Real Estate Articles » Land Investing

Sweeten The Deal With Owner Financing!

By: Paul Breden
Submitted: 07:09PM on Thursday 04 December 2008

Let's say you find a 50-acre land parcel priced at $150,000. While you're convinced it's a good price, and the best the seller will accept, how can you insure the most beneficial profit possible?

Your purchase price is $3,000/acre, however you believe that if the parcel were broken into five 10-acre parcels, it would be more likely to sell at about $6,000/acre.

You have $155,000 in cash to invest, but you prefer to gain additional leverage if possible. You offer the owner $25,000 down at closing, with another $20,000 at the end of a year (plus interest), an additional $20,000 after two years (plus interest), and the entire remaining balance, plus interest at the end of the 3rd year.

In your purchase offer, you include language to the effect that you will have the property surveyed at your expense, and the seller agrees to give you five seperate deeds, each for ten acres. Your surveyor will provide 5 seperate legal descriptions.

By allowing yourself three years before having to come up with the remaining $85,000, you have pretty much assured yourself that all 5 parcels can be sold before the final payment is due.

Your other expenses would include interest the first year of $6,250 (at 5%), interest the 2nd year of $5,250, and with the final payment another $4,250. Your survey will be less than $5,000.

First, let's take a look at your potential to make a profit if you paid $150,000 cash and sold all five 10-acre tracts at the end of one year for a total of $300,000. You would have invested $150,000 plus $5,000 for the survey - a total of $155,000. You would receive $300,000 at closing. That's a very healthy 93.5% profit.

If it took 2 years to sell all of the tracts, you would still receive $300,000, but would have invested the same $155,000 for a cool 46.75% profit - not bad. If it took the entire 3 years to sell, your profit would be reduced to a paltry 31.2% profit. Either way, you come out better than putting your money in a 2-3% CD at the bank. So much for paying cash.

Now let's see what a difference leverage makes in your purchase, if you make the purchase under the terms I described earlier - $25,000 down, etc.

If you sell the entire property at the end of one year, you will receive the same $300,000, however you will have invested only $30,000 of your own money. Making $300,000 off of $30,000 is a 1,000% profit.

At the end of two years, you receive the same $300,000. By that time, you have invested the initial $25,000 downpayment, plus the second payment of $20,000 plus the first year's interest and the survey for a total investment of $56,250. Now you've made $300,000 off of your $56,250 investment or a whopping 266.6% profit.

At the end of year three, you would have invested $65,000 plus 2 years' interest of $11,500 and the $5,000 survey for a total of $81,500 invested. Your profit? 122%!

In this example, the only variable is the total number of dollars invested. Everything else remains unchanged. The final benefit is keeping the unused cash on hand for contingencies - like the present state of the economy and banking system.

Sound too good to be true? I've done this many times. The key ingredients are to buy below the market, and employ maximum leverage. In my next article entitled "Value added - the final puzzle piece!", I'll provide the secret to adding great value to your land once you own it.