Real Estate Buying Strategy: The "Hybrid" Equity Split

Here is an advanced technique we teach our mentorship students to use to make up to an extra $25,000 or more on every equity split they do. It’s called a “hybrid equity split,” and I think you’ll like this simple yet highly profitable technique and will want to add it to your investment toolbox.nnThe best way to understand the concept is to walk through an example of a deal I did with the owners of a two-bedroom, two-bath property. The sellers were motivated because the husband had been transferred in his job. When I met with them, we talked through doing an eight-year lease option on the property. Right at the very end they balked, and I pulled out this hybrid equity split idea to sweeten the deal just enough to close it.nnThe terms of the lease option were as follows: A term of eight years with a monthly rent of $913 and a purchase price of $102,000. The upfront option consideration we paid was $1.nnNow, most investors would structure their equity split as follows: They would split with the seller on a 50-50 basis anything they as investors sold the property for over $102,000. For example, if they sold the property on a two-year rent-to-own basis for $120,000, they would give the seller the first $102,000 and split the remaining $18,000 profit 50-50. In other words, they would make $9,000 from the resale plus any cash flow the property generated over the two years.nnThe way I structured our hybrid equity split was as follows: We did the eight-year lease option as described above and agreed that we would also do an equity split on anything we resold the property for above $127,000. In other words, the first $25,000 in profit would be mine alone, and we would do the equity split on any amount above that.nnBy the way, why offer 50-50 to a seller when they will often have their needs met and will be thrilled with substantially less? I agreed they would get 12 percent of the amount we resold the property for over $127,000!nnHow did I get the seller to agree to this? I simply asked the seller, “Mrs. Seller, if there were a way where you would get your full $102,000 we talked about and on top of that you would get a chunk of the future appreciation from the resale of the property is that something we should talk about, or probably not?” (If you haven’t done so yet, I encourage you to learn some simple “negative phrasing” techniques like we teach our students.nnOnce the seller says that she is in fact interested in talking about that, you simply go on to explain, “Well, I don’t know if we could do this, but what if we set a percentage that you would get from the resale of the property? Obviously, we would need to build in a minimum base profit of $25,000 to make this worth our time, but what if we said that you’d get a part of anything we sold the property for down the road over $127,000? What I mean is that you would get all of the first $102,000, that’s completely yours, and you would also get, let’s say, 10 percent or maybe a little more of any amount we sold it for over $127,000. Is that something we should talk through, or probably not?”nnMy seller agreed to this, after negotiating strongly to move the percentage from 10 percent to 12 percent. Notice she just accepted the $25,000 base profit. I then sold the property on a two-year rent-to-own basis with $3,000 nonrefundable option money, a rent of $1,000 per month, and a final price of $120,000.nnMy tenant-buyer decided not to buy. When I checked the value of the condo prior to reselling it to a new tenant-buyer, I was thrilled to discover that the condo had jumped in value to $165,000. So I resold to my next tenant-buyer for $189,000 on a two-year rent-to-own basis.nnJust remember to build in a base profit for yourself on any equity split deal you do. Even if it’s only $10,000 or $15,000 before you split the rest of the money that is pure profit for no extra work.nnUltimately, the equity split and the hybrid equity split are both great ways to get the seller to “partner up” with you. When you negotiate these types of deals, the best part is that getting a long term is easy. After all, the longer your term, the more money you will both make and the seller won’t have to do any of the work.nnMake sure you don’t offer an equity split to start off with. Why give away a portion of your profits if you don’t have to? Save this new tool to use in those cases where you have a fit but need one last sweetener in the deal to make the seller say yes. As always, make sure you do so “reluctantly” using negotiating language patterns.