How to buy for Zero Interest

I will be writing about the time value of money over the next few posts.  

My partner went out on a property call that we received.  The people were planning on moving to Wisconsin where they grew up.  The property was paid for and comprised of three units in an average location. They wanted $155,000 which was about what it was worth.  They would not discount for a quick close, cash in "as is" condition.

After several attempts to get them to drop the price, my partner asked them if they would take $15,000 down and take a $1,000/month for 144 months.  They immediately said yes.  This became a low down interest free loan.  The rents are in excess of $1,700/month.  

Four years have passed - what is the snapshot of the deal now?  $96,000 owing on the balance, $16,000 in positive cash flow over the past four years with taxes, insurance and management fees netted out and the property is now worth over $200,000, an increase of $45,000 in equity.  If sold today for $200,000 and a net of about $185,000 after selling costs including sales commissions and related selling fees, the walk away from the closing table would be $89,000.  

A bank would have required 30% down and rates would have been around 6% at the time, the payment would have been a pi of $651/month and the principle would be at $102,657 at the end of four years.  $46,500 would have to been put down on the purchase and the bank would have loaned $108,500.  Which one would you do?

How did the seller come out?  Seller received $15,000 at the time of closing (quick) and had no appraisal or inspection issues and no closing costs.  Seller has received $48,000 in cash flow over the past four years and still has another $96,000 coming in over the next 8 years.  It allowed them to have enough money to move back where they wanted to be. They have a reliable flow of cash to help with their living expenses and are taxed at a reduced rate over time.

Always ask the seller why they are selling and what do they want to do and when do they want to close!!!!