Welcome back, real estate enthusiasts! Today, we’re diving into how to pay what might seem like “too much” for a house but still come out ahead. We’ll walk through analyzing deals, structuring creative financing options, and ultimately turning seemingly overpriced deals into profit goldmines. Let’s get into the nitty-gritty!
Breaking Down the Deal
Start with the Exit Strategy
Before you even think about making an offer, start with your exit strategy. Ask yourself: Are you going to rent the property, or are you going to sell it through owner financing? Determine what the property would rent for, or what the monthly owner-financed payment would be.
For this example, let’s say the monthly payment is $1,050.
Back Out Expenses
Next, you need to account for all the expenses that will come with the property:
- Taxes: Assume $150/month.
- Insurance: Let’s estimate $115/month.
- Desired Cash Flow: Following Grant’s rule of thumb, aim for a minimum of $150/month in net cash flow.
After analyzing these, you’ll arrive at your “play” number—this is how much you can afford to pay monthly for the property.
- Monthly Payment: $1,050
- Subtract Taxes: $1,050 – $150 = $900
- Subtract Insurance: $900 – $115 = $785
- Subtract Desired Cash Flow: $785 – $150 = $635
So, $635 is your “play” number—the maximum monthly amount you can allocate to any loans used to pay for the property.
Free and Clear Property Example
Let’s start simple. Suppose the seller owns the house free and clear but insists on an $85,000 purchase price, which is 85% of the After Repair Value (ARV) of $100,000. Most cash buyers would walk away, but you don’t have to.
Known: $85K Purchase Price
Known: $635 Monthly Payment
Unknown: Interest Rate and Term
Grab your financial calculator. We’ll solve for the term of the loan. Here’s what you input:
- Principal Value (PV): $85,000
- Monthly Payment (PMT): -$635 (negative because it’s an outgoing payment)
- Interest Rate (I/Y): Let’s try 4.5%
When you calculate, you’ll find that you can pay off the $85,000 in about 15.5 years.
Owner Financing Numbers
Selling it for $100K with 10% Down
In this scenario, you’re selling the property for $100,000 with a $10,000 down payment. The buyer takes a loan for the remaining $90,000 at 9.5% interest for 30 years.
- Monthly Payment from Buyer: $756
- Total Paid Over 30 Years: $272,000
Adding the $10,000 down payment:
- Total Received: $282,000
- Subtract Total Paid to Seller: $282,000 – $119,000 = $163,000 Total Profit
And your monthly cash flow is $150—a solid win.
Subject-to + Second Lien Example
What if the seller owes $50,000 to the bank and still wants $85,000? Here’s where it gets fun!
Known: $50K Owed to Bank at $292/Month
Known: Need to Get Seller $35K
Known: $635/Month Total to Work With
Unknown: Terms for Second Lien
Your total “play” of $635 a month splits into a $292 monthly payment for the bank and $343 left for the seller’s second lien.
Calculating Terms for $35K Second Lien
With $343/month at 4.5% interest:
- You pay off $35K in about 10 years.
- You end up paying about $44K to the seller, adding $9K in interest—a win-win.
The Buyer Wants $10K Down
This happens often. Here’s how to structure it.
- Option Period: Get a 60-day option period and closing. This lets you find an end buyer who can give you $10K down.
- New Second Lien Terms: Instead of $35K, make it $25K.
- Private Money Options: Secure $10K from a private lender at 10% interest for 5 years.
- Monthly Payment to Private Lender: $212
- Leaves $131/month for the seller.
Calculate again:
- The seller’s $25K at $131/month at 4.5% becomes over 27 years.
Getting Creative with Multiple Lien Positions
The sky is the limit here. Your debt does not all have to come from the same source, and you can create multiple lien positions.
The Harry Arm Principle
Don’t be afraid to renegotiate terms. For example:
- If the seller balks at 27 years, offer 0% interest to shorten the term.
- You might reduce those 27 years to 10 years without much hassle.
Other Possibilities
You can even buy another note at a discount to pay off part of the seller’s lien. The opportunities are endless.
Wrap-Up
In conclusion, while it might seem counterintuitive, paying what appears to be “too much” for a house can still yield substantial profits with the right strategies. By starting with a clear exit strategy, meticulously backing out expenses, and leveraging creative financing options like owner financing and second liens, you can turn seemingly overpriced deals into lucrative investments.
Remember, the key is in the numbers—understanding them, manipulating them creatively, and ensuring they work in your favor. Whether it’s structuring terms that make the deal viable or negotiating multiple lien positions, the opportunities in real estate are boundless. Stay savvy, stay flexible, and watch your investments grow.
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