Potential Seller Financing Flipping Opportunity: What are the Options?

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As you may have heard in my BiggerPockets Podcast episode, I am a big fan of seller financing and leveraging. 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.  When it comes to selling real estate by carrying paper, it can be real fun.

So let’s examine a possible seller financing sale I am considering:

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The Two Bedroom Condo

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.

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?”

Despite the fact that I absolutely hate 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.

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.

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.

What Could Happen

So what happens if I do find a buyer?

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.

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.

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.

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.

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?

The Benefit for the Buyer

What’s in it for the buyer? Well, there are two options.

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.

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.

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.

In this instance, both sides can win.

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.

In the meantime, I will keep posting that on Craigslist everyday and see if anyone bites.

Photo: mrak75

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.

9 Comments

  1. My only comment is that if you sell in less than one year, even with Seller Carry Back Financing you will be paying “Ordinary Income Tax” rates on the profit which could be … 25% – 40%.

    If you held it (rented it) for say 18 months and then sold it you could 1031 Exchange it and pay NO TAX on the profits.

    A lot depends on where the market will be in 18 – 24 months, will the Condo be worth $90,000 or a $100,000 or a $125,000? With a 1031 Exchange all of the profit and “Depreciation” could be moved to the next project.

  2. So what you really have here is pure speculation, not an investment. It could be possible the price you paid is going to be the market price for the next 10 years, as the $150k price was created by speculation during the last artificial run up in RE prices fueled by the subprime lending debacle empowered by the last administration.

    I know nothing about your market, but in my market if a condo building becomes more then 50% rental no lender will provide financing to a owner occupant. I understand you would be providing private financing, but who would purchase the unit at anything other then a steep discount knowing that when and if they decide to sell no lender will be available for their buyer?

    Don’t take this wrong, but you should be in the stock market trading purely in options. You would have a better return and there would be less of a speculation factor involved.

    • That’s a great point, Dennis. I’m just trying to understand how he hopes to get $25K of instant appreciation when selling to this fictional buyer. You’d have to find someone pretty naive to pay that kind of premium for the privilege of seller financing, especially for a condo.

  3. How could a seller financing deal work out if the owner still has debt left on their current mortgage? Let’s use a realistic value for a home…..$200,000 and they’ve got $100,000 left to pay off the bank. What would be your method(excluding subject-to, which leaves the risk on the seller and any type of private or hard money lending to pay off the bank) for obtaining this property with no (or minimal) money out of pocket?

  4. Totally agree with Dennis.

    How can this even be titled a “Case Study”? It’s not even close and it’s just dreaming.

    Honestly, I’m surprised Brandon and Josh accepted this post.

  5. Like I said before, I don’t know his market, but in Philly there is always a nicer, more efficient (greener) condo building being built. Also in Philly as one gets closer to the ten year tax abatement granted new construction the potential buyer has to calculate into the purchase price, taxes in a City who’s schools are $200 million in the red, with government pensions hanging like the Sword of Damocles.

    So far in the last couple years the City in lieu of raising RE taxes directly, has instituted a $300 trash fee on all multi units from duplex on up, it matters not if the duplex is owner occupied.
    On top of that we have a $50 rental license fee for each unit in a building with no cap. Duplex $100 due a year, 100 unit $5000 for this license no service is provided whatsoever.

    Now we have the AVI (Actual Value Initiative) where RE taxes are to be calculated at 1.34% of actual market value, which is established mostly by spinning a wheel and throwing a dart.
    All of my properties have been assessed at 2 to 3 times actual value, which has been a godsend to the legal profession in Philly.

    I look at the authors 7.5% return thinking one minor assessment of his condo building for an unforeseen repair may put him in negative cash flow territory and chase his future smoke and mirrors buyer to another property. I sure hope he doesn’t have any of his own money in this deal.

  6. You better read the Dodd Frank Law that went into affect Jan. 2014. You can’t charge 8% owner financing. The note interest rate cannot exceed the index (T bills, prime, etc.) and if the seller doesn’t abide by this law; then, the seller can lose all down payment and all monthly interest and be paying legal fees. At least; the aforementioned is what I read online. Check with qualified/trained/and licensed loan originator who’s been certified under the new rules to handle a loan. As such relates to Dodd Frank. Not just any loan officer or realtor or title company attorney knows the ins and outs of Dodd Frank which is over 900 pages.

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