FUNDAMENTAL PRINCIPLES OF CREATIVE REAL ESTATE
This blog covers the six fundamental principles of creative real estate. You may have already read a version of this chapter in previous books and seminar materials. It is crucial that you not just understand the six fundamental principles of creative real estate but that you think from them. That is why I am repeating it here. Even if you have read it before, I invite you to read it again to remind yourself of the key cornerstones of creative real estate transactions. The most successful creative real estate dealmakers think from these. You can do that, too, but it does take practice.
PRINCIPLE #1: EMBRACE PROBLEMS AND CREATE SOLUTIONS
What do you think a problem is? The automatic thinking about a problem for most of us is that problems shouldn’t happen. They are bad. They make life harder. They are barriers to having life work out.
Guess what! Problems are good! The dictionary defines a problem as “a question proposed for solution or consideration.” That is it! A problem is simply a question to be resolved.
You want to be looking for problems to resolve, but not just any kind of problems.
You want to be looking for people problems. After all, it is people who have problems around real estate. A building has no problems, even if it is falling down. The building does not care. However, the owner might care; the lender might care; the neighbors might care; the tenants might care. Property problems are actually people problems.
A solution is also defined as “an answer to a problem.” Now, we make the case that there are many possible answers to a problem, not just one. We assert that a solution is one of many possible answers to a problem. This book is intended to demonstrate that there are an infinite variety of strategies to solve problems and close your transactions. In many cases, you could apply several of the strategies in this book—and in the other books in this series—to close the transaction. You just have to structure the solution so it is a win for everyone.
If the definition of a successful transaction is who gets the best price, it is frequently in the context of win or lose. One party wins and the other party loses. However, if a real estate transaction is treated as a solution to a problem, then you want solutions where each party can view the transaction as a solution to his or her problem. This is what we mean by win-win transactions.
Open your own mind to possible solutions for the people problems beyond the conventional thinking. After all, this book is about creative real estate financing, not ordinary and usual real estate financing.
By the way, when you ask people what problems they are dealing with in buying or selling a property, the initial problem people describe is usually not the real problem. People who need to sell a warehouse or house for cash could want it to pay for a child’s college, buy a home near family in another city, pay down debt, a tax bill, or buy a vacation home. The problem is not just that they need cash, but they are trying to resolve a problem in their life. What’s the real problem? You cannot find out unless you know the principle of get all of the facts.
PRINCIPLE #2: GET ALL OF THE FACTS
What do I mean by facts? I define facts simply as “the state of things as they are.” There are hundreds of different facts that may be relevant to a transaction.
Yet, when you really look at it, most of us are far less concerned with the facts than with our opinions about the facts. We want to agree or disagree with whether someone should or should not have done something. “They were wrong” or “You were robbed” or “They are so unfair in their lending policies.” These are all opinions, not facts.
To solve a problem, you must start with the factual details of the situation: the property, zoning, the owner, the lenders, the neighbors, the community, building setbacks, and everything else that is pertinent. The more relevant facts that you can gather, the greater the chance you have of understanding the situation you are dealing with and creating the best win-win solution.
Getting the facts about the people issues requires asking questions, questions that allow people to talk freely about themselves and the issues with which they are dealing. Ask open-ended questions that elicit something more than a yes or no answer. In that way, you will learn far more than the question you are asking. As we noted in the prior principle of embrace problems and create solutions, you need to understand the people problems. To understand them, you must ask and listen.
When you are asking questions, let people know that your ability to come up with a winning solution for them and everyone else depends on their answers to your questions. When they understand you are asking questions to get the full picture in order to design the best possible solution, they will appreciate your interest. Use questions that others are unwilling or afraid to ask, such as: “What are your plans after you sell this property?” or “What is the current situation on your mortgage?” or “To what extent have you gone over your tax situation with your CPA?” You can ask these otherwise intrusive questions in an unobtrusive way.
But do note: Most of us are not skilled at asking questions to get at the heart of people’s situations without asking leading questions or sounding judgmental. To become skilled at asking questions that reveals all of the facts, including the other party’s real motivation, takes practice. I have spent years practicing asking questions in a way that people want to answer them. Furthermore, the skill is not developed by simply changing the wording of the question; it is also the manner in which you ask the question.
When you come from a commitment to help people, they can trust you and will be willing to open up to you. Think about a conversation you had with someone where you felt they were being critical of or judging you. When you know someone has your best interest at heart, they can say things to you and you listen rather than be defensive. Imagine if you could be that way with the other people in your deals.
From these questions, you gather the raw material to determine the problems to be resolved and formulate possible solutions. You have a more solid foundation from which you can support your situation, and can now work toward putting together a deal that works. Ultimately, the people you ask will appreciate that you asked these questions, because you will help them understand and achieve what they truly want.
PRINCIPLE #3: WORK WITH MOTIVATED PEOPLE
It is usually more profitable to work with a buyer or seller who really wants or needs to do a transaction. A motivated buyer, seller, or lender will do more to get the deal done than an unreasonable party who wants to win at the expense of others in the deal or someone who is unmotivated. The test of a motivated person in a deal is what will they do?
Be relentless (but still gentle) in discovering what people will “do” in order to uncover how best to put together a deal. Will they provide—or at least consider—seller financing? Will they accept other real estate as a down payment? Will they lease part of the property back after closing? When you present these options, make sure they understand why this might be a beneficial solution.
You will never put together a deal with someone who is not motivated to make the deal. I would rather work with someone who is broke but highly motivated than with a multimillionaire who has no motivation to really close a transaction. Cut your losses when you discover there is insufficient motivation to make a deal; redirect your efforts to people who are truly motivated to solve a problem.
PRINCIPLE #4: CREATE “NET BENEFITS” FOR EVERYONE INVOLVED
Many books on real estate assume that one party will win in a real estate transaction and the other party will lose. Operating that way usually results in one party attempting to take advantage of another party in the transaction, and one party guarding against being taken advantage. Either you take advantage of another person’s misery and stress or you fear that he or she will take advantage of you.
That kind of deal can easily fall apart given that the only thing holding it together is the stress and misery of the other party.
But there is another way. That way is have everyone in the deal win. Create transactions where the buyer and seller can be of service to one another. However naïve you might at first think it sounds, there is a way where everybody wins.
Now, everybody wins does not mean that everybody will be completely thrilled or enthusiastic about the transaction that they are making. You are not looking to make the other parties happy in a transaction. Making people happy is a futile pursuit. But it is in your best interest to have others be satisfied with the transaction. People will do a transaction because of the net benefits that they receive in the transaction.
A benefit could be defined as “an advantage or profit gained from something,” and a detriment could be defined as “a disadvantage or loss from something.” Only if all of the perceived benefits for each party are greater than the perceived detriments for each party will a transaction actually be consummated. Detriments, like benefits, are completely individual to each party. What looks like a detriment to one party may be a non-issue or even a benefit for another party.
Net benefits can be constructed so there is enough to go around for everybody (I win/you win). In the end, there have to be more benefits/positives than detriments/negatives, or the deal will not close. The discussion about asking questions is critical to creating benefits that will be attractive to the parties involved in the transaction.
By the end of this book, you will see that an easier way, a better way, is creating transactions where there are sufficient net benefits for everybody. Those net benefits—the perceived benefits that outweigh any detriments—are the reason why people will complete a transaction.
Those net benefits are also the reason that others in the transaction will work with you in the future.
PRINCIPLE #5: IT’S ABOUT THE PEOPLE, NOT JUST THE PROPERTY
To do creative deal making, you must create a relationship with the other players. If you are a buyer, you must create a relationship with the seller. If you are the seller, you must create a relationship with the buyer. It takes courage for people to think outside the box. If they do not feel that you care about them at all, they will be unwilling to think and act outside the box, and nothing will change. Relationship is the foundation—without it, you cannot build a deal that will work.
PRINCIPLE #6: EMPLOY QUALIFIED PROFESSIONALS
By employing professionals, you not only protect yourself from mistakes, but you also gain the confidence to take action where you might otherwise hesitate or freeze. In any real estate transaction, there are hundreds of potential pitfalls. Legal agreements, valuation issues, closing problems, property condition, ownership disagreements—any of these present opportunities for serious mistakes.
This book—or any book—cannot begin to address all of these issues. Working with competent professionals will reduce the potential for creating new problems and will reduce the impact of problems that do arise. Hindsight is always better than foresight. What sometimes looks like the best decision at the time is flawed in retrospect. You want professionals to be on your team to help guide you.
While there are many different professionals that can protect you in a real estate transaction, the most critical professionals to work with are those who work on the legal, tax, title, and brokerage issues.
Legal experts: First, be sure to obtain qualified legal counsel in any real estate or financing transaction. Remember that not all attorneys are created equal. Find a knowledgeable real estate attorney who will represent your legal interests and keep you out of trouble without making your business decisions for you. Also, make sure you choose an attorney who matches your style and with whom you can effectively work. For example, these creative real estate transactions are not traditional, so an attorney who only thinks inside the box may have difficulty with some or all of these transactions. These strategies are legal, but they are uncommon, so you need to work with someone who can think outside the box of traditional transactions. And sometimes a strategy works in one state but not exactly the same in another, so you need an attorney who understands federal and state real estate law.
Tax experts: There are also complex tax implications in any real estate transaction. Creative real estate transactions are no different from traditional transactions. Get a qualified CPA to advise you on the tax implications of any real estate transaction you are contemplating. For example, a seemingly innocent action can create a taxable event costing you thousands or more. And, like attorneys, CPAs come in all flavors. Find one who you can work with and who will advise you well. Use them in every necessary situation.
Title experts: Title companies are critical to the success of any transaction, particularly for closing services. In some states, attorneys fill this role. In other states, real estate brokers can close transactions. Regardless, you want to find a closing agent that you can count on for both responsiveness and open-mindedness. The open-mindedness is critical as you negotiate real estate and financing strategies that are outside the box. Select a title company or closing agent who has experience closing complex transactions. Work with them consistently. Train them. Be loyal.
Broker expertise: Many real estate brokers do not know or are not interested in creative approaches. Find a broker in your local area who is knowledgeable about doing creative real estate and who has high integrity. Such a professional can teach you a lot about the local market, and maybe you can teach him or her a thing or two as well. To determine if a broker is knowledgeable, use the principle of getting all the facts and especially the guidance on how to ask powerful questions. Ask the broker to explain how he or she has done creative deals outside of traditional brokering.
In summary, work with professionals who are knowledgeable and skilled, and pick the ones with whom you work best. It may take time to find the right people but it is worth it.
These are the key creative real estate principles.
STRATEGIES NOT FULL SOLUTIONS
All of these principles are strategies to use, but they are not full solutions by themselves. You have to apply the strategy to the particular people and circumstances of the transaction. The application of any strategy in a particular situation can make the difference between big profits or big losses and lots of aggravation. Use good business principles in managing the details of the transaction. Get good advice.
As an example, if you acquire an option to purchase a property, but the document is flawed or it is not properly recorded, the option may be unenforceable. These kinds of issues must be included in your original contract to effectively apply any strategy.
This is why you need a professional. If you are not a seasoned investor or real estate broker or real estate tax expert, I hope by now you are clear you need to involve one or more of these experts in working with you. It is worth the extra eyes on your contract to be sure that, as part of creating net benefits, you win as well as the other party. Even if you are a seasoned investor, subtle changes in the deal could put you at risk in the deal in unexpected ways. It is best to work with qualified and experienced advisors every time.
In this book, we will not spend time dealing with the history of financing since the Napoleonic era, or the philosophical examination of the intrinsic nature of financing, or even my personal opinions about financing in the various parts of the world. This is a book about real deal creative financing techniques. It is designed to give you tools to close deals when regular financing cannot.
Our intention is to give you as much meat as possible for your discovery of these techniques for yourself.