When Buying on Terms Pays Off Big Time (Almost $200K!)

by | BiggerPockets.com

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.

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.

aerial view of large home on big piece of land

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).

single level home in huge yard

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.

Related: No Money Down Investing IS Possible: A Message to Naysayers & Skeptics

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.

mother and father with five children standing in a field

Related: Are Nothing Down Real Estate Deals Risky?

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
Total: $187,800

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.

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.

10 Comments

    • Chris Prefontaine

      Usually it’s not a last minute event Leigh. There are many check points along the way as well as meetings with the tentant buyer as well as mortgage broker. Let’s say they do, however, have a life event which of course can and will happen once in a while – you then have options: (1) Put on the market FSBO or with a Realtor and sell (we’ve done many like that), (2) Extend with Seller and install another Tenant/Buyer, renter or sell off at that point if more time needed, (3) Pull in private funds (least desirable) and close it out. I’ll tell you that our forms and agreements allow you to give the home back to the seller anyway so when you approach the seller and say we can extend or I can give it back, 9.9 out of 10 times they gladly extend. There are, of course, many other options and what we call “pivots” but on this forum that’s as deep as I can go without getting confusing. Hope that helps.

    • Chris Prefontaine

      I’m not an attorney or Dodd Frank expert and Dodd Frank is still a bit “gray” as far as even attorneys understanding it. Generally speaking, however, DF applies primarily to you selling via owner financing. We sell rent to own primarily. You’d want to speak with an attorney who understands not only Dodd Frank (most don’t) but our lease purchase and owner financing forms. We have attorneys ourselves and with our students in many of the States already. Lastly, the Tenant Buyers sign a statement at signing time saying that this transaction does not apply to DF. Hope that helps. Make certain please that you use the proper forms.

  1. Chand Ramlakhan

    Sounds very interesting, but I was wondering why a buyer who can afford a 20% (non-refundable?) deposit ($122,400) and a monthly payment that is about equal to or greater than the typical 30 year mortgage payment ($1950 + $1000) would want to do a lease purchase. How do you market to find a buyer like that? Also, I am a bit confused as to where the $18,600 payment every year “Over time” came from, I don’t see where that fits in into any of the three paydays? Does the $1,000 extra every month go directly to the buyer’s principal?

    • Chris Prefontaine

      HI CHAND – WE FIND 5-10 MONTHLY. AS HIGH AS 80% OF THE BUYERS DEPENDING UPON THE MARKET CANNOT GET A LOAN FOR A MYRIAD OF REASONS. BUYERS ARE PLENTIFULL! Also, I am a bit confused as to where the $18,600 payment every year “Over time” came from WE ALWAYS SCHEDULE MORE DOWN PAYMENT FROM THE BUYER AND IT CAN COME FROM THEIR TAX REFUNDS, RAISES, BONUSES, REGULAR INCOME, ETC.., I don’t see where that fits in into any of the three paydays? Does the $1,000 extra every month go directly to the buyer’s principal? YES THAT IS THEIR DEPOSIT AND DEPOSIT OF COURSE IS CREDITED.

  2. Chris Prefontaine

    HI CHAND – WE FIND 5-10 MONTHLY. AS HIGH AS 80% OF THE BUYERS DEPENDING UPON THE MARKET CANNOT GET A LOAN FOR A MYRIAD OF REASONS. BUYERS ARE PLENTIFULL! Also, I am a bit confused as to where the $18,600 payment every year “Over time” came from WE ALWAYS SCHEDULE MORE DOWN PAYMENT FROM THE BUYER AND IT CAN COME FROM THEIR TAX REFUNDS, RAISES, BONUSES, REGULAR INCOME, ETC.., I don’t see where that fits in into any of the three paydays? Does the $1,000 extra every month go directly to the buyer’s principal? YES THAT IS THEIR DEPOSIT AND DEPOSIT OF COURSE IS CREDITED

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