Epic Real Estate Investing - Seller Financing and Lease Option : Case Study from the Epic Files

Episode Date: April 9, 2012

A sound real estate investing education is paramount to a real estate investor's success, and the best learning comes from putting that education to use in real life. Real world application of that proper real estate investing education provides a specific type of experience unmatched in a classroom environment. Additionally, learning from others' experiences can accelerate one's learning like nothing else. Thus... The Epic Files. Enjoy! Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, this is Matt from the Epic Pro Academy and today I have a case study to share with you straight from the Epic Files. You see, a few months ago I received a call from one of my yellow letters and it was from an older gentleman that wanted to sell his house and he wanted to sell his house because he just wanted to move back east to be closer to his grandchildren and he had lived in this house for a while. He wasn't necessarily in distress. He actually wasn't in distress at all.

He simply just wanted to avoid the whole real estate agent experience. didn't want to go through that and my letter fortunately happened to land in his mailbox on the right day at the exact right time and he gave me a call and after we spoke on the phone for a while and it was for a long while we got along really well we talked about all kinds of stuff we created some great rapport but I didn't sense any real motivation or urgency other than he wanted a short and simple transaction and he wanted his price so there wasn't really any motivation there at all and typically I wouldn't leave my house under that scenario. I mean, there just wasn't enough reason for him to sell his house quickly for me to make that appointment.

But my gut was telling me something different. And, you know, the property just wasn't too far away. And I didn't have anything else going on at the moment. So I decided to go take a trip and take a look. And like I always do, prior to my visit, I ran some just quick and dirty comps. And it was a three-bedroom, two-bath house, my favorite single-family configuration. and I had to figure that the property was worth about $225,000. And I had it figured that it would probably rent for about $2,000 a month.

So based off of my available resources at the time and my personal formulas, I'm going in thinking either I have to purchase this property at $100,000 since I had access to that in the form of a private money loan at the time at 8%. Or I have to structure a deal with terms of payments not to exceed $1,000,000. $1,500 a month. That was my max. So that was the goal. All cash at $100,000 or monthly terms at $1,500.

Those are my minimum deal standards. And if I can't get one or the other, there's not going to be a deal. And needless to say at this point, I wasn't too optimistic about it anyway, but like I said, my gut was just telling me go see this through and see what happens. So I arrive at the house, nice neighborhood, the house is in good condition. I'd love to have this property in my portfolio. It fits my criteria perfectly. But it's not going to end up in my portfolio unless I can get the seller to either meet my price or my terms.

And of course, when I asked him what he wanted for the property, he said $250,000, well above market value. And he wants all cash. And he is standing firm. He's not budging. And he owed about, I don't know, $75,000 on it still. So he had a good amount of equity in the property. So I'm really thinking there's no deal. I've got one foot out the door.

And I was like, by the way, what are you going to do with all the cash that you make from this property? And he said he was going to put it in a CD. And I was like, really? And what type of return are you expecting to get from that CD? And with this disgusted look on his face, you could tell that he knew what the market was doing. He said, you know, I'm going to be lucky if I can get 1%, but that's the market it is what it is. And I was like, 1%, really? Well, would you be open to 5%.

And he was, well, yeah, I mean, who wouldn't? But where can I get that? I said, you know, I don't know if this is going to make any sense. you or not, but why don't you just leave your equity in the house? And I'll pay you the 5%. And he thought about it for a minute and you could see him really struggling trying to figure this out. And he goes, well, I'm going to need some cash. I said, okay, how much? He said, well, if I could leave with $25,000 in my pocket, I'd accept your payments on the rest. So I did some quick calculating and I let him know that, you know, I could probably put a deal like that together. So we shook

hands and we agreed to agree. We had some more details to work out, but we agreed to agree. Ultimately, here's how it went down. I used $75,000 of my private money loan to pay off his existing mortgage, and then I gave him the remaining $25,000 in cash. Now, my payments on that private money loan are $667. I've got to keep my overall payments below $1,500 for this to meet my terms. Now, the seller carrying back $150,000 at 5%, amortized over 30 years. that creates payments of $805, making a monthly payment of $1472, $1,472. It's a little bit under my $1,500 max, or okay, but it was just barely making it. I wanted to see if I could create a little bit more cash flow for myself.

So I said, you really don't want to wait 30 years to get your money out of this, do you? And he agreed, that is a long time. I wouldn't mind having it a little sooner. And I was like, well, you know, I'm bringing that up because I'm going to need a little lower payment to make this work for me. Would you be open to amortizing the loan over 50 years with the balance due in 10 years? And he thought about that and he's agreed, yeah, that'll work out fine for me. If that helps you and that puts this deal together, let's do that. And so what that did is it brought my payment to $1,348.

Got a little bit more room there. And now he doesn't have to wait 30 years to cash out. Now, as I got deeper into this deal, the numbers were still a little too thin for me to do just a basic lease. So what I did is I opted for a lease option. option or a rent to own type situation. And I started by placing an ad in Craigslist titled, Three Bed, Two Bath, Rent to Own, 3% moves you in, no banks involved. That ads always worked for me in the past, so that's the one I stick with.

And the phone started ringing almost instantly like it typically does. And I ultimately chose a family to lease option in the property too. And here's how those numbers played out. I valued the property at a premium of $265,000. On a rent to own situation, you can go for a little bit more. So I've already got $15,000 built in right there. Then they paid 3% up front for the option. So I put another $7,800 in my pocket right away, just like that.

Then it was a two-year option at a 5% appreciation per year, making the actual sales price at the end of the term $292,000, creating another $32,000 of profit and some change, totaling $54,800. And then, don't forget the lease payments of $2,200 a month, of which I'm letting them contribute $100,000, a month to their actual purchase price, as long as they didn't miss a payment, and as long as they covered all the maintenance of the property under $500.

And what this did is it gave me a very comfortable and solid to your cash flow of about $300 a month, adding another $7,200 on top of my $54,800, giving me a grand total of $62,000 of potential profit on this property. Now, if they don't exercise their option, I'm just going to do this all over again. And if I have to, I can actually do this several times before my balloon payment to the seller is due. So to recap, I found the deal with the yellow letter. I gave the seller their full asking price above market value.

I used private money and creative seller financing to acquire the property. And I'm selling the property over time via a lease option. And I didn't put $1 dollar into the deal nor one point of my own credit. I like that deal. I'll do that all day long. I'm Matt Terry. I'll see you next time with another case study from the Epic Files. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.