August 24, 2017 at 4:48 pm #11393
Michael AillonParticipantAugust 24, 2017 at 4:48 pmPost count: 292
I’m advertising a property for 3200 cash. However, I have a buyer who wants to do terms and will put down 1000 and can pay 300 per month. How much should I raise the price? How long should I finance him for?
Thanks for your help
Rod HallParticipantAugust 24, 2017 at 5:27 pmPost count: 297
All depends on what you paid for the property. I prefer short term deals returning 300 – 500% with X discount on balance if paid before X amount of time. $1000 down and $300 month is a nice deal. Sounds like buyer really wants to own and not just rent like so many long term tiny payment terms go. I’d think about $4800 total terms price.Kevin FarrellModeratorAugust 24, 2017 at 6:56 pmPost count: 1145
Michael – I do terms deals at 1.5 X cash price for terms.
For example $1000 cash or $200 down and $100 per month X 13 months = $1500. And I write it out just like that on the terms contract so that the buyer knows the difference between cash and terms price. And he knows how long it will take him to pay it off.
You can do whatever you feel comfortable with. Try to set it up so it makes sense to you and the buyer.Chuck LidtkaParticipantAugust 24, 2017 at 7:32 pmPost count: 137
Easy, clean & transparent way to implement it Kevin!MilanParticipantAugust 25, 2017 at 5:52 amPost count: 523
Kevin, tell us little bit about your experience doing larger deals. Are they selling? Do you have lots of tire kickers wasting your time. Anything you learned you would like to share?
Regarding term deals I mark them 75% using low down and low monthly payment, max $250. It backfired on me couple times already. You get the low quality buyer, but they sell fast. Default on some is almost certain.Rod HallParticipantAugust 25, 2017 at 9:19 amPost count: 297
Yep, all good stuff. I appreciate that you who have commented here are consistent in sharing and advice.Kevin FarrellModeratorAugust 25, 2017 at 2:27 pmPost count: 1145
Milan – I am just getting into higher value parcels selling for $10K to $40K. I get a lot of calls from people who want to buy on terms. I tell them that I want to sell for the cash discount price and do not want to sell on terms at this time. The right buyer for these properties can write the check on the spot. I am waiting for him or her. I don’t mind waiting.
My terms deals are all for properties under $5K. Most of those buyers need lots of hand holding. I do not want to deal with those problems with larger transactions. There is a lot of meat left on these deals the way I price them so another investor can buy at my price and still make a good profit on terms if that’s your business model.David CliveParticipantAugust 25, 2017 at 4:55 pmPost count: 10
Executive Summary: Theoretically, we should charge much much more for terms deals than cash because of our ability to reinvest in highly profitable deals. In practice, few buyers would agree to the total cost of the theoretical payments so folks have a higher financing price and charge interest but the combination often results in an implied interest rate of 25%-100%. Big money could be made with capital structure management/selling the loan.
As a finance guy, the question I ask is: what could I be doing with the money that is tied up in this financed property. The tool that finance people use to compare investment options when there are more deals than you have money for is IRR (what is my annual rate of return assuming I am continuously invested). If you can flip a property and double your money in a year, that’s a 100% annual rate of return. If you can double your money flipping the property in six months, that is a 300% annual return (if you start with $100 dollars, you end up with $400 by the end of the year thus a $300 profit on your $100 investment). Doubling your money in 3 months would be an IRR of 1,500%.
In theory, your effective interest rate should equal the IRR you estimate you can earn by flipping properties. Which would mean that your buyer would be making $300 payments for about 36 months for your deal to be equivalent to a 100% IRR (this is assuming the value of $3.2k, downpayment of $1k and $300 monthly payments).
PEOPLE WHO SELL ON TERMS AT THE SAME PRICE AS CASH WITH NO INTEREST ARE EITHER NUTS, DON’T UNDERSTAND THE TIME VALUE OF MONEY OR HAVE OVERPRICED PROPERTIES.
Because no buyer is going to agree to an explicit interest rate of 200%+, many people in this business use a higher price plus a reasonable expressed interest rate for financed deals and the combined effect is equivalent to an interest rate of 25%-150% on the cash price (higher percentages tend to work best on smaller deals).
In return for only making 25%-75% interest the seller has a higher probability of selling the property quickly. There is also the potential for defaults which can be a headache, but may offer the chance to resell the property and collect more in payments than if the buyer had completed the purchase (though I would argue that when your portfolio experiences a lot of defaults, you won’t be able to sell the properties for top dollar because of economic or other conditions).
Because this is a small deal, my advice would be to start the discussion by asking for payments that give you at least 100%+ IRR on the remaining $2.2k of your asking price left in the property after the down payment. A 100% IRR is roughly equal to 10 payments of 300 dollars – excel/google sheets function for number of months:
=NPER(2^(1/12)-1,-300,2200,0) = 9.9 monthly payments
=NPER( [this is the function that calculates number of periods]
2^(1/12)-1 [this converts the interest rate into a monthly interest rate, start with a base of 1 and add the 100% interest rate to arrive at 2. The next step is to raise that to the power of 1/12 and then subtract the base of 1 that we started with to get the monthly compounding interest rate]
-300 [the monthly payment amount]
2200 [the remaining purchase price after the down payment]
0 [the ending value after all of the payments are made at the interest rate you specify should be 0 because the loan should be paid off]
Making the big bucks:
If you find or know of an investor who is interested in earning 10%-20% on payments backed by raw land, you can sell the loans to the investor for a profit (so you make a profit on the land and an additional smaller profit on the loan) and you don’t have to wait for payments to come in – you can just go reinvest the loan proceeds into the next deal. This is the best of all worlds because you can offer your property to a larger market, get your money right away, receive a larger profit and make an investor happy (of course you need to work out default situations and have a plan in place for defaults before hand).MilanParticipantAugust 25, 2017 at 7:33 pmPost count: 523
Nice David! That is a true science of time value of money.
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