how is that possible? I hope that was your first knee-jerk reaction when you read that headline.
Or maybe it was: WHave a hat catch?
Well, there’s no catch, and it Is possible. Plus, it’s not a standalone deal—we’re doing them all the time.
Buying real estate on no terms using your cash or credit
I love when deals fluctuate because it usually means we’re creating multiple income streams from a single deal. This particular home I’m talking about, shown below, started out as a lease purchase with an owner who had no mortgage on the property. It was the house he grew up in, and he was now in his 80s, with two wives. He was taking care of his third wife and did not want to bear the burden of this house.
He couldn’t sell it on the open market for $189,900, so we made a deal with him to lease it to us for $850 a month with a $350 monthly credit against the price. The structured term this time was 48 months. This means that at 48 months or so, we will pay the seller the balance amount of $189,900, less $350/month for whatever number of months. If it were full-time, we would have paid the seller $173,100.
We take out almost all of our properties with rent-to-own buyers, so we sold this one for $225,000 over a period of 36 months. See, it is very important to make your sell side smaller than your buy side to allow room for delays, financing, or any other curveballs that may come your way (and they will!). The monthly payment was $1,276. The monthly spread on this asset was $426.
On all assets we buy and sell on terms we make three payment days. The first is the non-refundable down payment that we collect from the buyer after vetting them and having a mortgage-ready plan with which they can be successful. In this case, it was approximately $12,000. Payday #2 in this case was $426—or for the entire period, $15,336. If we pay the seller $177,300 (if it went 48 months, it would be $173,100 as mentioned above, but let’s say the buyer is successful and does 36 months, which they were predestined to do ) and coming from the cash-out of the buyers financing of $225,000 less the down payment of $12,000, our payday #3 is $35,700.
Now, as this deal sits now, three payments 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 (on all our lease/purchase The agreements are structured with a $10 deposit) and have been able to extract $63,036 from this tiny single family – and pretty standard practice for us actually. In fact, the current average for all three of our pay days is $80,471.86, and we do two to four of these each month with our small family company and another five or more with students around the country.
Where did the $225,000 profit go?
This deal gets interesting.
A hurricane had hit the buyers’ home country, and part of their financing plan was a down payment increase from dad. Well, when Dad and Dad’s area was hit by the hurricane, they came to us in tears and asked if they could get an extension just before they were up to 36 months.
We had few options.
Connected: 3 Ways to Respect Home Sellers When Negotiating a Deal
The first option was to stick to their contract and they would lose their down payment and have to move out. We’ll be selling the property for about the price they tied it for, if not a little more.
The other option would be to simply extend the term with the seller (remember, we already had 12 more months with him, but of course the buyers don’t know that) if we need more than 12 months. At that point, we could raise the price monthly if we wanted because we had to expand, thus increasing pay day #2 and #3.
There are many combinations of a successful deal structure, and that’s why, in this instance and many others, it pays well for the investor, who I call the “master transaction engineer.” This means having the ability to look at any trade and know which way to pivot to create a win/win scenario, while protecting profits.
a combination of strategies
We’ve picked a win/win/win on this one.
We called the seller knowing that he was taking care of his third wife who was very ill and did not want to manage the house any longer. We offered to buy the home with owner financing for the balance amount (approximately $177,300) and a down payment of only $11,000.
Now, before we go any further, I’m a big proponent of not using my 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 are all kinds of ongoing makes payment. we’ve already spent the original $12,000 that came in three years before this buyer.
We negotiated a new term with the seller of 60 months, in which he accepted $810 principal-only monthly payments. So now we’ve extended our pay day #2, we’ve made a hefty principal payment of $810/month (previously we were only getting $350/month), and the seller is thrilled that he gets cash flow without tying up the property. On the other hand, the buyer is quite grateful and relieved, as we have given them a new tenure of 48 months, so they are not worried about it.
Let’s play it because when you have owner financing and principal-only payments, you are able to pull six figures out of most deals.
Sale Price: $225,000
Minimum Deposit: -$12,000
Financing Due: $213,000
we owe the seller in 60 months $177,300 less the $11,000 deposit, less $810 x 60 months, so about $117,700 balloon payment. When we go to the closing table, we owe $213,000 less the $117,700 balloon payment we owe, so (not adjusting for closing costs) roughly $95,300.
Wait a minute, Chris. You said $225,000 profit!
we did not.
This house comes with an additional lot next door that is already taxed separately that the owner basically agreed to go with the house as long as I kept paying taxes on it. When we renegotiated with the buyers, we made it clear that we could extend the term, but we would keep the lot. He replied that they are never in the yard anyway and was fine with it.
The lot is currently on the market for $79,900, and we are estimating to sell it for $70,000.
This brings the total profit to $165,300 and the $12,000 payday #1, plus payday #2, totals approximately $48,960. Thus the total profit reached $226,000.
The deal began as a sandwich lease and transitioned to owner financing.
It pays to be a Master Transaction Engineer.
What do you think about this deal? Have you ever structured anything similar?
comment below!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
