Potential Seller Financing Flipping Opportunity: What are the Options?
As you may have heard in my BiggerPockets Podcast episode, I am a big fan of seller financing and leveraging. My favorite way of buying real estate at the moment is via seller financing (but it doesn’t mean that I only want to buy real estate this way.) I am also a fan of selling real estate through seller financing (also known as an “owner carry”) as well. During a depressed market, I strongly believe in leveraging when it comes to buying – but at some point, you have to consider selling also. When it comes to selling real estate by carrying paper, it can be real fun.
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So let’s examine a possible seller financing sale I am considering:
The Two Bedroom Condo
I recently purchased a 2 bedroom condo with all cash in Las Vegas for approximately $65,000 after all closing costs (which is painful because 2 years ago I could have bought it for maybe $40,000 or less). Nevertheless, it is still a good investment – since as I am typing this, I actually have a renter looking to move into this condo for $695. Let’s just roughly call it a 7.5% cash on cash return. Not “mind blowing cool,” but hey, I am waiting for this condo to shoot back to $150,000 one of these days.
In any case, given what I know in the Vegas market – where finding inventory is super hard – I began to think about “what if I flip this property via seller financing?”
Despite the fact that I absolutely hate selling my real estate way too early before another super bubble comes around, I might consider it if I can recoup most of my capital invested.
So what are my terms? I want to sell this condo at $90,000 via seller financing and I want the buyer to put 50% down while I carry the rest of the $45,000 at 8% 30-year amortization with a 3 year balloon payment.
Am I too ambitious? Probably. But who cares? In this crazy market, anything goes. Besides, I now have a renter in there for $695 a month so I can afford to hold on and ask a little higher.
What Could Happen
So what happens if I do find a buyer?
Roughly speaking, I would get about (for case study purposes, let’s just ignore closing costs to not complicate matters) $45,000 back, which makes my total investment in the property $20,000. In the mean time, I would now carry a $45,000 note that would pay me $330.19 a month, which is not a far cry from the $405 a month I would get if I were to have a renter minus the normal expenses.
That’s right, if I were to sell it, I would no longer have to worry about expenses like maintenance, property taxes, insurance and other homeowner burdens. All I need is to wait for a check in the mail.
What’s the return like if I carry out this plan? My $20,000 investment will yield me $3,962.33 a year which means I would have a 19.81% return on my money. I have a $25,000 capital gain, which is not unreasonable given that most seller financing properties are sold at a premium compared to the market.
But what if that $20,000 in capital is still important to me and I want to deploy it? Why don't I sell this $45,000 loan to someone else? If I have a buddy who's just have money sitting around with nothing to do, why don't I sell the note to them, heck, even at a discount? Let's say I sell this loan to my buddy for $40,000 instead of $45,000, he can earn $3,962.33 a year from a $40,000 investment, still a cool 9.91% a year, much better than the CDs or the stock market. Meanwhile, I just recouped $40,000, thereby making my profit a cool $20,000.
Yes, I just flipped that house for an extra $20,000 profit. Now if the buyer of this condo doesn’t pay, my buddy can foreclose on the buyer and get the condo. Not too bad eh?
The Benefit for the Buyer
What’s in it for the buyer? Well, there are two options.
1.) One, the buyer can kick the tenant out and live in there. The cost to live in the condo, which is $330.19 payment plus $145 HOA plus $100 insurance and taxes would come close to $575, which is cheaper than the $695 rent. Plus the buyer gets to own all the future appreciation potential. Heck, the buyer actually gets to buy a house, which is hard enough to do in Las Vegas. Furthermore, the buyer was able to borrow the money without having to go through a bank or having his or her credit sifted through. It could work well for someone who recently decided to let their property go in a foreclosure or a short sale because they bought something bad back in the mid 2000s.
2.) The buyer could let the tenant stay and collect the $695.00 a month, which would gross a $405 profit. Subtract the payment and he gets a monthly cash flow of about $75. Not much, but at least the buyer doesn’t have to make payments and just wait for the house to appreciate.
Let’s just say if the house did go up to $150,000, the buyer would have made a lot more money because the buyer put only half the required capital down. The power of leverage would allow the buyer to get about $60,000 from a $45,000 investment. If the buyer paid cash to buy the condo at say $70,000, the buyer would have made more money but a lower return in terms of percentage.
In this instance, both sides can win.
Obviously, asking for 50% down might be a bit too optimistic. But this is just a starting point for you to get to thinking about how you want to sell your property.
In the meantime, I will keep posting that on Craigslist everyday and see if anyone bites.