{"id":47432,"date":"2013-09-01T05:33:24","date_gmt":"2013-09-01T11:33:24","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=47432"},"modified":"2024-06-18T04:44:38","modified_gmt":"2024-06-18T10:44:38","slug":"2013-09-01-seller-financing-case-study-flip-profit","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2013-09-01-seller-financing-case-study-flip-profit","title":{"rendered":"Potential Seller Financing Flipping Opportunity: What are the Options?"},"content":{"rendered":"

As you may have heard in my\u00a0BiggerPockets Podcast<\/a>\u00a0episode, I am a big fan of seller financing and leveraging<\/a>. 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. \u00a0When it comes to selling real estate by carrying paper, it can be real fun.<\/p>\n

So let’s examine a possible seller financing sale I am considering:<\/p>\n

The Two Bedroom Condo<\/h2>\n

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.<\/p>\n

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?”<\/p>\n

Despite the fact that I absolutely hate<\/em> 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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

What Could Happen<\/h2>\n

So what happens if I do find a buyer?<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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?<\/p>\n

The Benefit for the Buyer<\/h2>\n

What’s in it for the buyer? Well, there are two options.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

In this instance, both sides can win.<\/p>\n

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.<\/p>\n

In the meantime, I will keep posting that on Craigslist everyday and see if anyone bites.<\/p>\n

Photo: mrak75<\/a> <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

As you may have heard in my\u00a0BiggerPockets Podcast\u00a0episode, I am a big fan of seller financing and leveraging. My favorite way of buying real estate at the moment is via […]<\/p>\n","protected":false},"author":808,"featured_media":174153,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5525],"tags":[],"class_list":["post-47432","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-flipping-houses"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/47432","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/808"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=47432"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/47432\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/174153"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=47432"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=47432"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=47432"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}