In Real Estate, there’s a category of investors, as operators who provide resources in order to create transactions that may provide a return, called “Investors on Terms“.
In short:
In Real Estate, Investors on Terms focus on the needs, goals, and expectations of sellers and buyers. They design a deal within the framework of real estate law, with that purpose in mind. Regardless of the property, sellers and buyers become the focus of the investors‘ efforts to complete a deal.
Diving deeper:
This category is made up mostly of individuals and small businesses, as the flexibility required for successful real estate transactions of this type is not easy for a large company.
Investors On Terms tend to be juxtaposed with traditional operators who are involved in conventional transactions. These are the typical deals that can be found in most of the residential real estate industry. They are straight sales for cash, and many are financed via institutional lenders. Over time, they have been pushed, and still are, as the standard, prepackaged, ready-to-go deals leaving buyers and sellers to make them work for their specific goals. In fact, they work just as well as ready-to-go food or other oversimplified solutions, meant to work for most but with compromises that reduce their effectiveness and profitability.
Custom Deals:
The need to find the right path to an ideal real estate deal for all parties requires advanced knowledge of real estate law and the real estate market of the moment at the specific location of the property.
This allows Investors On Terms to design a custom deal that achieves the goals of both sellers and buyers through the available legal tools, leaving the real estate property not in primary focus as many other types of transactions typically need to do.
Real Estate Investors on Terms focus on the parties to the deals, mostly sellers and buyers, to design the best possible arrangement for all the parties involved, rather than focusing on the property itself. The ultimate goal of the deal is the sum, rather than the compromise, of the goals of the parties involved.
Example of Investment on Terms:
As an example, out of possible hundreds, a deal on terms set up by a real estate investor on terms, could be landlords who are retiring and don’t want to deal with leases and tenants any longer, so they are thinking of selling, but they like the monthly check that comes from their rentals. The deal could be a lease-option; for a number of years there would be a safe, monthly check coming through, with little or no maintenance or other liability worries; there is also a financial commitment to purchase the property at locked-in price and conditions at the end of the term, which would end the easy checks and is the downside of such an arrangement, but the retiring landlord would sell anyway, ending the monthly income years earlier; and in a lease-option, it’s hassle-free and with much reduced risk.
A hands-off deal that allows the landlord to pocket more than in a conventional sale; at the same time, the buyers would get out of the hamster wheel of renting and moving into their forever home, creating a stable environment for raising a family.
Keep in mind that it’s one of hundreds of examples, and there’s almost always a viable and convenient solution for every seller, buyer, and whatever property or situation. The secret is partnering with the right investor on terms who has adequate expertise.
Choosing an Investor On Terms to work with:
Investors On Terms may bring capital to the table other than advanced expertise, but, unlike other investors, capital is not always necessary or critical.
Inexperienced Investors:
The potential for low-capital investments and good yeields makes investments on terms and the underlying deals on terms, very attractive to many inexperienced “wannabe” entrepreneurs, from all walks of life and backgrounds. The field of investors becomes rich in rookies and hard to read, especially for home sellers and home buyers who transact once every decade on average. It’s difficult to understand who is a seasoned real estate investor and has the necessary knowledge and experience, and who did a course and is riding on the experience of another coaching investor, often referred to as a “guru”, who may or may not have the required background and performance. Many “gurus”, in fact, are former investors who give up and try coaching as an easier way to make money regardless of having completed any deals. These courses are usually very expensive, and student investors can be desperately eager to get deals done in a world where speed and patience must be critically balanced. Make sure you’re talking with someone who knows what they’re doing.
Shady practices:
To make the situation even more challenging for sellers and buyers, who, on average, move and therefore sell and buy their home only every 10 years or so, scams and scammers are always present in real estate due to the large sums of money involved and the long reach of modern technology, unfortunately. Choosing the right investor partner is harder than ever if not familiar to these advanced deals.
Checking the online profiles of investors, including those present in very established and reputable organizations like the Better Business Bureau, is important. Usually, if they’ve been around enough in a very intense industry, it’s a good sign.
Real Estate Attorneys:
It’s also very useful to get legal counsel, with the challenge of finding one of the very few real estate attorneys who specialize in investments and commercial, not just in general, residential real estate. Mainstream transactions can be handled by many real estate attorneys, but investments on terms require a very different approach. The best and most competent lawyers in this field usually do or have done deals on terms themselves. If they don’t, they’ll rarely entertain the option to advise on them and may easily dismiss them on the grounds of potential risk that they can’t evaluate and therefore control, whether they are willing to admit it or not. Remember that many lawyers have a zero-risk approach to transactions, which nullifies the pursuit of reward and profit, which is the purpose of business. The ideal attorney for these deals needs to look at a fair and clear balance of risk and reward, and even more importantly, their primary task of compliance with the prevailing law; this makes it also critical to get counsel from an attorney licensed in the state of the property who has professional knowledge of the governing law.
Real Estate Agents and Brokers (or Realtors):
A similar approach should be for real estate agents, especially residential agents, as they get no training for these types of deals and, on many occasions, have never even encountered any, let alone brokered them. What they know is usually from hearsay. The inability to evaluate these deals and to know how to best handle them generally creates a negative response that may not be in the interest of the seller or the buyer but fits the broker or agent’s business model.
It could be very different in commercial real estate, where agents and brokers are much more accustomed to more creative and sophisticated transactions, often needed to address the challenge of large amounts of money that need to change hands, some of which are made upfront.
Advanced solutions:
However, especially in tight credit economies and markets, as we are witnessing in the post-pandemic era of high inflation, investors on terms provide options, which cyclically appear as the best solution for sellers and buyers, by a large margin. On many occasions, a seasoned investor can implement techniques that were either very popular in similar times and real estate markets of the past or have innovative ways of achieving today what conventional real estate deals cannot.
Potential Risks:
Aside from straight real estate scams that are avoidable with a little common sense (check Real Estate Scams to be aware), the largest risk when dealing with investors on terms is trusting a rookie investor in disguise. Working with a seasoned investor is a great way to be aware and shielded from shady schemes. It could be hard to understand who is properly trained and experienced, and unskilled investors could be unable to create the right terms for everyone to be successful. As with any business transaction, risk is always present, and that’s what produces a return. However, a high level of expertise allows an investor to calculate, prevent, and control risk, while others may not even see it coming, let alone have ways to deal with it without damage.
Benefits for Home Sellers:
The largest benefits are, for a seller, the ability to sell a property that is not selling fast enough, for top dollar, more quickly, in a smoother transaction that also requires less effort than a conventional deal.
It also gives options for tax planning and optimization. Minimizing tax exposure, legally, of course, is possible and actually incentivized by the government, which offers many tools to achieve such a goal. Investing in real estate is economically convenient for society, and such incentives exploit the work of real estate investors. Investors can make a living off of these programs, so it’s a win-win for those who invest and for society.
Other advantages are the ability to plan finances and use real estate as an investment tool rather than a bulk sum of money that gets eroded in its value by inflation, even if left in an interest-bearing account like a savings or money market bank account. Not to mention the many write-offs that you may be able to enjoy in real estate. There’s just not enough space here to go through them all. There are also potentially ethical and emotional benefits, and much more; each deal has its own unique set of pros (and cons).
The key is knowledge and experience.
Disadvantages for Home Sellers:
So what are the cons?
Many times, not all the money that comes from the home sale can be immediately available, therefore disqualifying those who need too much upfront. This is statistically the main reason why a home seller can’t really contemplate a deal on terms, but again, each deal could have unknown potential that a seasoned investor can find and unlock.
Benefits for Home Buyers:
For buyers, a deal can represent the only sure and quick path to home ownership, as many are left out of a highly regulated credit system. A great example would be the self-employed, divorcees, and foreigners, many of whom have major credit challenges that can often be fixed in months or a few years. Deals on Terms give them the time they need, and in many cases, they deserve. Many buyers on terms nowadays just want to avoid the steep costs of housing due to high interest rates and expensive, often unaffordable, mortgage loans. When you look at the cost throughout the life of a typical 30-year mortgage loan, you see how much can be shared between seller and buyer—massive extra profit for the former and huge savings for the latter.
Disadvantages for Home Buyers:
Every deal on terms is very different, but generally speaking, being able to avoid paying cash or successfully applying for an institutional mortgage loan for the purchase of their home, means that they may have to pay a premium for such privilege. However, if they are in a paid, temporary accomodation like a home rental, in a fast appreciating real estate market like we still are despite the high interest rates, may more than offset the extra cost. If they make a short term deal, where they may have to secure a home loan a few years down the road to make an agreed upon balloon payment, they may do so in a much more affordable credit market with lower interest rates and softer requirements. They also get the time to plan and position themselves for the best terms, shop around, arrange finances and save up. All in one single move, from their temporary accomodation to their forever home purchased on terms.
Who wins in conventional sales:
In a conventional real estate transaction, typically if a party wins, another loses. Lenders and banks always profit in financed purchases, that tend to be the most, brokerages make money, as most conventional sales are brokered, and all transactional operators, like inspectors, attorneys, appraisers and others also gain from most transactions of that type, extracting much equity from the deal. so, if a home buyer makes a good deal, it means that the property was underpriced and the seller missed out; if the home seller sells at a good price, then the buyer overpaid.
Who wins in deals on terms:
Investors on Terms set up deals where they add value for the homebuyers (alternative or creative financing, as some call these deals) and procure a sale for the homesellers that is better financially, practically, and on many other levels, and manage to carve a profit out of it for themselves. So everyone wins. Some may wonder how it’s possible that everybody wins. The answer requires, as it’s typical when engineering and understanding these deals, to think outside the box. In fact, the parties who lose are outside of the deal; it’s landlords who don’t get a tenant to give them a monthly income, and it’s banks that are cut out of the deal for a while or forever and don’t get to charge interest and all the fees associated with providing a mortgage loan. There are also many brokers who are not prepared to handle these deals that are left out (there are some who instead are amazingly good at it, they are worth their weight in gold, but there are very few, unfortunately), and investors on terms can easily perform all the same tasks. With regards to closing attorneys and title companies, the ones who earn from the transactions are those who are able to handle them; however, they are needed or firmly recommended in either type of deal. Home inspectors, home appraisers, contractors and home builders, staging pros, real estate photographers, and others are just less critical than in traditional sales and have much less impact on the profitability of a deal on terms.
By moving the lost profits outside of the deal, it should be pretty clear why a good investor on terms can craft deals that are a win-win-win for sellers-investors-buyers.
Needless to say, investors on terms tend to attract much dislike in the industry as they favor sellers and buyers but reduce easy profit opportunities for many operators, redistributing those values to those who should benefit the most, home sellers and home buyers.
(If any real estate brokers or agents read this, we just want to invite them to join us in setting up these deals, and they will have the opportunity to bring value to the deal and be rewarded. However, most would have to open up to a different, improved way of transacting real estate; it’s not that hard, and we are more than happy to help and cooperate).
Real Estate Market Disruptors:
The above examples and points are just a few to give an idea of the role and purpose of real estate investors on terms. They are often referred to as disruptors of mainstream real estate and are disliked by many of the mainstream operators. They often offer much better solutions and provide tough competition for conventionals, presenting innovation in real estate transactions for the more sophisticated and open-minded sellers and buyers who don’t mind looking “outside the box”.
Investors On Terms & Conventional sales:
Finally, just like real estate attorneys who specialize in investments, as mentioned above, real estate investors on terms can also easily handle conventional sales, and they certainly do when they promise the best outcome in the specific situation.
Conclusion:
In the end, why wouldn’t a seller or a buyer not want a custom solution that is designed around their goals for their real estate challenge of selling or buying in the most profitable and convenient way that’s available?
Feel free to poke around DealsOnTerms.com, a new website that shows a few examples of properties offered for sale on terms and also conventionally.