How is it possible to buy a beautiful, debt-free home on 10 acres for full market value and not use a bank or any of your own cash?
I know what the naysayers are thinking—that’s not possible.
You’re correct—if that’s your expectation and you’re looking for excuses.
If, on the other hand, you’re looking for ways to succeed and to properly structure deals, then take note of this deal structure for sure because you can and should be doing these deals.
Buying Real Estate on Terms
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.
The seller had it on the market during the spring and summer of 2016 and could not sell by owner at $598,000. Then he dropped it in a panic to $399,000 because he wanted to leave the area, and at this point, we started discussions. The holidays were creeping up and his family had already relocated to Texas. His motivation was to be there with them. It’s super important to not get caught up on price, but rather, look at the seller’s motivation and timing for selling.
Related: 4 Reasons Property Owners Might Choose to Sell via Seller Financing
We structured an owner-financed deal with him for 24 months (shorter than we prefer, but it was a gorgeous home) with principal-only payments of $1,540/month. That means no interest, 100% principal pay-down every month. The price we paid was $420,000. That means our balloon payment on or before 24 months is only $383,040. By the way, owner financing can be done many many ways, but when I refer to owner financing, I’m referring to a free and clear property every time. This way, 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 $499,000 on a 24-month term. It’s typically our policy to structure our selling side shorter than our buying side to allow room for delays, financing, or any other curveballs that can come your way (and they will come!). We were not able to do that on this one, so we were super careful with the prescreening of this buyer to make sure they could be mortgage-ready in time. The monthly payment was $2,300. The monthly spread on this property then was $760, less insurance of approximately $110—so let’s call it $650.
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, some might 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 approximately $65,000 over time, and “over time” in this case meant every six months they were putting down $8,000+. Payday number two for the entire term was $15,600.
If we owe the seller $383,404 as noted above and the buyer goes the full 24 months (they were prequalified to be mortgage-ready in 18-24 months), our payday number three is $499,000, less $65,000 paid and less $36,960 principal pay-down—or $50,960. Now, as a summary for you, this deal so far with three payday totals:
- Payday #1: Deposit—$65,000
- Payday #2: Monthly Cash Flow—$15,600
- Payday #3: Back Dnd/Financing—$50,960
- Total: $131,560
By most people’s standards, the fact that we put $100 down on this and are able to extract $131,560 is out of the ordinary. For us, it’s rather normal as far as deal structure and is a bit above average for size of all three paydays.
In fact, our current actual average all three paydays is $80,471.86, and we do 2-4 of these every month with our small family company.
Related: Seller Financing: Benefits & Drawbacks Investors Should Know
What if the Buyers Have a Life Event?
Well, I’m the first one to tell you that approximately 5% of your tenant buyers—even if you have a strict protocol like we do—will have life events or other problems that precludes them from moving forward. What are our options if this were to happen on this deal with such a tight timeframe?
- Ask the owner for an extension.
- Ask for an extension with a small principal pay-down from another payday from another deal.
- Ask for an extension with a small extension fee, keeping in mind an extension means further principal pay-down.
- Ask for an extension with the same monthly payments but less than 100% going to principal.
- Pull in an investor with IRA money sitting around not earning a nice rate of return.
It will pay you well to be a master transaction engineer, understanding how to navigate any deal that comes your way.
What’s your favorite way to structure no money down deals?