How I Made More Than $130,000 Profit on a $183,900 Purchase

by | BiggerPockets.com

I buy and sell 5–10 homes monthly around the country and typically create three paydays per deal. This deal came with a fourth payday. Here’s how.

We received a lead from an expired listing (a listing that was on the market with a realtor but didn’t sell for whatever reason) and we booked an appointment to meet with the owner. Come to find out, it was two brothers and the home had been their dad’s who had just passed away. After reviewing how we buy—only on terms, no conventional loans or cash of our own—they decided they just wanted a conventional sale so that they could close out the estate. We left them with the same comment we always do: No worries; keep us in mind if you don’t get the full price in the time frame that you desire. This was in the dead of the winter, just after a huge snow storm.

In Real Estate, Things Always Change Given Time

About six or seven months later, one of the owners called me back. It was the fall now, and he was about to move to South Carolina to retire. He said, “I’m not sure if you remember me, but my brother and I met with you and your son. We ended up selling off all of Dad’s property. But I have my own house that I couldn’t sell with my realtor, and I’m leaving Monday for South Carolina (this was a Friday). Can you do that owner financing thing with us?”

Given his time crunch, my son Nick and I jumped in the car the next day (Saturday) and brought our standard purchase & sale agreement (customized to accommodate our terms deals or course) with us. We sat in his living room with him and his wife, and got it signed.

Here Are the Purchase Numbers And Details

  • Approximate Value: $200,000–$220,000
  • The real estate agent had it on for $225,000, then $199,900, and we got there it was down to $189,900
  • We signed the purchase & sale for $183,900 by explaining that he didn’t have to pay a realtor, so we’re basically giving him what would have been a full-price offer, and on top of that, we were paying the closing costs (when we do owner financing* no, or little, money down, we cannot expect them to also pay their transfer tax usually incurred by the seller)
  • $900 down and $923/month principal-only payments
  • Term: 48 months

We exit almost all of our homes via a rent-to-own buyer, and in doing so, we create three paydays (and sometimes a fourth). The first is the non-refundable down payment from the buyer; the second is the difference between what we collect from the buyer for their lease and what we’re paying the mortgage company (or owner in this case); the third is the cash-out, which is made up from the increase in price from what we bought it at to what we’re selling at and also the principal pay-down over the term.

On This One, We Did Just That

  • Sold for $239,900
  • 36-month term (this left a full year buffer before our balloon was due with the seller, in case the buyer had challenges with financing or anything else)
  • Rent-to-own monthly: $1,500/month
  • Payday 1: $15,000 down
  • Payday 2: $477/month ($1,500 less $923 to seller, less $100 insurance) to approximately $17,172 if we don’t extend the term)
  • Payday 3: $183,900 purchase price, less principal pay-down (used 36 months so could be even higher) of $33,228 = $150,672;
  • $239,900 sales price less balance after 36 months (less if we were to go full term) – $150,672 = $89,228; but they already paid $15,000, so roughly $74,228.

Now, if this was to cash out after only 36 months, the total all three paydays would be approximately $106,000. If we were to let it go 48 months, we would pick up another $477/month for a year, and another $923/month principal pay-down for a year, adding another $16,000+ to the deal—so closer to $123,000.

What Types of Insurance Do Landlords Need?

Fourth Paydays are Fun And Profitable

One of the many things we do each year around the holidays to create fourth paydays is, we call our sellers who are collecting monthly principal payments from us who have more than a year remaining. We offer them some options to receive some cash now instead of waiting for all of it at the end of their term. Some sellers love extra cash during the holidays (you can offer it any time but we find this works well).

More Options

  • Offer to pay $6,000 against principal (just a prepay on what we owe anyway at the end of the term) if they’ll extend it 12 months. Keep in mind, 12 months @ $923/month principal pay-down, and we just picked up another $11,076 (payday three) as well as the $477/month (payday two) or $5,724—so another $16,000—bringing our deal to over $139,000. This is the one we actually did last December, and the owner said, “Thanks. Would you be open to doing that again next December?” Hmmm, Let me think about that, SURE!
  • If they said no, we could have offered even an extension fee,  because we’re picking up all the additional payday twos and threes, but we didn’t have to.
  • We gave them two options, not just the $6,000 for a year extension; we gave them an $8,000 offer for 24 months, and they didn’t go for it. They picked the $6,000 for 12 months option.

If the buyer in the home was diligently pursuing their financing, this clearly wouldn’t work: They would cash the home out too quickly. In this case, it was a family of five working individuals. They’ve never missed a payment, and they are not breaking any speed records getting cashed out. In fact, one lost a job and was out of work for almost a year, so when I called to say we could extend their term, they were ecstatic and very thankful.

Now, wait a minute, Chris, you may be thinking; I thought you don’t use any cash. Well, year-end is also a popular time to have your first paydays scheduled and coming in on other deals while you’re getting closings from third paydays, so we utilize some of that free cash flow to create fourth paydays as outlined.

Structuring these paydays on terms creates wealth and continuous cash flow. And unlike other real estate niches that require constant attention to generate cash flow—like wholesaling and flipping—these three paydays cash flow the terms with the seller, handle any and all business expenses, and make for some healthy profits for you!

So in summary, The terms are typically done on these types of deals when buying:

  • Sandwich lease purchases
  • Owner financing purchases on free and clear properties
  • Subject to existing financing purchase

Those transactions create three distinct paydays and sometimes a fourth.

  • Payday 1: A non-refundable upfront downpayment.
  • Payday 2: The ongoing spread (difference) between the monthly rental/lease fees from the buyer and the principal payments to the seller or seller’s mortgage company.
  • Payday 3: The final cash-out from the property sale, which includes the property markup as well as the principal pay-down over the term.

*Owner financing to us typically means a home that is free and clear of any mortgages or liens and we buy it by paying the owner monthly principal payments—no interest.

Do you have any questions?

Ask them 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.

33 Comments

    • Chris Prefontaine

      Principle only is on Free and Clear properties when we do owner financing (buy the property and seller holds mortgage) or sandwich lease when we negotiate such. Hope that helps. We do lease/purchase, owner financing and subject to and every variation of those. You may want to go through my Amazon Best Seller Real Estate on your terms as well as the free webinar on our website. Best of luck on the deals and let us know how we can help.

        • Chris Prefontaine

          HI Virginia – foreclosures are just another source. The source doesn’t matter. If you’re talking about buying foreclosures from banks on terms – that’s unlikely or in fact impossible as banks sell those for cash. I wouldn’t waste your time chasing foreclosures unless you have investors to back you and/or your own funds and I don’t like either of those as you know if you’ve reviewed our material on the free youtube channel or my Amazon Best Selling Book. I hope that answered that. If I misunderstood the question let me know and I’ll take another stab at it!

  1. David Cruice

    Oustanding, Chris. I LOVE creative financing techniques. That’s quite a doozy you’ve got going there. A win-win for everyone. Bravo! I’ll definitely look to pick up a copy of your book, “Real Estate on Your Terms. All the best.

  2. Mark Pelshak

    Chris,
    Thank you for your article. It was very well-written and refreshing. My very first deal in investment real estate was a Subject-To which I then found a buyer to put down $18,000K in a non-refundable down payment. So much of what you said was so very familiar with a few new tips I plan to utilize.

    My questions for you is:

    1) How do you protect yourself from the seller just selling the home underneath you or letting the home go to foreclosure by not making payments to their lender?

    2) Do you have the owner put the home into some sort of trust with both you and them being the beneficiary?

    Thanks for your response!

    • Chris Prefontaine

      1) How do you protect yourself from the seller just selling the home underneath you or letting the home go to foreclosure by not making payments to their lender? In a sandwich you record a Notice of Option or Memorandum of Real Estate and you’re all set. You should never do a SW without that. It’s part of our checklist and forms. IN a sub to it’s not applicable, you own.

      2) Do you have the owner put the home into some sort of trust with both you and them being the beneficiary? No haven’t. Doable? Of course. I’m not a big proponent of land trusts as I follow Lee Phillips’ suggestions on that. Doesn’t accomplish much despite some mentors making that a profit center with their forms and courses.

      • Mark Pelshak

        Thanks Chris. Makes complete sense. Looks like you’ve got a lot of people with questions. That’s sure to increase the visibility/popularity of this article.

        To help some of your viewers out: The reason he is able to find a buyer willing to pay $240K for a home the Realtor could not sell at $190K is due to financing. There are so many people out there who are ready to buy but can’t due to financial standing at the “current” moment though they will be ready in 1, 2, 4 years time with credit repair assistance. These potentials know they can’t purchase the home the traditional way because they won’t simply qualify, even if the home was at $100K. The only way they can purchase is using Rent-To-Own/Lease-Purchase options…and these require a substantial down payments which are larger than if they got financing from a bank doing FHA, etc. They understand this due to their situation and are typically happy to make this “cash” down payment to get into a house which they can purchase in the agreed upon time. Basically they are paying a high premium today for the option to purchase in the future when their credit is in a better position. As far as the increase in price from $190K to $240K, that’s due to the future price of the home at the end of 1,2,4 years. You would not want to offer said home at a price of 190K today when the buyer is going to be actually closing on the home years in the future when prices would have increased (depending on markets). Sometimes this works in their favor because if prices significantly sky rocket and they’ve agreed to today’s price for the future, they’ve just made that much more in profit/equity. I hope that clarifies a bit.

  3. David Smit

    That too was the catch for me; why is the tenant willing to pay $240k for a property that was listed not long before at $190k, let alone commit $15k non refundable up front towards it? Was there a significant face lift/rehab done? Also, what about taxes, sewer, maintenance costs, etc? Seems the numbers are a bit glorified, though I’ve no doubt this was a great way to do it regardless. Nice work.

    • Nathaniel Larrea

      @ChrisPrefontaine

      Sounds amazing (without know a lot of the intracity details of course). In your article when you mentioned… (when we do owner financing* no, or little, money down, we cannot expect them to also pay their transfer tax usually incurred by the seller). Did you mean you also pay the transfer taxes at closing or seller? And what about the property taxes?

    • Chris Prefontaine

      Hi David – actual numbers, never glorified, rounded down. All our buyers put down 3%-10% up front and/or over time or they don’t get accepted. They also get a solid mortgage ready date and plan as well or they don’t get accepted. NO rehab – as is. Taxes, sewer, maintenance all on buyer. Buyers act, pay and behave like a buyer until such time they get financing and then they get their own loan and continue to operate as usual.

  4. Larry Rojas

    Hmmmmm, too many unanswered questions… lots of good questions that creates doubt for using what appears to be great creative financing. The most important factor for this to work, the property would have to be owned, free and clear… no bank financing (that would bring an inflexible situation).

    • Chris Prefontaine

      You are 100% correct Larry. When we say “owner financing” we only do that on Free and Clear, always, and always do only principle paydown 100% of payment. There’s been no exception to that in our company for 100’s of deals. Yes. If you have other questions let us know!

    • Chris Prefontaine

      When offering TERMS to buyers that are not able to get conventional financing and locking in their price for them for 1-5 years instead of them renting and the market potentially appreciating right past them, we seldom if ever get pull back on price issues. Short answer is you get more on terms than the conventional or cash pickier buyer.

  5. Mark Pelshak

    Chris,

    If I wanted to learn your method of purchasing homes with a wrap or subject-to, which of your programs would you recommend? I have a little more than a novice knowledge of the process but would love to learn from an expert such as yourself.

    Thanks!

    • Chris Prefontaine

      Thanks for your interest Mark. The good news is we only have one process, one funnel that puts you totally in our support and follow up protocol. It’s the QLS Home Study Program and comes with Strategy calls. After you start the QLS just remind me that you spoke with me on Bigger Pockets. We teach how to be the Master Transaction Engineer , meaning handling all types of transactions and deal structuring with our 45+ years of experience in our office and family team. Looking forward to helping.

    • Chris Prefontaine

      HI Virginia – foreclosures are just another source. The source doesn’t matter. If you’re talking about buying foreclosures from banks on terms – that’s unlikely or in fact impossible as banks sell those for cash. I wouldn’t waste your time chasing foreclosures unless you have investors to back you and/or your own funds and I don’t like either of those as you know if you’ve reviewed our material on the free youtube channel or my Amazon Best Selling Book. I hope that answered that. If I misunderstood the question let me know and I’ll take another stab at it!

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