As an article I wrote a few weeks ago Financing Opportunities for Potential Sellers We have received so many negative comments, but today we received an offer that is close to what we were actually looking for. As a result, I would like to elaborate on the math of this transaction.
In case no one has read the previous article, in a nutshell, I bought a two-bedroom, two-bed condo in Las Vegas for a net cost of about $ 65,000. I’m looking for a seller who sells at a premium price to turn over a property in a funded transaction. In this case, I’m looking for a $ 90,000 neighborhood with the buyer paying 50%. Then execute an 8% loan with a 30 year amortization over a 3-5 year phone. In a previous article, it seems that many people are crazy about expecting such prices and crazy about buying. But hey, what do you know, I received the offer today.
My condo offer …
The buyer today offered to pay $ 28,000 instead, but is ready to repay the loan principal in 5 year installments at 8%. So at the end of each year, he would pay me one-fifth of $ 62,000 (or $ 12,400) for each of the five years. Is this a good sale for me? Or do I have to keep renting a condo until real estate prices return to crazy levels?
It was a really intuitive decision until I put together the numbers.
Now let’s calculate some numbers again.
First, if you want to keep your condo rented, make a return.
Assuming I’m not selling the property, I’ve been running me with about 7.5% revenue so far.
But what if I sell to this buyer?
That is, the total cash investment after selling for $ 37,000, as you can quickly get back $ 28,000. As you can see, every year I lose interest as the buyer repays $ 12,380, which is one-fifth of the original principal.
This is the cash flow I would have received in 5 years (Note: you don’t have to pay HOA, maintenance, property tax or insurance at this point).
Do you know my internal rate of return (IRR)? If you do not know the internal rate of return, the IRR is the discount rate used to evaluate all cash flows.It may be difficult to grasp, so please check it out. See this thorough article for more information. All you need to know is that the higher it is, the better.
Do you know what an IRR is? 32%! Do you know what that means?Yes, that’s it Absolutely great return With your money. I think a better way to explain this revenue is basically a break-even point if the total cost of borrowing is 32% per year.
But what if you want to keep your tenants and sell your condo within 5 years to express your gratitude? Again, I don’t know if the market will rise significantly in 3-5 years, but I think it will (not only is the housing market recovering, but the reality is that the value of the U.S. currency will decline significantly. ). ).
So, instead of guessing, if I accepted this buyer’s offer, I wondered if it was worth selling at a price that reflected the same rate of return.
With some simple Excel math, this is the price I came up with … $ 217,313.81. This is the selling price (which is also the real estate agent’s commission after all!) I need to get it at the end of the fifth year to get the same revenue as if I sold the seller finance.
Even I am not so optimistic. I’m thinking about $ 150,000 at most. But at that price, at the end of 5 years, my IRR will be 24%. Not enough.
As you can see, the time value of money is very important and can play an important role in determining profits. I didn’t notice the magnitude of the difference until I started calculating investment banking styles. The big difference here is due to the fact that you’ve received $ 28,000 from the beginning (make sure you own this property for nearly a month, but don’t be too particular about the numbers. ).
So to those denialists, I say “yes” -seller funding is possible and can work. If you can get the buyer to repay most of the principal from the beginning, you can significantly increase your return on investment. Most seller loans require balloon payments at the end of 3 years, 5 years, 10 years, 15 years, etc., but instead say they make annual principal repayments. Obviously, this may not work for many, but for those who can, this will greatly help your return.
Perhaps BPers is right to think I’m a greedy speculator / gambler / crazy guy. The buyer told the agent that he only wanted 12% interest instead of 8%, as the buyer would only drop $ 28,000 instead of $ 45,000. I asked for.
Let’s see what happens …
Photo: Kevin Dooley