"Skin"

In the context of real estate, "skin" means commitment.

Here's an example to clarify the concept. Put yourself in the position of the owner of a small but successful 50 seat restaurant. Money comes in from your customers, but don't forget that you have expenses as well. Expenses like food, staff and overhead. If your restaurant is full, you make money; if it's empty you lose money.

You receive a phone call in the middle of the week from someone who says they are having an event for 50 people two weeks from Saturday, and want to reserve the whole restaurant from 7:00 p.m. through 10:00 p.m.

There are some things to consider. If you have a full house, you are guaranteed to make a lot of money. On the other hand, what if the alleged party of 50 does not show up at all? Your restaurant will be empty! You can't accept regular dinner reservations for that Saturday, because you need to keep all your tables available for the big party. You will be in a position where you will not have any "Plan B", and you will lose a lot of money.

In real life any successful restaurant would require that a substantial deposit be paid in advance for such a big party to protect the restaurants' interests against exactly this circumstance. In other words, the customer has to put some "skin" in the deal to demonstrate their commitment to the transaction and to provide some insurance to the other party.

In legitimate real estate transactions, no one gets something for nothing. A while back I represented a Seller who was selling a small $2,000,000 mixed-use building on a major Avenue. ("Mixed-use" means there's retail space on the street level and apartments above) One day I received the following offer:

The Buyer offered $10,000 down on the full price of $2,000,000 and would finance 500,000 of the purchase price with a third party lender. The Buyer wanted the Seller to finance the other $1,490,000 and provide a $600,000 cash credit at closing to cover the Buyer's closing costs. Yes, you read that correctly; a $600,000 cash credit, which simply means "give me $600,000".

Let's go through this fascinating proposition step by step.

1. The Seller owned the building outright, so there was no outstanding mortgage.
2. The Seller would have to pay the Buyer $600,000 to cover the Buyer's "costs".
3. The Seller would have to finance $1,490,000 for the Buyer.
   
4. If the Buyer defaults on their loan payments, the Seller would get control of the property, but there is still the $500,000 stake that the third party lender now holds in the building plus the $600,000 the Seller gave the Buyer plus all the closing costs on the Sellers' side.
   

On the other hand the Seller receives a $10,000 down payment.

Were this proposal accepted, the Buyer would in essence "buy" the $2,000,000 building for $10,000, or 1/2 of one percent of the asking price, AND receive $600,000 in cash to cover "expenses"! Can you see that there's no "skin" put in the deal on the Buyers' side?

Needless to say the Seller rejected the offer in its entirety.

Summary:
Simply put, "Skin" is akin to the risk of personal loss. The best transactions are when both parties have something to lose should the deal not go through. If only one party has capital, time and/or resources at risk, it makes for an ugly scene. Protect yourself. Whether you're buying or selling you want to have experienced representation that really knows their stuff.

Reach me at: michael.sussilleaux@gmail.com