When Buying on Terms Pays Off Big Time (Almost $200K!)
How is it possible to create $187,800 on a home selling for $619,000? I know what the naysayers are thinking—it’s not.
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And if that’s your expectation and you’re looking for excuses, you’re correct.
On the other hand, if you’re looking for ways to succeed, ways to properly structure, ways to thrive in your market, take note of the deal structure I’m about to describe, because you can and should be doing these deals.
Buying Real Estate on Terms Without Using Your Cash or Credit
I love doing sandwich leases, but our preference is to own homes whenever we can. Owning for us means buying with owner financing or taking over properties subject to existing mortgages.
In this example, the home purchased was in Kansas City. The seller had already vacated, moved on, and was free and clear from any mortgages (the home was debt-free).
Many times on radio or podcast shows, the listeners will say to me,”Yeah, but that must only work when a seller is desperate.” That’s not at all the case though.
The motivation in this instance was not money but rather closure and not worrying about keeping up the home.
It’s super important to not get caught up on price. The seller’s motivation and reason for selling is super important and one of the biggest things to be clear about. (Keep that in mind when speaking with sellers!)
For this property, my company and I structured an owner financing deal with him for 48 months with principle-only payments of $1,500/month. That means no interest, 100 percent principle pay down every month.
We settled on a price of $520,000, and our balloon payment on or before 48 months would only be $448,000.
(By the way, “owner financing” can be done many ways. But when I refer to owner financing, I’m referring to a free and clear property every time, whereby we can structure principle-only payments.)
It’s super important to note here that our original price we had this property tied up for was $586,000. We didn’t like the activity we were getting at a selling price of $619,000, so we went back to the seller. Through strategic negotiating, we were able to get him to reduce it to $520,000.
Coincidentally, once we’d worked all that out and were just about to lower our selling price, a buyer came forward and loved the home at $619,000!
We tend to exit almost all of our properties with a rent-to-own buyer. This one sold for $619,000 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, or any other curveballs that might come our way. (They will come at some point!) But we were super comfortable with our screening and pre-vetting of this individual, and we were also comfortable with the seller in that we could get an extension if necessary.
The monthly payment was $1,950. The monthly spread on this property, then, was only $450 less insurance of approximately $100—so let’s call it $350.
Structuring Paydays on Terms
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 pre-screened and are mortgage-ready. These are not always upfront, but typically we won’t let someone in the door without at least 3 percent and a plan to bring that up over time to the 7- to 10-percent range.
Trust me on this one. If you take less than 3 percent 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 are of the mindset, “Who cares if the buyer cannot cash you out? Just sell it again and collect another deposit!” Morally, we cannot operate that way, so we have a strict pre-screening and buyer on-boarding process that provides buyers with a clear path to mortgage readiness and home ownership.
In this case, it was approximately $122,400 over time. “Over time” in this case meant every year a $18,600 payment, starting with move-in date and signing, and then $1,000 extra every month on top of their lease.
Payday No. 2 for the entire term was $16,800 ($350 x 48 months).
If we owe the seller $448,000, as noted above, and the buyer goes the full 48 months, our third payday is $619,000 less $448,000 due less $122,400 already paid (or $48,600).
Now, as a summary for you, this deal so far with three paydays totals:
Payday No. 1: Deposit $122,400
Payday No. 2: Monthly Cash Flow $16,800
Payday No. 3: Back End/Financing $48,600
By most people’s standards, the fact that we put $10 down on this and are able to extract $187,800 is out of the ordinary. Realistically, however, it’s rather normal as far as deal structure, albeit a bit above average in terms of the size of all three paydays.
Our average for all three paydays as of this writing is approximately $75,000—the equivalent of two or three deals.
So, as you can see, it pays well to be a master transaction engineer, understanding how to navigate any deal that comes your way!
How do you feel about buying on terms?
Leave a comment below.