Seller Finance Exit Strategy Case Study

Why I bought the asset

On Feb we decided to buy a vacant Duplex in Dothan AL, from a source we buy non-performing land contracts.

I liked that the realtor felt we could get a quick sale of the property and from my personal walkthru I didn’t feel the property needed much to be in rent ready condition. It has hardwood floors and the metal roof was in good shape.

Exit Strategies

My primary exit strategy was renting the asset and keeping it for cash flow. My second exit strategy was to sell as-is cash, to which I received only one offer and the timing and price were not right for me. Nevertheless, created a third exit strategy and offered seller finance.

I had to almost restrain myself to not go back to the property and have it fixed. I have developed and rehabbed structures for the last 18 years, and having this asset within a driving distance I was attracted to doing what I have always done. But numbers are numbers that was not my best exit strategy.

Helping sell the asset

I decided to help the realtor by marketing the asset directly and sending him the customer to show the property.

The target for this asset was an investor that wanted cashflow putting little money down, who was willing to take-on the small rehab, deal with a management company and have good credit. In one month I received an acceptable that met my terms.

Terms of the sale

Due to that having options is advantageous, we required the buyer to have good credit and agree to certain terms, therefore it is attractive to hold the note and it is attractive to a note buyer.

The terms of the agreement are 10% down 9.9% rate with a 5-year balloon payment. It will take us 28 months to recoup our investment and the internal rate of return is 48% a year.

I prefer to value this exit strategy (and all others) with the internal rate of return because the cash flow is not constant at the beginning and we have a balloon payment in year 5. Namely, this metric equates to the yearly return I will receive for every penny invested in this deal.

Our Joint Venture partner feels comfortable with us holding this one for 5 years.