What to Do When You Lose a Buyer

Losing a tenant buyer during a terms deal is not the end of the world. Here's how to pivot.

What happens if you lose a tenant buyer in the middle of a terms deal? Even worse, what if it's a unique property that restricts who can even live there?

In this case, an Associate of ours had structured a terms deal on a mountainside chalet that was completely off the grid and it wasn't entirely finished. It was a new build and the seller (a contractor) had run out of steam. Anyone purchasing the house would need to finish the flooring, sheetrock, and appliances. As you can imagine, finding a tenant buyer for that property was difficult in and of itself.

Our Associate did find a tenant buyer, but things didn't go quite to plan. Let's take a look at what happened.

The first tenant buyer

The first tenant buyer on this property was highly-qualified. Our Associate knew that any owner would need around $100,000 to get the property finished, and he vetted the tenant buyer thoroughly to make sure he would be able to finish the job.

Everything looked great and the tenant buyer ended up putting in an offer that worked for our Associate. But just one week after moving in, he and his fiancé broke up. He tried to make it work moving forward, but a few months later he started missing payments.

At this point, our Associate knew he had to pivot. He tried to work with the tenant buyer to figure out a plan to get back on track, but it became clear that it wouldn't be possible. Our Associate brought in his attorney and started to go through the eviction process, but luckily, the tenant buyer left soon after on his own accord.

Finding a second tenant buyer

Now our Associate was in a tough position. It had already taken around five months to find this first tenant buyer, now he needed to find a second one! He first went to the seller and explained what happened and he and I had a detailed conversation with the seller together. This is one of the major advantages of being an Associate—this one phone call was pivotal. He was now nine months into the term with this seller, so we asked for an extension in order to get a new tenant buyer in the property and structure a new term with them. The seller wasn't thrilled, but eventually agreed to add on a year to the term. This was easy because we always communicate and build trust throughout the relationship and also because we have tweaked our agreements over the years with our attorneys to allow us wiggle room! You have access to ALL of those in module 11 of our QLS (Quantum Leap System Home Study Program) course.

(Just to clarify, our Associate didn't need an extension but it does make his life a lot easier. It gives him more time to find a second tenant buyer, and it allows him to structure a full 36-month term with the new tenant buyer. If the seller didn't budge, he could have still gotten a new tenant buyer in with a shorter term.)

Now, there's an important note about the timing of this deal. Our Associate first took on this property before the COVID-19 pandemic. But nine months later, when he had to find a second tenant buyer, the pandemic was in full swing. As you probably know, rural properties became much more desirable and attainable during this time as many people began working remotely. All of a sudden, this off-grid incomplete home was a hot commodity. The second time around, our Associate was flooded with applicants—and he found an even better, more qualified buyer.

The second buyer was a contractor and came to the property twice to look it over (driving eight hours to get there!). He did inspections and went through everything with a fine-toothed comb. A week later, he agreed to a deal. Let's look at how it shaped up.

Key take-away I hope for you here is that there’s always a deal after the deal and sometimes several. There’s no need to panic whatsoever. Just call us!

All 3 Paydays™

This deal was structured as an owner financing deal with a 36-month term. The purchase price was $431,000 and it was sold (to the second tenant buyer) for $460,000.

Now, it's important to remember as we go through these numbers that our Associate is still retaining some of the money from the first tenant buyer. The down payment (Payday #1) is always nonrefundable, so he keeps that. Plus, he was paying down the principal while he was with the tenant buyer (a total of six months). So we'll go through All 3 Paydays™ for the second tenant buyer, then add up the remaining cash at the end.

Payday #1 is a nonrefundable down payment of $20,000, around 10%.

Payday #2 has a bit of a nuance. There is $1,200 going out per month in the form of principal only payments. Knowing that, our Associate offered the tenant buyer two options. They could get the property at $440,000 and pay $1,600 per month in rent, or they could get the property at $460,000 and our Associate would give them a $400 credit on the monthly rent, making it $1,200. They ended up going for the second scenario, which benefits our Associate.

Why does it benefit him? Well, he is confident that the tenant buyer will be able to cash out of this deal in less than 36 months—most likely it will be around 18. The spread in the first option would be $400 per month, or $7,200 over 18 months. But in the second scenario, he gains $20,000 instead of $7,200.

That means the total for Payday #2 is zero. But that's fine!

Payday #3 is the markup on the home plus the principal paydown. The markup is $29,000 and the principal paydown is $43,200 over the length of the term. With the deposit subtracted, that comes out to around $70,200 if the deal goes the full 36 months. If it goes 18 months like our Associate is expecting, it would be closer to $45,000 in total.

But let's remember the additional revenue from the first tenant buyer! Our Associate kept a $15,000 deposit from that first tenant buyer, plus made around six months of principal only payments ($7,200). That's an additional $22,200 which comes out to about $14,200 after closing costs.

So, at the end of the day, our Associate is looking at around $84,000 if the second tenant buyer uses the full length of the term or $60,000 if he cashes out at 18 months. Either way, everyone wins!