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Aaron the House

Real Estate Investing Problems Solved!


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November 2013

Seller financing with a great back end strategy

New Rental Acquisition

I closed on this deal and it is a record breaker for one of my longest seller financing terms.

For me, purchase price is not something I focus on so much. Of course, that doesn't mean I'm going to over pay for a property, but I will pay considerably more than any investor in the market place. For example, on this particular deal, on it's best day, it might bring $150K... maybe. An investor might pay $110K. I paid $140K. Crazy right! Well, not really when you think about who really pays.

Let's take a look at the terms;

10% down, 5% interest, $625/month, fully amortized. If you run that in your handy HP10B-II financial calculator, you get 441 months. That's almost a 37 year note. I did this deal with a seller in her 60s. She told me she got keys to the house in 1979! SHE is focused on sales price. Other investors offered her $100K~$110K. She saw my $130K offer and jumped. However, she got a little more ambitious and said she couldn't accept any less than $140K. I agreed, but lowered the payment on the $130K sales price ($117K PV after 10% down) from $628.08 over 30 years to $625 over 37 years.

The house is in rentable condition now and will easily bring $1,100/month. If you're happy with a 10% return on your money, you could keep the house and, well, be happy. However, in the note is a substitution of collateral clause that allows me, at my discretion, but with the seller's approval, to move the note to another property. I have a duplex that has a $108K hard money loan on it. The payments are $891 interest only and there is a short term balloon coming due in a few years.

By next summer, if the market heat ups again I could put this property up for sale. I expect I would net $135K out of it. If I move the $126K note to the duplex and use the proceeds of the sale to pay off the $108K loan this would be the outcome; I'd recoup my down of $14K and I would then have a very well financed duplex with a much lower payment, a fully amortizing loan on it giving me an additional $250/month cash flow AND about $12K cash for my pocket.

I did this deal to acquire a well financed new rental, but could use it to replace the existing financing for my duplex. Will they allow me to move the loan? I have the right according to the note, but still have to get them to sign the reconveyance. However, I would be moving the note from a $140K-ish house in a C+ area to a $250K-ish duplex in a B area. Which collateral would you rather be secured by over the next 37 years?

There are also tax aspects to consider: If I pay $140K now, and net $135K in 6 months, it is probably a small loss after all other costs and deductions are factored in. However, if I net less and don't get the full $12K for my pocket, I have a much bigger loss on the sale which I can use to my benefit.