Deal Case Study - Buying an A Class Property with Seller Finance

Dan Austin: [0:01] Welcome to the collecting keys Friday focus. Hey there. Welcome back to another episode of the collecting keys Friday focus. You got me, Dan Austin, as your host today. And today, I wanna do a deal case study on a project Mike and I are about to purchase. We've been... Last week, we did our first deal case study with Dylan, one of the guys in our instant investor group, and we really want to put more of this stuff out there, more of this content, you know, showing and highlighting people in our group winning, and sometimes losing on specific deals, especially in this market where a lot of people are talking about sitting on the sidelines, or just trying to find their footing of where they can start, cause they have this like analysis paralysis, they don't know what's next, it's not quite set laid out in front of them. We want the people that are actually doing deals, that in five years, everybody's gonna look back and say, dang, they're crushing it. And the reason why they're gonna be crushing it is because they just kept doing deals, and kept working through this awkward, kinda difficult time, where most people are in a stalemate with this market. So for today's deal, I wanted to go over one that Mike and I are doing, because we have no idea how this one's gonna turn out.

Dan Austin: [1:05] So I wanted to give the initial numbers as we're purchasing, we'll close on this here in about three or four days after this episode airs, we'll be actually getting the keys to this property. And then you'll hear Mike and I give updates on the Mike and Dan show on Wednesdays, if you don't listen to those, start listening to them, and you'll get updates to this project. And then we'll do, once we're complete with it, we'll do another Friday focus, another case study on the actual output of this. And I think this will be fun, because you don't really ever see people out there that are putting stuff out into the ether on podcasts, or Instagram, or wherever they're posting their stuff. You rarely see people talk about the numbers that they ran initially when they went to buy it, and then what actually, what the actual numbers were. You always see the end state of it, and you know, high fives or or whatever, or you see the beginning stages of it, you never kinda get to watch the whole movie as it as it plays out. So I want this to be that case, and I'll just jump right into it. This is a property that we're purchasing in Post Falls, Idaho, so a pretty good market. It's just kind of moving along. It's not like really really bad, but it's not really really great right now.

Dan Austin: [2:11] It's just kind of an average, good steady market, nothing to write home about, so to speak. Deal actually came in on a mail lead back in early June, and we hadn't mailed for many months over in that market, many many months actually, which is why we love direct mail, because leads will still trickle in, you know, so you might send out a batch of mail, and maybe you get fifteen, twenty, 30 leads off of that mail, but that's just in the one month, you still have residuals coming in. And sellers like this, who happen to be an older seller, a tired landlord, they tend to hold on to those cards, and when they're actually ready to sell, they will they will call you, and they'll they'll sell because you... They've got your card, they got your number, and so again, that's why we love mail, it's just this residual marketing that kinda keeps going as you have you stayed in the business long enough. Anyhow, so purchase price, $425,000. The actual value that we believe it is, is about 525,000. The seller came in and said his realtor friend told him it was worth 475,000, which I think was actually a really reasonable statement by his realtor friend. He obviously wasn't trying to get a listing, and tell him it was worth a pile of money, and all that sort of stuff. So I think we were kinda right in there, but the seller knew what he had. He know...

Dan Austin: [3:22] It's a newer home. It's a 2,005 Vinyl Village built home in a very good, historically strong market, and doesn't need a lot. It has a brand new roof on it, but it's had tenants in it, and the inside needs a little bit of work, you know, paint, carpet probably, and some fixtures. Now full disclosure, me or Mike have not been in this property. We've seen photos, but we run it just like any other market we're doing, a 100% virtual, even when it's in our home market here in Spokane or North Idaho. So I'll probably walk in and shoot some content out there for everybody once we get the keys. But right now, I'm just going off of pictures, and, yeah, it looks like it needs some minor, you know, carpet paint type upgrades. Again, roof is new. The exterior looks pretty good, maybe a little bit of landscaping touch up. But other than that, it's pretty solid. So as we got into negotiations, the seller kinda knew that he's like, I got a solid property, I don't have to sell it, but I wanna sell it. And we told him, you know, frankly, we can't offer you the full retail price, even though it's worth it. But he... The the seller's logic was, I don't wanna sell it on the market because the tenants... And they are gonna move out, but I have tenants in there, and I'm gonna have to replace the carpet, so I'm willing to take less of a price, which...

Dan Austin: [4:28] Great logic, guess. A lot of us would probably still replace the carpet and list it, because it, you know, could be worth tens of thousands of dollars, but he wanted the convenience, and that's honestly why our business exists, because people truly do want the convenience, so we can offer that. The tough thing was we couldn't offer that convenience at the price that he wanted, so we pivoted to seller financing. And let me take a note on this, I've talked about creative financing quite a bit lately, kind of on this mission to like, make it known that creative finance is a tool. It's an uncommonly used tool, because it's freaking hard to get sellers on board, and to... Quite frankly, it's hard to get a wrap... Your head wrapped around some of these deals where you're gonna do subject to, wrap around mortgages, you're gonna do all these weird crazy things just to make a deal. The paperwork trail, you have no idea how it's gonna work. You call your title company, and they're like, I don't know if this is gonna work. Right? So it's just like this fine line you're walking on some of these. Again, Novations is another one, where it's just so complicated. And so for the people out there, we've had some on the podcast where they're talking about, I make a full business doing subject to, I make a full business doing Novations. It's like, they're either one in a million, or they really don't, and they actually end up leveraging other people's lead sources, and bringing it under their umbrella. Right?

Dan Austin: [5:42] So they teach that, but then they get a piece of profit of everybody's deal. That's typically how these guys are doing. A lot of it's bullshit. You should know how to do it, and you should know how to do it very well. But keep in mind, it's a single tool. Cash offers still going to always be the best. Seller financing is a close second, and then after that, the more creative you get, the more difficult it is, but a lot of newer investors tend to try to make deals that shouldn't work, work. They shouldn't work because the seller's unreasonable, they shouldn't work because the numbers are getting crazy, and so they think, well, instead of being a good salesperson, I'll just do some crazy weird subject to wraparound deal that makes no sense to anybody, and it just ends up falling apart and wasting everybody's time anyhow. So that's my 2¢, I'll type... Let me jump back into this. So we pivoted to seller financing, why we did that, was because the seller had a good asset, we knew he had a good asset, he knew he had a good asset, And so, he also owned it outright, he was ready to retire, so of course, income is great for him, and he knows what he's got, and it's a great asset. So he's a person I wouldn't mind partnering with, because he knows what he's doing, it's an asset I wouldn't mind owning, and it's a seller that's quite reasonable. So what we came back with, we asked him what he would want in that scenario of him being the bank, and he says, I want 5% interest. That is awesome. He gave us the number.

Dan Austin: [7:01] Now we can work around that number. So when you're looking at seller financing deals like this, you're looking at purchase price, down payment, interest rate of the mortgage, and then the actual amortization, like how long out will you spread these payments. You have then the fifth thing, which is kinda more like, I would call like four b, which is the actual length of the loan, which has nothing to do with how much the monthly payment. So typically, you'll hear the balloon payment, five years is the least, or the shortest balloon, anything above five years, I love it. So ten years, even better. So it gives you ten years to figure out something to do with this property, before you have to pay this guy off. But anyways, what we did was we said 5%, okay, so we already talked about the the price, we kinda negotiated around that, we got it down to about $4.25, and then he wanted 5% down, he actually originally wanted 10% down, and then we just told him we couldn't do that, we kinda walked away, and he just begged us to take the property, he's like, how about 5%, I just want 5% down. So we're like, okay, for 22,500, or whatever 5% ends up being, we're like, we'll do it. So essentially, the mortgage ends up becoming 400,000 at 5% interest. And then we said, what about an $1,800 a month payment, knowing that that's more than he's collecting in rent, because it was under rented.

Dan Austin: [8:16] And I looked at Zillow, I saw that the minimum I should expect for rents in that market was 2,400 for that house. And I knew that it could potentially even go up to 3,000, looking at some of the listings. So my worst case scenario was essentially break even, because I said taxes are gonna be $2.50 a month, insurance is 60, HOA fee does have a small HOA fee of $15 a month. So with the $1,800 payment, I was all in at 21.25. So I felt pretty comfortable there, that worst case scenario, I'd break even, of course, if in the first year, a furnace breaks, and I'm out $8,000, yeah, that's the risk of this kind of deal. Knowing though that I could also be cash flowing several $100 a month just off of this single door. And so that's where the 1,800 came from, and anyhow, he liked it, I knew he would. So 5% interest, $1,800 on a $400,000 loan, and then we just carried out the amortization to like... It ended up being, I don't know, like eighty, seventy something years. Right? So if you put in your if you put in your your calculator, your mortgage calculator, we just ran it out until we hit $1,800 a month. So really, if it was a full term loan, it would be like, I don't know, seventy, seventy years, but we're still having to pay them off in ten. So that's how that works. And again, if you have any questions about this stuff, or you're confused, hit me up on Instagram, investor mandan. I'm totally happy to clarify anything that I'm missing here, or that you're just not...

Dan Austin: [9:36] It's not clicking. Some of the stuff with the numbers can be kinda difficult to catch when you're just listening to it. So anyhow, that's that's how we we negotiated, we got there. So again, we are coming with 5% down, which is about 22,000. House is Vinyl Village, pretty good condition, it's gonna need some interior upgrades. We're estimating carpet paint, probably some new fixtures, a couple things on the inside, plus some carry cost. We're estimating with our down payment to be about 50 k out of pocket into this, so about 20 k in upgrades, some closing costs, which are probably only a couple grand. And so, yeah, that's kinda where we're at, 50 k out of pocket. So as a flip, like if we were just straight flipping this, we probably wouldn't do this deal, because we're gonna come out 50 k, we're gonna spend three, four, five months, whatever it takes to do this. Honestly, for you know, not like a major huge profit, know, we think it's worth $5.25, we'd probably list it at like, I don't know, $50.09, or somewhere really aggressively to try to get the pricing, so you start looking into the margins, and you're like, with the risk of something else happening, we probably wouldn't have done this as a flip straight away.

Dan Austin: [10:43] But looking at it as well, this is a great opportunity for us to employ a lease to own strategy, or a land contract strategy, as you've heard. So we're taking title of this property, we'll remain, we'll maintain our title. If you look at this, and we were to list it at 525,000, we'd want a 10% down payment, and we would add a thirty year mortgage at the current rates, even on the low end, the 7% rates, the monthly principal and interest would be $3,143. Again, we're paying 1,800. So then when you add the tax and interest to that, anybody that's buying this at market value with 10% down, is paying $34.50. So our goal is to list this thing at $5.25 with special financing, is what we'll say in the listing, requesting 10% down, and then we'll do the lease to own option, and we'll explain that terminology. And essentially, the 10% down is gonna be nice, because I would get our 50 k out of it, so we're $0 into this deal. Then, because it's the lease to own, they are responsible for all the maintenance, we don't need property management, you have to underwrite these people just like tenants, right, you are carrying their loan. So that's what we'll do, we'll be reviewing, and getting credit scores, and all that sort of stuff, checking employment records for people. But anyhow, the reason why we're thinking this is, on the...

Dan Austin: [12:00] If we know that we can rent it for no less 2,400 up to $3, we know that just the rental rates alone are going to be that. And if we know that if they're going to buy this for $34.50, or if they were to buy this on the market for 30, they would be paying $34.50. So what we can do is we can really feel strong about our sale price at that $5.25 k, because people are gonna get special financing. And what we'll do is we'll shoot for our rent to be in that no less than 2,600, probably into the 2,800 range, which means that's the money that just goes to us. And then we'll add a couple $100, $2,300, maybe even up to $400, as far as to their principal pay down. You don't have to do that, that's just how Mike and I like to do it. So we wanna stay under the actual amount that they'd be paying every month, by a couple $100 if we can, just because I think that's a lucrative, or it's a really... Looks really good to people trying to buy, because they're like, well, otherwise I'd be paying $34.50, but with this I'm only paying 3,200, something like that. But the idea is that our rent, we're going to be collecting 100% of that, just straight to us, and then we'll be able to... They'll be buying buying down their loan, which will...

Dan Austin: [13:08] So we'll be getting some of our equity on top of that down payment, we'll be getting some of that equity every month, so then it really becomes more of a cash flow game for us, where we're cash flowing, you know, anywhere between like 700 and $900 a month. Now, we would set aside a couple $100 a month, just in case these people fail, and they trash the house, and we actually have to go in and renovate it, but really, from that standpoint, we could be cash flowing, you know, 5 to $700 a month with $0 into this, so our cash on cash is amazing. No management, no headache, none of that stuff, we just have to once, you know, every couple year, or every couple times a year, just to make sure everything's going good, you know, make sure the house isn't getting trashed. So that's really our hope, is an infinite cash on cash return, cash flowing somewhere in that 5 to $700 a month after set asides. So... And and a sales price of 525 k. So you heard it here, that's that's what I'm quoting, those are the numbers I'm playing with, and that we're we're dabbling in. Some of them are conservative, some of them are not conservative, so I think there's a balance out of this that we should be good to go. I'm hoping, so we'll close here in a few days, hoping that we'll have this thing all wrapped up and ready to rock and roll, and be able to actually do a post mortem on this probably sometime like around October, so be hearing from us hopefully by then that we have a plan, and then in between we'll be talking about the details and numbers on the Mike and Dan Wednesday show. So that's all, I'm gonna I'm gonna stop there with this DOK study.

Dan Austin: [14:30] Again, hit me up on Instagram, investor man dan, I love chatting with people, I love talking about anything for the marketing that we're doing, and how we're doing it, all the way down to how we would manage a project like this, and what we're doing with contractors, all that sort of stuff. Happy to share my experience, that's why we do this. Really do enjoy working with our listeners, and helping you all out. So other than that, we'll catch you guys on one of our next episodes. See you. Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.