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.
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).
- 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.
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