Financial Education through Real Estate Investing: Creative Financing — Seller Financing (Part 6)

September 13, 2022

 

Ipromised more stories from Part 1 so here is another recent one. Thank you to your constant feedback and behind the scenes interactions with me, I’m happy to share as many as I can throughout my writing journey.

From Part 2 of this series, you recall that I’ve just recently acquired 11 properties in the US using a “straight-up” VTB. I will share with you a VTB that I also proposed back in May this year (2022).

Background/Context

Wehad been shopping around for a personal winter home for about a year within North America. Frankly, our list of criteria narrowed the locations down quite quickly — Southern California, Arizona or Hawaii.

At the beginning of this year, we took a very indulgent and luxurious 5.5 weeks long trip to celebrate turning 40. One of the stays was at the Ritz-Carlton on Waikiki in Honolulu.

In 2021, we spent nearly a month in Oahu (the island Honolulu is on) and naturally explored the real estate market again to see if there are any viable strategies. It came as no surprise that very few would work on the island of Oahu other than development and Serviced Accommodations (aka STR: short-term rentals).

After some further digging in 2021, we also learned that the STR restrictions are so great that the numbers wouldn’t work. And we do not typically ‘build or develop’ from scratch in markets that we don’t have a primary focus on. So, the idea exited our mind and we were happy at the Ritz, the Four Seasons and Disney’s Aulani during our subsequent visits.

Atthe Ritz-Carlton, we learned upon check-in that there’s complimentary gelato by the pool deck everyday at 2pm. (Hello, diabetes!)

Okay…before going any further, I’m just going to make a couple of disclaimers here:

1. This is definitely not an endorsement (I wish it was…lol), and
2. This is a semi-personal/emotional buying decision unlike 99.9% of our other business-driven purchases.

Back to the story…

At2pm on the first day, we went for gelato and met this incredible couple. Through our casual chats, we learned that the Ritz-Carlton Residences in Waikiki is what they’d call a ‘condotel’ — a branded condo that can be managed by the Ritz-Carlton and the Marriott group. Long story short — we could buy a unit here and have revenue coming in like a short-term rental. Because of the brand, a high level of maintenance and marketing standards are kept (and yes, the expenses do reflect in the pro forma). However, it was perfect for the lifestyle we’d like.

With that said, I will share that the biggest hold back is still the fact that it’s a ‘condo’ and we do not ‘invest’ in condos as professional investors. I will elaborate on that later. This factor was quickly removed when the main driver is to have our winter home with little to no headaches to maintain it. Then I remember saying this for years: condo living is a lifestyle choice. For personal use, it’s 100% acceptable. Just don’t call it investing.

So, the due diligence began (don’t worry, I still had a decent time there for nearly 3 weeks).

Depending on when you’re reading this, just recall for yourself what May 2022 was like since one of the largest global pandemic in human history started…the world seemed to be almost back to normal.

Honolulu/Oahu, Hawaii has relied heavily on tourism as one of their main economic drivers for decades. The pandemic wiped out 70% of SMEs (small to medium-sized enterprises) during the lockdowns and 50% would gone forever. Hotels were deserted. Shops were closed. Beaches were empty.

I remember driving past Waikiki Beach in February 2021, I could count the number of people on it in one hand. ONE! While the detached market was booming like it was everywhere else in North America due to lockdowns, the condo and tourism markets were completely slaughtered and depressed.

To get to the heart of the story, I’ll fast forward some facts and the share with you the different offers made based on the findings:

Seller’s motivation/situation:

• Purchased during pre-construction for USD ~$1,280.000
• Market comparables came back at ~$750,000 — $860,000 (depending on the floor it’s on)
• Seller is from Asia and bought it to ‘park’ money (which I really learned that it’s just a typical buy rent and pray)
• Seller’s parents had already planned to visit and spend a month in July 2022
• Seller wanted to sell because they were just watching the value go down

After this, here are the offers made (remember: always make 2 offers when you are working with a realtor — those who don’t want to or haven’t had the experience to are likely not someone you’ll be a successful long-term working relationship with. #truth) —

1. VTB Offer: $750,000

• Downpayment: $445,000
• VTB Loan: $305,000
• Proposed rates: 5% interest only = $1,270.83/month
• Term: 5 years
• Balance of $305,000 due after 60 months in full
• Open term for 6 months after 5 years at original rate
• No prepayment penalty after the first 2 years (or after 24 months)
• Will pay $10,000 in realtor commissions (will add to purchase price)
• Will pay seller’s legal fees (up to $2,000 — will add to purchase price)
• Will offer Quit Claim Deed for extra security (90-day clause)
• 7 nights stay per year subject to the following windows: Sept 10 — November 30 every year (US Thanksgiving weekend blackout for +/- 5 days), January 10–30, May 1–31
• For as long as the Buyer owns the property or up to 5 years
• Valued at approximately USD $6,000+/year
• No rollover or banking of nights
• Reservation must be made min 4 months or 120 days prior (subject to availability)
• Must be in 1 reservation per year
• Possession/closing date is July 10, 2022
• Buyer agrees to start paying property tax on closing date
• Seller agrees to pay maintenance fees till August 10, 2022
• Seller agrees to vacate the property (check-out) of the unit on August 10, 2022 the latest
• Sellers agrees that the 1st mortgage payment starts August 11, 2022

2. For Cash Buy –

• Offer/Purchase Price: $745,880
• Possession on/before July 1
• They can pay us $18,000 directly for the parents’ stay in July (50% based on quoted rate directly from the Ritz-Carlton website)
• All other additional offers in the VTB offer applies
• Additional nights beyond the 7-night stay in the same reservation will be billed at 35% off of Ritz’s published rate (as per website quote at the time)

Ihope to have demonstrated a few things here with everyone:

1. Those ‘seller may want’ clauses don’t always have to just be included in a VTB offer. Remember, any deal happens with conditions and needs (sometimes even wants) align.
2. “Always make money in the buy” is still Rule Number 1. As a result, I would negotiate on terms that the ‘performance’ can bear as opposed to going up in prices as much as possible during a negotiation process.
3. It’s about aligning the seller’s intentions and conditions to sell while working out internally on the numbers. Either of these offers would make this a great short-term winter home while making money during the time it’s not for personal use.

Here’s what happened: The Seller said YES…at first. Then their inexperienced realtor and traditional lawyer made them change their minds. Oh well! I moved on. 1 week later, when the reports on inflation, rising interest rates and the looming global recessions started happening, they came back and said they would take my offer again. Sorry, too late.

I do believe that everything happens for a reason. In this case, I dodged a bullet. The value dropped and tourism slowed down. While emotionally, it felt like a loss, financially and logically, it concluded the way it was supposed to. I ended up pursuing the deal shared in Part 1!

Tomy dedicated readers, I thank you for your support and feedback. If this is the first time you’re reading one of my publications, I hope you’ve enjoyed it and learned a thing or two.

For those of you who are in and close to Toronto, ON —Trust Your Talentis running a 2-dayLIVE IN-PERSON Real Estate Investing Bootcamp on September 24 & 25where you will dig into this particular strategy amongst many others. You can visit theBootcamp Registrationpage ortalk to a Strategy Coachfrom Trust Your Talent Academy to learn more. Take action now if you’re serious about thriving through the tough times and come out better at the end of all of this!

Ifyou’re wanting to be a part of a community of real estate investors from around the globe, here is the T.A.L.E.N.T.ed Investors Facebook Group. It’s a place where people come together to share experiences, knowledge, successes and challenges, and money making opportunities!

For those of you who prefer watching videos, here is the YouTube channel where some of my work (very raw) has been shared.