How We Pulled a 6-Figure Profit from an Owner-Financed Deal: Case Study

by | BiggerPockets.com

How is it possible to pull a six-figure profit from owner-financed deals with no banks, no credit and no cash out-of-pocket?

I have one main answer—and a bunch of other cool variables.

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Main Answer = Principal Pay Down

But Chris, I can’t find those in my area.

You’re right. But change your mindset—you can when you know how to look.

I’ll even give you a price range and term and then can guarantee you that.

If you structure the three paydays we teach, you’ll get six figures from any deal above this price range.

The price range is $200,000 and up.

Lake View Home with a view and a detached garage with apartment above it.

Buying Real Estate on Terms Without Using Your Cash or Credit

I love doing sandwich leases, but our preference is to own the homes whenever we can. Owning for us means buying with owner financing or subject to existing mortgages.

This home was purchased in our own market by my son-in-law Zach. By the way, I know a lot of readers here are new. Zach was a bartender and personal trainer with no real estate experience prior to getting trained in the family business. He’s now a master of the scripts and does all our buying. You can, too!

The seller had it on the market for $429,000 with no luck selling with real estate agents. It was a second home, and fall and winter were approaching so they were getting ready to go back to their primary home several thousand miles away. They were worried about taking care of the home during the winter. On top of that, they’d experienced the heartbreaking loss of one of their kids, and their twin daughters could not stand being there without their brother.

The cool thing about this home is that it’s lake view with a two-car detached garage. A long-time friend had been renting out the garage and wanted to stay. I’ll explain how we worked this as a win/win with our tenant/buyers shortly.

Related: 10 Glaring Red Flags That Indicate Your “Great Deal” May Be a Costly Scam

The Deal Structure

We structured an owner financing deal with the sellers for 48 months, with principal-only payments of $1,000/month. That means no interest, 100% principal pay down every month. The price we paid was $399,000. That means our balloon payment on or before 48 months is only $351,000. By the way, “owner financing” can be done many many ways, but when I refer to it, I’m referring to a free and clear property on which we can structure principal-only payments.

We exit almost all of our properties with a rent-to-own buyer, and this one we sold for $429,000 on a 48-month term. It’s typically our policy to structure our selling side shorter than our buying side to allow room for delays, financing issues, or any other curveballs that might come our way. We wanted this one to go full-term, unless the buyers were to rush the process, an option they have in order to maximize the principle pay down. The monthly payment for buyer was structured at $1,750 plus taxes (those are always passed onto our buyer). The monthly spread on this property then was $750 less insurance of approximately $200, so let’s call it $550.

The garage rental is $700 (more on that shortly).

On all properties, we buy and sell on terms we create three paydays. The first is the non-refundable down payment we collect from the buyer after they’ve been prescreened and have a mortgage-ready plan they can succeed with. These are not always up front, but typically we won’t let someone in the door without at least 3% and a plan to bring that up over time to the 7%-10% range.

Trust me on this one—if you take less than 3% and do not have a plan, you’re asking for a problem because all you really have is a tenant. Now, many educators and trainers would say, “Who cares if the buyer cannot cash you out? Just sell it again and collect another deposit!” Morally and ethically, we cannot operate that way so we have a strict prescreening and buyer on-boarding process that provides them a clear path to mortgage readiness and home ownership. In this case, it was structured at $80,000 over time, and “over time” in this case meant every 12 months they were putting down $20,000+ but started with $40,000 up front. Payday #2 for the entire term was $26,000 (48 months x $550).

If we owe the seller $351,000 as noted above, and the buyer goes the full 48 months, our payday #3 is -$2,000 before factoring in the garage rental ($429,000 less $351,000 plus $80,000 paid). We structured the garage rental to be coming to us until the tenant buyers completed an agreed-upon amount in their scheduled deposits (to ensure they were successful and to give them incentive), at which time we would turn over the garage rental to them. We could have waited and put the incentive on them getting a mortgage, but remember, we wanted to go full-term. You can place incentives wherever you choose.

Payday #1—Deposit: $80,000
Payday #2—Monthly Cash Flow: $26,000
Additional Garage Income (Approx.): $5,000
Payday #3—Back End/Financing: -$2,000

Total: $109,000

By most people’s standards, the fact that we put $10 down on this and are able to extract $109,999 is out of the ordinary. It’s rather normal as far as deal structure and is a bit above average for size of all three paydays generally, but not when talking about $200,000 and higher owner financing deals.

Any questions about this deal? 

Leave them below!

About Author

Chris Prefontaine

Chris Prefontaine is the best-selling author of Real Estate On Your Terms. A real estate investor with over 27 years experience in the field, Chris is the founder of Smart Real Estate Coach and host of the Smart Real Estate Coach Podcast. He lives in Newport, Rhode Island with his wife Kim and their family. Chris is a big advocate of constant education. He and his family mentor, coach, consult, and actually partner with students around the country, teaching them to do exactly what their company does. Between their existing associates nationwide and their own deals, Chris and his family are still acquiring 5-10 properties every month and control between $20 to $30 million dollars worth of real estate deals, all done on terms without using their own cash, credit, or signing for loans.

7 Comments

  1. Paul Merriwether

    I LOVE THIS ARTICLE!!!

    It reminds me of myself in that I bought a home with nothing down assuming their rental because they just wanted to get from under the home. Another time the owner died and the heirs out of state just wanted out as fast as possible. People for many reasons as you mentioned just want RELIEF from in their minds a burdensome problem. While on the other hand a buyer is EXCITED to have met you offering them a great deal to buy a home. And you make SERIOUS CASH!!!

    • Chris Prefontaine

      That’s a case by case Willie. We normally will go 6-12 months less than the seller terms but there are of course exceptions to everything so things like: do we think the seller will extend easily if we needed them to, do we think this buyer is very very strong based on the tenant / buyer screening we did (never place a buyer without screening and mortgage ready plan so you’re setting them up to win never to fail plus it covers you from liability of sticking someone in there yo should not have – a huge mistake many investors and even educators are doing. It’s wrong in every way legally, morally and ethically), etc..

  2. J Cherney

    Chris, thanks for taking the time to share this deal.

    Based on your years of experience with situations like these, would you share your top 2-3 indicators that qualify potential buyers as a “very very strong” candidate?

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