In the latest episode of Raising Private Money, Jay Conner and Crystal Baker divulge the secrets behind a lucrative real estate investment deal. From innovative acquisition methods to strategic exit strategies, this episode is a treasure trove for both new and seasoned investors.
The Power of Referrals in Real Estate
Acquiring Properties Through Referrals
One of the standout techniques discussed in the episode is the power of obtaining deals through referrals. Crystal, for example, secured her deal via a referral from a previous seller. This method not only fosters trust but also tends to result in more favorable negotiation terms. Jay Conner emphasizes the importance of asking for referrals explicitly when closing a deal, as it can open doors to new opportunities.
A Token of Appreciation
Another golden nugget from Crystal’s approach is rewarding referrers with substantial thank-you gifts. She shares how she transitioned from gift baskets to $350 Amazon gift cards, which, in turn, incentivizes more referrals. As Jay comments, a well-appreciated referrer can become a continuous source of potential deals, making this investment well worth it.
Negotiating the Right Purchase Price
Understanding the Maximum Allowable Offer (MAO)
Crystal provides key insights into negotiating the purchase price effectively. At the heart of this strategy lies the Maximum Allowable Offer (MAO) formula, an essential tool for any real estate investor. MAO = After Repair Value (ARV) x 70% – Repair Costs.
By factoring in repair costs and future appreciation, investors can arrive at a sound purchase price that ensures profitability. As Crystal explains, adjusting for additional room (Murphy’s Law) further safeguards against unforeseen expenses.
Crystal’s Real-Life Example
In her example, the property’s ARV was estimated at $200,000, with $18,000 in repairs. Applying the MAO formula, she calculated the offer to be $110,000. However, through strategic negotiation and justifying potential work needed, she secured the property for $96,000, well below her initial offer, ensuring a favorable deal.
Leveraging “Work for Equity” as an Exit Strategy
What is “Work for Equity”?
One of the most innovative strategies discussed is the “Work for Equity” model. This approach involves selling the property on a rent-to-own basis, where the buyer earns credit towards the purchase price by completing specific repairs and improvements on the property. This method is particularly effective for buyers with lower pre-approval amounts, who are looking to invest sweat equity into their future home.
Implementation and Benefits
Coach Crystal meticulously outlines how she implements this model. By offering a detailed scope of work with timelines, she ensures that the tenant-buyer maintains progress and upholds the contract’s terms. This arrangement not only reduces initial rehab costs for Crystal but also incentivizes the buyer to invest in their new home, creating a win-win scenario. According to Crystal, properties sold on a lease-to-own basis typically demand a higher price, compensating for the terms extended.
Pricing Strategy and Future Appreciation
Calculating the Selling Price
Crystal’s strategy of pricing properties higher on a work-for-equity deal is another critical takeaway. She shares how she marks up the sale price by 10% to 15%, accounting for potential market appreciation over the lease period. For instance, an ARV of $200,000 was leveraged to sell the property at $235,000, ensuring future appreciation and securing a safety net against market fluctuations.
Ensuring Collaboration and Compliance
An essential aspect of this approach is the collaborative effort between the investor and the tenant-buyer. Clear communication and setting realistic expectations ensure that the buyer is well aware of the responsibilities involved, and milestones are achieved within agreed timelines.
Conclusion
This episode is a masterclass in real estate investment. From strategic referrals to the intricate workings of the “Work for Equity” model, the insights shared are invaluable. By adopting these strategies, real estate investors can enhance their deal-making prowess, significantly increase their profits, and build sustainable relationships in the market.
For those looking to delve further into the world of private money and real estate investment, Jay Conner’s free guide, available at https://www.JayConner.com/MoneyGuide, offers seven compelling reasons why private money can transform your investment approach. Don’t miss out on this opportunity to elevate your real estate game.
By diving deep into these strategies, real estate investors can not only secure more deals but also maximize their profits and build lasting partnerships. Happy investing!
10 Discussion Questions from this Episode:
- Referral Importance: How significant do you think referrals are in the real estate business, based on Coach Crystal’s experience? Can you share an instance where a referral played a crucial role in your professional or personal life?
- Gift Strategy: Coach Crystal mentioned using gift cards as a thank-you for referrals. What are your thoughts on this strategy, and do you believe a $350 Amazon gift card is an appropriate and effective amount?
- Work for Equity Explanation: How would you explain the concept of “work for equity” to someone unfamiliar with real estate investing, based on Coach Crystal’s description?
- Negotiation Tactics: What negotiation tactics did Coach Crystal employ to justify her offer of $96,000 on a property listed at $128,000? Do you think these were effective?
- Mayo Formula: Discuss the importance of the Max Allowable Offer (Mayo) formula in real estate investment. How does understanding this formula benefit a new investor?
- Exit Strategies: Coach Crystal chose to use a “work for equity” exit strategy. What are the pros and cons of this approach compared to other exit strategies in real estate investing?
- Valuation and Appreciation: Crystal adjusted the selling price to account for potential future appreciation. How important is it for investors to consider appreciation in their pricing, and what methods can they use to estimate it?
- Profit Margins: With an average profit of $86,000 per deal, how do you think Crystal’s strategies contribute to achieving such margins, and what could other investors learn from this?
- Rehabilitation Management: Discuss the different ways Crystal manages work-for-equity projects, particularly her approach to giving tenants credit for improvements. How would you handle this situation differently?
- Learning from Community: Both Jay Conner and Coach Crystal emphasize learning from past deals and community discussions. How vital is community involvement and knowledge sharing in your professional growth?
Fun facts that were revealed in the episode:
- Coach Crystal often gives $350 Amazon gift cards as a thank-you for referrals.
- Referencing the ‘work for equity’ strategy, Crystal sells properties in as-is condition, allowing buyers to earn equity by making repairs themselves.
- Using the ‘ work for equity ‘ exit strategy, Crystal sold a property with an after-repair value (ARV) of $200,000 for $235,000.
Timestamps:
00:01 Discussing unique deals, writing key details, and lessons.
05:58 Purchased property for work in exchange for equity.
09:36 Negotiating property improvements and mortgage readiness.
13:03 Offer 50% credit for rent-to-own renovations.
14:42 Budget, scope, and timelines ensure project completion accountability.
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Mastering the Art of Real Estate Investment: A Deep Dive into Crystal’s Unique Deal
Jay Conner [00:00:00]:
Round figures were $200,000. Uh-huh. What did you sell it for?
Crystal Baker [00:00:06]:
- Wait a minute.
Jay Conner [00:00:09]:
You’re after repair value was 200. You’re selling it on work for equity for 235. Mhmm. How did you come up with that?
Narrator [00:00:19]:
If you’re a real estate investor and are wondering how to raise and leverage private money to make more profit on every deal, then you’re in the right place. On raising private money, we’ll speak with new and seasoned investors to dissect their deals and extract the best tips and strategies to help you get the money because the money comes first. Now here’s your host, Jay Conner.
Jay Conner [00:00:47]:
Joined. We’re talking real deals today. Get a pad and a pen to, write down the details of these deals, most importantly, the takeaways, and the lessons. Alright, Crystal. Well, since we ran out of time last time talking deals if you would go first, tell us about your deal, all the details about it. All I know is that you told us last time this deal was sort of different and had some nuances to it. I don’t know what that’s all about, but I’ve got my pen ready to go.
Crystal Baker [00:01:23]:
Yeah. And then Tim went and stole my thunder.
Jay Conner [00:01:27]:
Who stole your thunder?
Crystal Baker [00:01:28]:
Tim. Ben said
Jay Conner [00:01:29]:
What did Tim do?
Crystal Baker [00:01:31]:
He did the very last one. You let him go, and I hadn’t gotten to go, and he had a similar type of deal. I’m like?
Jay Conner [00:01:40]:
Well, here here here’s here’s the news.
Jay Conner [00:01:42]:
We probably have a lot of people here on this Zoom that were not with us last time. So
Crystal Baker [00:01:50]:
It doesn’t matter because I’m sure that there’s gonna be pieces, parts that that will be different. But I just thought it was funny because then I was like, well, stole my phone there. After all, I was like, yeah. Mine’s so different. Alright. So, got the deal by referral. So it was from a previous seller.
Jay Conner [00:02:09]:
So when you said you got it by referral, a previous seller, are you saying you bought a property, you bought a house Mhmm. From a seller, and then those people referred you to another owner of a property that wanted to sell their house? Correct. Alright. So I have another question. Uh-huh. Did you ask for that referral specifically, or did they just do it on their own organically?
Crystal Baker [00:02:36]:
It was organic. They were talking about
Jay Conner [00:02:39]:
How much I helped them. Wow. So, you know, there’s already one takeaway right there, folks. There’s already one takeaway right there. When you buy a property from a seller, go ahead and at least plant the seed and ask for referrals. Right? Yep. Go ahead and plant that seed, and ask for referrals. When you get a referral, Crystal, do you give a gift or do you, is there any kind of specific way that you thank a seller for a referral or what?
Crystal Baker [00:03:16]:
Yep. I always I always do I used to always do gift baskets, and we just started doing gift cards, these last 2 years.
Jay Conner [00:03:27]:
Okay. Okay. Yep. How much is the gift card? 350. Woo. My lens. What kind of gift card do you get?
Crystal Baker [00:03:38]:
We’re using Amazon now since it’s I mean, I hate to be that person that’s feeding Amazon’s pocket, but that’s the most universal. It’s the easiest.
Jay Conner [00:03:46]:
Wow. That’s a very that’s a very nice gift. But then of $350. But then again, what are your average profits on your deals now?
Crystal Baker [00:03:56]:
We’re at well, the last time I ran the numbers, it was 86.
Jay Conner [00:04:01]:
86,000? Mhmm. 86,000. And the 350 probably is not gonna hurt your bank account. And, hey. But I’ll tell you what, $350, I mean, that’s a writer downer. I mean, that’s that’s a very valuable thank you gift that you have given, you know, for the referral. Go ahead.
Crystal Baker [00:04:23]:
Yeah. Well and, frankly, most people then are gonna start because we’ve actually had that happen where people now they’re kind of curious. Oh, well, how else can I help you?
Jay Conner [00:04:35]:
In words well, what they’re asking is, how else can I get another $350 gift card?
Crystal Baker [00:04:42]:
Precisely. So, we have on occasion had some it’s not everybody, so don’t go off track on that. But, we’ve occasionally had people then that are just sending things in like, oh, I just saw this other one for sale, and so you suddenly have another little bird dog out there for you. So
Jay Conner [00:04:59]:
Yeah. Interestingly enough, I had one of our private lenders come up to me after church. Let’s see here. This is this past Sunday night, and he said, Jay, I just saw a for sale by owner sign goes up. Looks like the house needs some rehabbing. And he says I’m gonna take a picture of the for sale by owner sign and text it to you. I said, send it on because when I get those referrals, I give a very nice thank-you gift as well. Go ahead, Crystal.
Crystal Baker [00:05:34]:
There you go. Okay. So got it by referral. They were asking for 128,000. It’s a 21, but it’s in a great community. It needed some work. We got an estimate from the contractor of 18,000. However, we have made the decision.
Crystal Baker [00:05:58]:
We had somebody that has been in our kind of in our world and wanted a work for equity option. And so we had been kinda looking at some of our upcoming options or opportunities that might fit for this person because they had a preapproval, but it was for a pretty substantially smaller amount than most of what’s gonna get you anything around here. And so, they felt like it was a fit, so we decided to purchase it as a work for equity. When we were looking at it we ran the numbers so if you did the MAO on it sorry. I didn’t tell you the after-repair value. The after-repair value was 203,000, I don’t know. And some other little numbers, but I’ve averaged it out to 200,000 just to run my MAO formula. So I did MAO at 200,000, and I did it with 18,000 in repairs and came up with 120, which my offer would have been 110.
Crystal Baker [00:06:59]:
In conversation with the sellers, kind of they were pretty motivated. This is a secondary property. They’d had tenants in it previously. They hadn’t had the best time ever with it, and so they wanted out. So I offered them 96, and they took it.
Jay Conner [00:07:18]:
So I’m taking notes.
Jay Conner [00:07:21]:
Did you say their asking price was 180,000?
Crystal Baker [00:07:26]:
No. A 128,000. Oh,
Jay Conner [00:07:28]:
A 128. Okay. I was getting pretty excited about that story.
Crystal Baker [00:07:33]:
It’s not as exciting. Sorry.
Jay Conner [00:07:36]:
So no. It is pretty exciting. So their asking was a 128. Facts. The rehab was budgeted or figured at 18. The r is 200. Your MAO formula was a 110. Okay.
Jay Conner [00:07:49]:
We have folks here on this Zoom training that don’t have a clue what MAO is. So let everybody know what MAO stands for and what is the formula. And listen, if you’re on this Zoom and you don’t know what MAO stands for, you need to write this you need to write this down. What Crystal is gonna share with you right now is what the most that you should pay for a property when you’re using all cash, whether it’s your cash or it is a private lender’s, all their cash. In other words, when you’re not buying on terms is what I’m saying. Right? You’re not buying creatively. You’re not buying with seller financing. You’re not buying subject to the existing note, which Willie’s gonna talk about when you’re paying in cash.
Jay Conner [00:08:44]:
So, Crystal, what does MAO stand for, and what is the MAO formula?
Crystal Baker [00:08:50]:
So MAO is a maximum allowable offer, and the formula is your after-repaired value times 70% minus your repairs. That’s gonna give you your MAO. However, we take into account Murphy. So, typically, in the price point I’m talking about, this $200,000 price point, I’m gonna subtract an additional 10,000 to give me room. So my offer coming out the gate isn’t gonna be that 120,000 that I told you I got. It’s gonna be the 110,000. That’s where my offer is gonna be.
Jay Conner [00:09:29]:
But you bought it for what’d you say? 96?
Crystal Baker [00:09:33]:
96.
Jay Conner [00:09:34]:
How’d you come up with that figure?
Crystal Baker [00:09:36]:
So we were playing around with some of the numbers and some of the potentials of things that could be done to bring up the condition of the property for a homeowner and to get her mortgage ready. So not so not what I would do to get it into a state where I was gonna either rent it or potentially sell it, but some of the things she was talking about doing. And I thought, well, to make sure that I can let her have credit because I could’ve gone 2 ways. So just for everybody’s benefit, not to get too complicated, but I could’ve gone 2 different ways. A lot of things she’s talking about, I could have said, well, you could do those. I’m just not gonna give you credit for all of them. Or in this instance, I thought, well, I can start in the negotiation to see. And if we can incorporate some of those, and I get it at a low enough price, it’s a win-win for both of us.
Crystal Baker [00:10:27]:
So that’s what we had done.
Jay Conner [00:10:30]:
So you sort of alluded to it right there, but, in what kind of way did you justify the offer of 96? They’re asking for a 128.
Crystal Baker [00:10:42]:
Yeah. So as a seasoned investor, I’m used to looking at properties that don’t look pretty, and I can see past that. But even the homeowners can’t often see past that. So they’d had tenants in the property, and it was dirty. It was yucky looking, which a great cleaner can fix a lot of things, and a good coat of paint can too. But so I just explained that you know, it’s dated. There’s a lot of things we’re gonna need to do. There’s a lot of hidden things that we’re all not necessarily seeing right now, and we’ve gotta take all of that into consideration.
Crystal Baker [00:11:16]:
So we had a conversation about all the different facets of things I thought were gonna need to be done to justify my offer, as well as the fact of and this is just part of my negotiation with any seller. You know? I also have to pay able to pay closing costs. I’m gonna have to market this property. They didn’t know I had a potential buyer right now because it wasn’t finalized. We didn’t sign any documents anyway, so it was still legit. I didn’t have a final on it. I’ve gotta do all the legwork to get this into a state where that can happen. And we know there are substantial repairs that need to happen.
Crystal Baker [00:11:47]:
So
Jay Conner [00:11:48]:
Alright. Now, you mentioned your exit strategy Yeah. To sell it on work for equity. Right? Yeah. So we’ve got folks here on the Zoom that have heard that term, but they really don’t know what that looks like. So when you say work for someone, work for equity, how would you like, you know, in a 2-minute seminar, summarize what that means and what that looks like?
Crystal Baker [00:12:17]:
Work for equity, the quickest version is that instead of doing all the rehab on the property and selling it in perfect condition, I’m going to allow a tenant-buyer to move into the property. And while they reside there, they can be completing projects to start to get credit towards their purchase. So I’m gonna start reducing the overall purchase amount incorporating that they’ve completed those tasks. Of course, they have to prove it was done by a licensed contractor. I have to approve the scope of work. I have to approve that it was finalized properly before any credit is given.
Jay Conner [00:12:51]:
So in other words, what you’re saying is Alright. So I’m gonna get work for equity really is a type of selling on rent for own I mean, rent to own. Right?
Crystal Baker [00:13:02]:
Correct.
Jay Conner [00:13:03]:
So you’re selling on rent to own or lease purchase. It’s one of the same thing. No difference, but you are giving credit for their work. Now, I’ll share with everybody what I typically do. You share with what you do. When I’m giving when I’m giving a rent-to-own buyer credit for work they do to the house, typically, I’m gonna be giving them about 50% credit towards their work on the house. And what I do is I know what the renovation or rehab budget would cost me if I’m getting it ready to put in the multiple listing service, and then I know what I’d be paying my general contractors or my crew to do it. But if I’m selling on a rent-to-own in the as-is condition, I’m gonna take about 50% of that once the work is done, of course, once the work is done and reduce the price by that amount.
Jay Conner [00:14:06]:
Does that align with what you’re doing, Crystal, or are you doing something different?
Crystal Baker [00:14:10]:
No. The way that we do it is we get the estimate, and then, typically, we determine what we think is reasonable. And it depends on the scope of work. Right? So if it’s an HVAC unit, I’m gonna give them this is just the way that I do it. I’m gonna give them credit for what I would have to pay for it because they have to hire a licensed contractor. But if it’s painting, you know, I might have to pay $5 a square foot. I’ll probably give them credit for 3.50 a square foot because they’re doing the painting. So things like that.
Crystal Baker [00:14:42]:
So what we do is we take that, we outline the entire budget, and then we outline the scope of work. We put timelines to that, and each line item has a dollar amount. And as they’re completed, that’s just reduced from the price. And so part of the contract states that they have to be meeting those timelines and or that’s a potential breach of contract so that we don’t have people that are in the house and, you know, 8 months have passed and they’ve done 0 projects, and now you feel like, what’s my recourse? Gotcha. So that’s how we do it. And, if we were to, the budget has to align with what we’ve negotiated on the price for that to work.
Jay Conner [00:15:20]:
Sure. With
Crystal Baker [00:15:21]:
What we did here.
Jay Conner [00:15:22]:
Right. So is that the exit strategy you did? Did they move in?
Crystal Baker [00:15:27]:
Yes.
Jay Conner [00:15:28]:
Okay. You know, that triggers another couple of questions. So your ARV round figures were $200,000. Uh-huh. What did you sell it for? 2359. Wait a minute. You’re after the repaired value was 200. You’re selling it on work for equity for 2.35.
Jay Conner [00:15:53]:
How did you come up with that?
Crystal Baker [00:15:55]:
We multiplied it times, well, I always do, times 10% or times 15%. I take a look at how much that changes the purchase price, and I figure out what my average is on that, as well as a conversation with my realtor. But I’m just pricing it up because I’m giving them a year, and I wanna make sure that I’ve taken into account any potential appreciation as well I don’t as we know, you can always reduce the price, but you can never increase the price. So
Jay Conner [00:16:27]:
Yeah. But no need to shoot yourself in the foot on that value of the house going up over the next 12 months.
Narrator [00:16:35]:
Are you feeling inspired by the knowledge you gained in this episode? Then head over to www.JayConner.com/MoneyGuide. That’s www.JayConner.com/MoneyGuide, and download your free guide that shares seven reasons why private money will skyrocket your real estate investing business right now. Again, that’s www.JayConner.com/MoneyGuide to get your free guide. We’ll see you next time on raising private money with Jay Conner.
