How I Pulled $225,000 Profit From the $177,000 Purchase of a Single Family Home

by | BiggerPockets.com

How is that possible? I hope was your first knee-jerk reaction when you read that title.

Or perhaps it was: What’s the catch?

Well, there is no catch, and it is possible. Plus, this is not a standalone deal—we’re doing them all the time.

Buying Real Estate on Terms Without Using Your Cash or Credit

I love when deals take twists and turns because usually that means we’re creating more income streams from the same deal. This particular home that I’m talking about, featured below, started out as a lease purchase with an owner who did not have a mortgage on the property. This was the home he grew up in, and he was now in his 80s, having outlived two wives. He was caring for his third wife and did not want to be burdened with this home.

 
He could not sell it on the open market for $189,900, so we structured a deal with us leasing it for $850 per month with a $350 monthly credit against the price. The term structured at this time was 48 months. This means that on or before 48 months, we would pay off the seller the balance due of $189,900, less $350/month for however many months it took. If it went full-term, we’d owe the seller $173,100.

We exit almost all of our properties with a rent-to-own buyer, so this one we sold for $225,000 on a 36-month term. See, it’s super important to structure your selling side shorter than your buying side to allow room for delays, financing, or any other curveballs that can come your way (and they will!). The monthly payment was $1,276. The monthly spread on this property was $426.

On all properties we buy and sell on terms, we create three paydays. The first is the nonrefundable down payment we collect from the buyer after they’ve been prescreened and have a mortgage-ready plan they can succeed with. In this case, it was approximately $12,000. Payday #2 in this case was $426—or for the entire term, $15,336. If we owe the seller $177,300 (if it went 48 months, it would be $173,100 as noted above, but let’s assume the buyer is successful and does 36 months, which is what they were prequalified to do) and have a cash-out coming from the buyers’ financing of the $225,000 less $12,000 paid, our payday #3 is $35,700.

Now, as this deal sits so far, the three paydays total:

Payday #1: Deposit                               $12,000

Payday #2: Monthly Cash Flow         $15,336

Payday #3: Back End/Financing       $35,700

Total                                                    $63,036 

By most people’s standards, the fact that we put $10 down (all our lease/purchase agreements are structured with a $10 deposit) and are able to extract $63,036 from this small single family is pretty good—and is actually fairly standard practice for us. In fact, our current average all three paydays is $80,471.86, and we do two to four of these every month with our small family company and another five or more around the country with students.

Where Did the $225,000 Profit Go?

This deal gets interesting.

There was a hurricane in the home country of the buyers, and part of their financing plan was a down payment increase from Dad. Well, with Dad and Dad’s area hit by a hurricane, they came to us in tears and asked if they could extend their term just before the 36 months was up.

We had a few choices.

Related: 3 Ways to Respect Home Sellers While Negotiating Deals

The first option was to stick to their contract and they’d lose their down payment and have to move out. We’d then sell the property for about the price they had it tied up for, if not slightly higher.

The second option would be to simply extend the term with the seller (remember, we had 12 more months with him already, but of course the buyers don’t know that) if we needed more than another 12 months. At that time, we could raise the monthly and the price if we wanted since we had to extend, thus increasing paydays #2 and #3.

There are many combinations to a successful deal structure here, and that’s why, in this instance and many others, it pays the investor well to become what I call a “master transaction engineer.” That means having the ability to look at any deal and know which way to pivot in order to create win/win scenarios, all while protecting the profit.

A Combination of Strategies

We chose a win/win/win on this one.

We called the seller knowing that he was caring for his third wife who was very ill and that he did not want to deal with this home any longer. We offered to purchase the home with owner financing for the balance due (approximately $177,300) and a down payment of only $11,000.

Now, before we go further, I’m a big advocate of not using my own cash or credit, so where did the $11,000 come from? The $11,000 came from another payday #3 that was scheduled to cash out from a previous deal (the cash out was actually $116,000) because, remember, we do two to four of these monthly, which creates all kinds of ongoing paydays. We already spent the original $12,000 that came in three years prior from this buyer.

We negotiated a new term with the seller of 60 months, with him accepting $810 principal-only monthly payments. So now we’ve increased our payday #2, we’ve created massive principal pay down of $810/month (we were previously only getting $350/month), and the seller is thrilled that he gets a cash flow without the tie to the property. The buyer, on the other hand, is quite thankful and relieved, as we gave them a new 48-month term, so they’re not worried about it.

Let’s play this one out because when you do owner financing and principal-only payments, you are able to extract six figures out of most deals.

Sales Price:                   $225,000

Less Deposit:               -$12,000

Due at Financing:       $213,000

We owe the seller in 60 months the $177,300 less the $11,000 deposit, less $810 x 60 months, so approximately a $117,700 balloon payment. When we go to the closing table, we’ll be left with our $213,000 due less our balloon payment of $117,700, so (not adjusting for closing costs) approximately $95,300.

Wait a minute, Chris. You said $225,000 profit!

We’re not done.

This home comes with an extra lot next door that is already taxed separately that the owner agreed originally to let go with the home as long as I kept up the tax payment on it. When we renegotiated with the buyers, we made it clear that we can extend the term, but we would be keeping the lot. They responded that they’re never in the yard anyway and were fine with it.

The lot is on the market as of now for $79,900, and we’re projecting to sell it for $70,000.

This brings the total profit to $165,300 plus the $12,000 payday #1, plus payday #2’s total of approximately $48,960. So total profits reached $226,000.

This deal started as a sandwich lease and converted to owner financing.

It pays to be a master transaction engineer.

What do you think of this deal? Have you ever structured something similarly?

Comment below!

About Author

Chris Prefontaine

Chris Prefontaine is the bestselling author of Real Estate on your terms – Create continuous cash flow now, without using your cash or credit and real estate investor with over 26 years of experience in the field. He is also founder of Smart Real Estate Coach and host of Smart Real Estate Coach Podcast. He lives in Newport RI with his wife Kim and his family.

42 Comments

    • Chris Prefontaine

      This goes right along with how and why our TERMS systems work so well. Conventional financing is a small pool of buyers. Terms brings a much larger pool of buyers. We’re also guaranteeing that price for the term so we build in some appreciation. Having done over 150 of these in last few years, it works extremely well.

  1. Melvin Granger

    Chris:

    Thanks for sharing the details of your story, very interesting. How is it that the “old man” couldn’t sell the house for $189,900 and you guys were able to get it under contract for $225K with no additional improvements? What was the time period between the buy & sell contracts?
    Thanks,
    Melvin

    • Chris Prefontaine

      Thanks for asking Melvin – awesome question.
      This goes right along with how and why our TERMS systems work so well. Conventional financing is a small pool of buyers. Terms brings a much larger pool of buyers. We’re also guaranteeing that price for the term so we build in some appreciation. Having done over 150 of these in last few years, it works extremely well. Time between buy and sell is always 5 days – 120 days.

      • Cornelius Charles

        Hey Chris. Thanks for the article.

        So you’re saying the reason he couldn’t sell it for 189K on the open market was because he wasn’t able to find a buyer that could qualify for conventional financing? What market is this in? I know i’m used to California prices, but that seems like a low price for a majority of buyers not to be able to qualify for.

        • Michael P. Lindekugel

          Cornelius,
          i am stumped as well. i dont see that Chris’s reply to Melvin answered the question. Chris doesn’t specifically answer why the owner could not sell for $189k. he seems to be dancing around the question. if the market is willing to pay $189k, then fannie, freddie, VA, FHA, and MBS loans wont be a problem. that is 90% of all loans. they are a problem should $189k exceed the FMV or appraised value of the property. i could understand if Chris was adding value that the seller cannot afford to pay for in exchange for shared profit partnership for a finished FMV of $189k.

  2. Kevin B.

    @Chris Prefontaine
    Great deal, Chris. Way to solve everyone’s problems, buying the seller’s house for him and helping to qualify a buyer that couldn’t buy. That’s why Specialists get paid more than General Practitioners do.

  3. Avi Garg

    Chris,
    You are very mistaken if you think you did not use your own cash. That money that came from a different deal was “YOUR” cash. You earned it from a different deal and it became your cash. So again reiterating, you put money down on this deal and not a $10 deal.

    • Chris Prefontaine

      Hi Avi- any and all deals we do not and never have dipped into personal cash. If it comes from another deal we refer to it as not our personal cash as it has not been distributed to anyone yet. We’re running several entities and they’re businesses. If you are doing a deal in your own name and/or distributing all your profits to yourself and then pulling it back out (poor planning) you could call it your cash. You may want to read a fantastic book called Profits First by Mike M.. We also sometimes invest back in our own deals in an IRA owned LLC – another lesson for another day but after 150 of these deals and creating 3 Paydays on most, it’s nice to have options. Have you done any deals of your own?

      • Michael P. Lindekugel

        not your money…..OK.

        partnership as taxed as pass through entities to the partners. LLCs can be taxed as disregarded entity sole proprietorship, S corporations, and C corporations. you would never put appreciating property in a c corp because of the 25% capital gains tax. you can’t escape taxation or cash flow in a sole proprietorship. there are tax penalties for failing to distribute profits in partnerships and S corps. you own all those entities. it is your money. the IRA LLC is also your money. as long as you have an ownership stake it is accounted for and taxed as your cash. Now, i understand maybe you want to say its not because you didn’t touch the cash. the only way it was not your money is borrowed or raising capital through the sale of stock. borrowing from your IRA/LLC is still your money. its your IRA.

        • Chris Prefontaine

          Ok I see a common thread here Michael and I’m glad you have extensive knowledge of LLC’s and taxes. Congrats. If one doesn’t invest their own capital like a most recent student deal video we just released from our student in NC, and in doing so they create $105,000 profits with all three paydays and then as those come in they can at their option choose to spend it or reinvest in another deal we don’t consider that his money. Nor does he. You’re considering his money because he earned it and then used it. We trace it back to launching a deal with none of his own cash. Not sure what you’re trying to get to here but at our last live event all of our Associates had approx $15million (it may have been higher I’m going from memory) and none of them used more than . $10-$500 for a deposit. There’s not reason for us to banter about what we consider “our” money or not and it’s not helping anyone trying to learn. One needs only go to our Youtube channel or our podcast to learn more and make their own decisions. If you have deals to share, you can of course go through the approval process with Bigger Pockets and share your deals because there’s no better way for the students to learn than seeing more and more deals and you seem very detailed and I’m sure have some cool deals to share.

    • Chris Prefontaine

      You bet Andrew and brings up a fantastic and very important point and that is that when you’re solving challenges and problems for sellers and buyers, price and numbers is NOT the motivating factor in most cases – it’s the solutions that matter and they’re not always monetary.

  4. Ronak Shah

    To those saying how come owner wasn’t able to sell on open market; I know a person in Jersey City-JSQ area who had good relations with few of his old clients and they would sell their property to him for what would be below market prices (this was up until 4 years ago). Different people have different motives for such transactions (don’t want to pay taxes, want to qualify for government programs, no inconvience of showing house, …).

    • Chris Prefontaine

      Ronak you are 100% spot on and this brings up a fantastic and very important point and that is that when you’re solving challenges and problems for sellers and buyers, price and numbers is NOT the motivating factor in most cases – it’s the solutions that matter and they’re not always monetary.

      • Michael P. Lindekugel

        i understand some sellers are willing sell below market. that is not in the description of this asset transaction. there is no mention of the FMV only that the seller could not sell for $189k. was the FMV $180k? if the FMV was $180k, then the buyer is effectively payed $10k interest on the asset acquisition.

  5. Marishka Pilch

    Yes, yes, YES! My husband, Larry Gill, and I have been quietly doing, and occasionally teaching, the very same thing for a number of years in Washington State. When our flipper friends learn how much we make on some of our deals and the multiple streams of income on these deals – deals where we put up VERY little money and never put our credit at risk – they all SAY they want to learn how to do it. But alas, the lure of “quick money” with fix and flipping is very seductive and intoxicating, and unfortunately they don’t make shows on HGTV about lease options and notes.

    So we just keep humming along, creating win/win/win solutions, and cashing checks in exchange for solving people’s problems. I also got a good laugh at some of the “yes, but” comments on this thread. This is a great strategy, with a lot less headaches than many other types of “traditional” real estate investing.

  6. Yan Cui

    Wow, this was very creative! Thanks for sharing! I am fairly new to investing so I had a couple of questions:
    1) How come you did your calculations off of the 60 months when the rent-to-own buyer would pay you off in 48 months?
    2) Did you end up re-negotiating the rent with the rent-to-own buyer for an increased spread in the new terms? I was unclear where the $48,960 came from but maybe this explains it

    Sorry if these sound like very simplistic questions – but just trying to understand the math. Thanks to anyone who would be able to explain – would appreciate it 🙂

    • Chris Prefontaine

      1) How come you did your calculations off of the 60 months when the rent-to-own buyer would pay you off in 48 months?
      We won’t push them so it will close 48-60

      2) Did you end up re-negotiating the rent with the rent-to-own buyer for an increased spread in the new terms?
      I was unclear where the $48,960 came from but maybe this explains it yes my daughter increased their rent and built in yearly increases!

      Sorry if these sound like very simplistic questions – but just trying to understand the math. Thanks to anyone who would be able to explain – would appreciate it ?
      Very good questions and that’s how you learn. NO need to every apologize- keep asking!

  7. Melvin Granger

    Chris:

    Thant’s an impressive amount of equity you’re able to unlock with a simple change in terms, very eye opening. I’m guessing the ideal buyer for you guys is someone who can or is qualified for bank financing but doesn’t want to go that route right now so the option to buy with a locked in price is appealing to them? In the cases where the spread between contracts is greater than 30 days, you guys are making monthly payments with an empty house for sale until you can get a buyer to move in and start paying you guys? I’m simply trying to understand the mechanics of the process here. Thanks again for your willingness to share your story and help others become better, it is very much appreciated.

    • Chris Prefontaine

      Great question Chris – finding buyers is actually the easy part of the puzzle because we help them get pre screened, enhance credit and work on a plan with a fairly accurate mortgage ready date. This provides them a path to home ownership otherwise not available. Our systems have been built and maintained by my son Nick who is our buyer specialist. The systems allow the buyers to go through a bit of self education via videos to make sure it’s a fit for them as well as us. Hope that helps. Please let me know if there’s anything else or if I didn’t answer what you were looking for. I answer all comments 2X weekly typically.

  8. Michael Howell

    Answer this Chris. IS THIS TRUE

    Chris Prefontaine aka Ron LeGrand Copycat is a fraud. Do your Research and have an attorney review any contract this guy puts in front of you. Chris Prefontaine has very bad unethical business practices and I have recorded and documented proof. Chris Prefontaine secretly records calls of home sellers in multiply States and Pretends to be a home buyer from PrePropertySolutions on behalf of his students, who have a completely separate LLC, so that Chris Prefontaine has zero liability! This is fraudulent misrepresentation because Chris is not actually a senior partner or on the purchase contract, and he is making these assertions to the sellers so that they sell their house to an inexperienced student that pay him thousands of dollars to learn his scams. He also fraudulently misrepresents personal experience to sellers to make them think he is the one actually buying the property. He tells his students to lie and say they close 4-5 houses a month, when the fact is they probably haven’t even sold one house Ever! I have dozens and dozens of these secretly recorded calls of Chris Prefontaine because he distributes them to his students with no regards to home owner’s private information. He even makes the recordings available for download on his website for anyone with a dollar can have access too. Chris loves the word guarantee and will say it until the sun comes up but if you have a lawyer review your contracts for both sellers, buyers, and students will see that is not the case.

    I personal lost $75,000 because of these false guarantees. I had to leave his unethical program, even though we were leading in his sales contests with most signed contracts, once we learned his horrible ethics and his illegal practices with secretly recording calls, fraudulent misrepresentation, and his multi-level marketing gimmicks that he copies from real coaches. Chris Prefontaine is a multi-level marketer and can be seen with a simple google search. Sellers need to beware that Chris Prefontaine of PrePropertySolutions brags he will make on average $20,000k to $80,000 per deal with little to no money down and even if the tenant buyer doesn’t cash out the seller he still walks away with thousands and leaves the seller and tenant buyer out to dry. I personally have spoken with both sellers and buyers who he has done this to. Heart wrenching to hear when a tenant puts over $30k nonrefundable deposit down that Chris takes and Seller doesn’t receive, and Tenant buyer loses everything! Tenant buyer lives in a home they think is theirs but instead has to get evicted and start all over again. Seller thinks house is sold but has to evict and start all over again, but Chris still made his money and could care less!

    Chris Prefontaine has broken many laws and I’ll be filing complaints this week with the Department of Real Estate in each state he is running these scams and handing over all the evidence. I also will be filing complaints with the FTC and Attorney General for fraudulent misrepresentation and secretly recording calls of home sellers with their personal information and distributing the recorded calls to his members and students. From speaking with the DRE and the fraudulent misrepresentation to sellers ,he will not only have his business in very serious trouble but once sellers realize that they were tricked to sell house to inexperienced students, these students will also can face serious penalties and sellers and tenant buyers can cancel purchase contract and may sue for damages.

    This report was posted on Ripoff Report on 10/23/2017 03:41 PM and is a permanent record located here: https://www.ripoffreport.com/reports/pre-property-solutions/nationwide/pre-property-solutions-pre-holdings-llc-chew-publishing-inc-smart-real-estate-coach-l-1408087. The posting time indicated is Arizona local time. Arizona does not observe daylight savings so the post time may be Mountain or Pacific depending on the time of year. Ripoff Report has an exclusive license to this report. It may not be copied without the written permission of Ripoff Report. READ: Foreign websites steal our content

    • Angela B.

      This post is quite discouraging. I am new to the forum and joined @BiggerPockets to network with other real estate investors, use the site as a resource to gain knowledge and insight and exchange information that would assist me with navigating as a real estate investor. I find the last post made by @Michael Howell regarding @Chris Prefontaine being a rip-off to be quite disturbing. I noticed that @Chris Prefontaine did not reply to @Michael P. Lindekugel and @Cornelius Charles posts that asked legitimate questions. Was he stumped? He did seem to be dancing around certain questions. Uhm? Why was the owner not able to sell for $189k? What about the FMV or the appraised value? I would like to trust that @BiggerPockets would look into this post to verify its contents and/or take it down if there is no truth to it. I’m not here to listen to a scam artist.

      • Michael P. Lindekugel

        Angela,
        i have been a RE broker since 2003. i have seen a lot of bad apple investors. there are legitimate reasons for wholesaling. lots of reasons in which the buyer is taking advantage. in WA State we have elder abuse laws for equity skimming. i am not saying Chris engaged in that type of behavior. he wont answer question. absent information from Chris the public will make assumptions about the nature of the transaction. i am all for everyone making money, but not at the expense of someone that probably is not in a position to make an informed decision.

        • Chris Prefontaine

          I’m glad you have been a realtor since 2003 Michael. I was a licensed realtor, broker/owner for 18+- years then investor all of those years and continue to be. I’ve been in real estate since 1991. Not sure which questions you need answers on but ask away. Our buying/selling entities have maintained an A+ BBB rating which is not easy in today’s social media, anyone can rant environment. We have more than enough free material out in the market place for someone to do a complete due diligence and that can include live calls with our family as well as live calls with our students/associates around the Country who are actually doing deals. Hope that helps. You too are welcome to call any time.

      • Chris Prefontaine

        HI Angela- I actually personally answered all questions to date and typically do them twice per week. If you are new to investing do your homework about our family company and you’ll be pleased. Social media can be interesting in many ways and anyone can rant and that will live so the onus is on you to do your due diligence. You can also go through our FREE webinar and request a strategy call with a family member and we are more than happy to speak with you. You can also get to know us and continue your due diligence by taking full advantage of our FREE material on our podcast and on our youtube channel.

    • Chris Prefontaine

      You see my answer on the report as the report does not allow you to pull it down despite it being resolved. This is one Associate who was looking for a get rich quick and that’s not us. Do your due diligence and speak with all our Associates…or look for excuses, your choice. Your due diligence will give you the answers you need.

    • Chris Prefontaine

      You see my answer on the report as the report does not allow you to pull it down despite it being resolved. This is one Associate who was looking for a get rich quick and that’s not us. Do your due diligence and speak with all our Associates…or look for excuses, your choice. Your due diligence will give you the answers you need.

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