they use to determine if they should do a deal. We, as Thoughtful Real Estate Entrepreneurs, have a broader perspective and a simple rule of thumb: SOMETHING about each deal we do has to be awesome. Once we “find the awesome,” we can “solve for awesome.” In today’s episode, Jeff talks about how to identify if there is one awesome thing about a deal, and then how to structure your deal to “solve for awesome” once you find it.

Episode Transcript

When you’re looking at different deals and trying to decide how to evaluate them, and maybe which deal you should do which one you shouldn’t, you compare them on lots of different metrics, cash flow, price, maybe your ability to add value. But you know what? I look at all those, but that’s not what I look at. Most importantly, I’ve got one simple rule of thumb, I call it solve for awesome, and in this episode, I’m going to tell you all about it. So let’s cue up the theme song and we’ll dive right into it.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for quote, motivated sellers to make lowball offers to. You see, we are people oriented dealmakers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows for sale. I’m Jeff from a Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you, join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Hey there and thanks again for joining me for another episode of Racking Up Rentals. Show notes for today’s episode are at www.thoughtfulre.com/e43. Please do us a big favor by hitting the subscribe button in your podcast app. It does help other fellow thoughtful real estate entrepreneurs who are looking for the right voice to listen to to find us. So thank you for doing that. And onward with the episode.

I was talking to a newer investor a while back at a networking event. And it had to have been a while back, right because we haven’t been able to have in person events for a little while now. But this was a few months ago. And I was talking to this person. And he was relatively new to real estate investing, but had done a lot of studying I could tell, but maybe didn’t have a ton of real world experience just yet doing a lot of deals. And he asked me a question which I you know, in his mind was a great question. And in my mind, it was actually a good question too. And he asked me a question something to the effect of Jeff, what is the number one criteria that you are focused on that you use to buy your properties? And what he meant, of course, was like, are you primarily focused on cash flow? Do you have a cash flow standard or a minimum? Do you have a price threshold? Do you have kind of a dis maybe it’s a price discount threshold? Is there a certain amount of value you have to be able to add to a property? So he’s asking me, what’s the number one thing that I look forward to decide if I should do a deal. And I realized as I was answering him that it’s actually different each time. Now my approach is in different each time, my approach is actually the same each time. But the exact standard and the metric I look at varies from deal to deal. And that’s what I want to explain to you. In today’s episode, I have this simple rule of thumb that I call something has got to be awesome about the deal. Now, I look at all the elements of a deal. And I know that for me in order to move forward, something about that deal has to be awesome. It has to be exceptional has to be way better than average. It only takes one thing

that has to be awesome for me to say yes. Now, if I find a deal that’s got lots of awesome things. You know, that’s even better, of course, but it only takes one thing for me to think that it’s awesome in order to proceed. So what are some of the things that could be awesome, about a deal? Well, you know, the location could be awesome. If this is the perfect perfect location in your town, in proximity to other things that people want to be at.

The location can be awesome. The quality of the property can be awesome to write if it’s just a beautiful, classic, rare, actual piece of property. That by itself is an amazing attribute. And that could be the awesome that you’re looking for. Price could obviously be the awesome, right? If you can get something at a price that’s just ridiculous that you can barely believe it. That could be the awesome that you are looking for. Another thing is what we call expandability. We get learned this term from my coach Greg pineo. expandability is your ability to change the picture and to transform something from what it is

To what it could be. As a as a very simple and extreme example, if you found a dilapidated single family home on on a piece of property sized and zoned for a skyscraper, that would be an A major example of expandability. Because you could get rid of the house, you could build a skyscraper

terms with the seller in terms of seller financing terms could be the awesome that you’re looking for. And within the category of terms, the bucket of terms, there’s lots of little details, each of which themselves could be the awesome, for instance, as you negotiate terms with the seller, the down payment might be the awesome, you know, what, if you have a seller who wants so little down, that, that’s becomes the awesome for you, the interest rate could be the awesome part, the duration of the loan could be the awesome part. So the point is, there’s a ton of different things that could be awesome about your deal. And this is where you get to employ your opportunity vision, as we call it, you know, your ability to look at all the different aspects of a deal. And to ascertain for yourself where you think the greatest level of potential and opportunity is. So once you have identified what is awesome, about a deal, if there is anything, if there is anything, but if you’ve identified that there is something awesome, the second step is to solve for awesome. Okay, now, I hope I’m not going to traumatize you here, but I need to take you back to algebra, middle school and high school. And remember, the concept of algebra was you were trying to solve for a variable, right? You know, the, the equation that teacher wrote on the board was like, three, a plus seven over four equals 42. And you need to solve for A, right, so what did solving for a mean? Well, solving for a meant putting a on one side of the equals mark, and everything else on the other side of the equals mark. And that’s what we’re going to do effectively with our deal here. Now that we know what is awesome, because the thing that is awesome that we have decided this is the awesome thing, this is really the reason we are proceeding with the deal. So we want to isolate the thing that we are proceeding with the deal for and make sure that we get that by having it over on one side of the equal sign if that makes sense to you. Because we want to build upon that one thing that is so awesome about this deal that we’re isolating, and we want to make sure that we capture it so we can build our deal around that. So I call this solving for awesome. And just like the first step of identifying if there’s something that’s awesome, is a process of what I call opportunity vision. The solving for awesome is a process of what we call deal architecture, which is, you know, your ability to arrange all the pieces of a puzzle in a way that creates a transaction that gets you what you’re looking for it gets the seller what they’re looking for, and works logistically as well. So your goal here, as you solve for awesome is to design a transaction that isolates the awesome and makes sure that you capture the awesome. So what would be a bad situation, a bad situation would be one in which you’re looking at a deal. And nothing really jumps out as awesome. There’s nothing to solve for. Right? And we all find a lot of deals that are kind of like this, right? You look at it, you’re like, Alright, well, the location is okay.

The quality of the building? It’s okay. The price is okay. Yeah, I mean, the expandability is okay, I could probably fix this up a little bit better. The terms if there are any, yeah, they’re they’re okay.

You know, if I’m looking at a house that is maybe $10,000 below what I think the retail value is, it’s in kind of a b neighborhood. You know, I can throw a coat of paint on it and maybe create another five or $10,000 of equity, mow the lawn. It comes with terms, but I’d have to put 30% down to 7% interest rate due in three years. I consider all of those things pretty blahs a, nothing jumps out at me as like, well the rest of this is kind of bizarre, but that one thing is awesome. No, I’m not getting that vibe out of this deal at all. And that’s the deal. I’m going to say no to I’m going to say No thank you, because I can’t find the awesome. Now let me just give you a couple examples from my own life, my own business about

properties and deals that came along and the awesome that I saw and then the awesome that I therefore isolated and solved for. I had seller come to me a few years ago. And I really liked the location and that’s why I had sent her the letter, of course. But it wasn’t until after I walk through the property with her, which was at least a year after she first reached out to me from my letter, so at least a year passed. And I finally got to meet her face to face, she was wanted to walk me through the property. And I could immediately see that the physical setup of this property had a lot of expandability, I was looking at this, this house had this big basement, in well in the basement with really high ceilings, which is really great. And I’m thinking about this neighborhood, and the the type of people who want to live in this neighborhood and the demand for product in this neighborhood. I’m looking at these tall ceilings, I’m thinking this is the perfect spot. For an accessory dwelling unit and ad you basically the ability to put another unit in the basement because the ceilings already nice and high. In here, there’s plenty of head clearance, it wouldn’t feel like a dark dungeon, a basement unit. And I could easily build a whole other unit here and I’d go from one unit, it was a house so it go from one unit to two units. And as I looked at upstairs, I saw that the house had this enormous attic that was not being used at all. And I thought I could make this a bigger unit as well. And so I knew that what I wanted to do is buy this house, which was a two bedroom, one bathroom house. And I wanted to make it two units, I wanted to turn the house part into a four bedroom two bath, plus, put the two bedroom one bath Agu accessory dwelling unit in the basement. So I saw tremendous expandability on this deal. And I loved that expandability in this particular location. So I looked at the deal. And I said the awesome is the expandability and secondarily the location. So I’m seeing two elements of awesome here. So I’m working in my whole equation to put expandability and I and location on one side of the equal sign.

Everything else doesn’t make as much of a difference to me, I’m looking at the price, I’m thinking well, I’m obviously going to negotiate the best price I can but I’m not too hung up on the price here, because I’m buying an apple and I’m going to transform it into an orange right. So it doesn’t really matter if I’m paying a perfectly fair price for the apple because I’m, it’s not going to be an apple for more than a couple of months after I buy it, I’m gonna transform it into something much better. So I’d negotiate the best price I could, but I just didn’t worry about that that wasn’t important. There were no seller financing terms available in this particular case. So I didn’t really worry about that. I just said, all it matters is I secure this opportunity to take this thousand square foot two bedroom, one bath house and actually turn this into like a 3000 square feet of living space with two units. And I was able to take the rent was 1100 dollars for that two bedroom, one bath house when I bought it. And once we got done with this massive renovation, it was 40 $400. So I saw the awesome, which was the expandability, I solved for the awesome, which in this case was very, very simple. Because none of the other elements worked, I just got the best terms or the best price that I could and I just didn’t sweat it otherwise closed on the deal and executed my plan. Because just by buying the property I was capturing the awesome.

Let me give you a different example. I sent a letter to some folks who own the house. And I sent them the letter because I thought they would be great seller financing candidates. And when the lady called me back, it turns out she was and one of their main motivations was to sell the property in a way that would defer capital gains, they knew they did not want to be landlords anymore. And they understood already that the the installment sale structure, providing seller financing and getting paid out over time would be a good strategy for them to use. So I actually didn’t really have to educate them on that. And as part of that, they really did not want to receive very much of a down payment because the down payment that they received, of course would be part of what their initial capital gains bill would be based on. And they wanted to keep that really minimized. And so I ended up making a very low downpayment on this property. And that was the awesome now there are several things about this deal that I liked. However, the the awesome in this case was a very small downpayment, which I think was about $15,000 on a $200,000 purchase. So I worked to solve for that. Awesome, I knew that all that mattered to me was keeping that downpayment low and the other elements like the interest rate, the price overall. I wanted to do my very best to negotiate those as well as I could however, it was

Not ultimately what was most important, the most important thing for me that made me want to do this deal. And I knew that the most important thing, the awesome that would facilitate me being able to execute the plan on this property that I wanted to execute, was keeping the downpayment low. So I solved for the awesome, which is the downpayment, negotiated the downpayment, and then gave the seller what she needed to feel good about the other terms in order for her to feel okay, accepting that very small downpayment, as well. So the moral of this story is that you have to have some kind of criteria in a barometer to help you a compass to help you decide which deals you should be doing, or shouldn’t be doing out of prioritize deals, which one it would be best to do, which one would not be as good to do. And you could choose to have one criteria, like you could say, I only buy things and have a 10% cash on cash return, for instance, or something along those lines, or only buy things that are 30% below the retail value. But I would encourage you to have a perspective of finding the awesome, find the thing that is the one thing that you believe is the best element of this deal. And it can be multiple things, if you are so lucky, but don’t do a deal. If there’s not at least one thing that you look at you say that is the awesome part of this. And then secondly, solve just like an algebraic equation, solve for awesome to make sure that the deal you structure puts to that you put together nicely captures that awesome thing that you are doing the deal for.

That’s it for today’s episode of racking up rentals. Again, show notes for today’s episode are at www.thoughtfulre.com/e43. Please do us a big favor and do yourself a big favor by hitting the subscribe button in your podcast app. And take a second to rate and review the show please just give us an honest rating and a review we would so appreciate that. Did you know also that we have a Facebook group for thoughtful real estate entrepreneurs, where we discussed a thoughtful way of pursuing real estate entrepreneurship. It’s called Rental Portfolio Wealth Builders and we would love to have you join us there. Just go to https://group.thoughtfulre.com and it’ll take you right to that page. If you liked this episode, please take a screenshot of it and post that screenshot to Instagram and then just tag us. We are @thoughtfulrealestate all spelled out on Instagram. So I’ll see you in the next episode. But until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being a win-win deal makers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.

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