He was standing by the side of Mormon Lake Road – about 20 miles east of Flagstaff, Arizona. The man was looking through a large spotting scope. It was pointed towards a tree line to the south of Mormon Lake. He fidgeted with the focus ring and then walked to the back of his Toyota Highlander SUV to grab some more equipment.
My wife and I were driving by. And we were curious. What was he looking at? I pulled up beside him and Linda hopped out. It turns out the man was a birdwatcher. He was keeping tabs on an osprey nest that sat in a tall pine tree at the edge of the lake. Apparently the winged creature nests there every fall before migrating south to Mexico.
While the osprey is a beautiful bird and all frankly I was more interested in the guy’s Toyota Highlander SUV. It was a hybrid.
What can I say? I’m a guy.
As my wife sat there admiring the glorious majesty of the osprey I couldn’t help but wonder – did this man’s SUV get good gas mileage? How much horse power did it have? Could it tow a boat? Was it worth spending an extra $4,000 over the gas model? The birdwatcher later admitted to me that the numbers didn’t pencil out. He bought the hybrid because it was the right thing to do. Over the long haul the extra money he paid for it would exceed his cost at the gas pump.
Most hybrid cars are like that – they don’t make economic sense.
In the real estate investing world there is hybrid exit strategy that does pencil out – seller financing. I call it a hybrid because seller financing is really like a fix and flip – buy and hold combination. Let me explain it to you by breaking down a deal my partner Manny and I just closed last month.
We partnered with an investor that had a self-directed IRA and purchased a bank owned home for $120,000. It cost another $25,000 to fix up the house. We sold the home to a buyer and did what is known as a carry back for $225,000. The buyer put $10,000 down and is paying us 9.95% interest. The loan is amortized over 30 years but will balloon in five. Here’s a breakdown on the numbers:
- $225,000.00 sales price
- $145,000.00 purchase price and repairs
- $ 80,000.00 spread
- $114,000.00 interest paid over 5 years
- $194,000.00 NET PROFIT = our investor’s share of the profit equals a 13.4% annualized cash on cash return
We make money up front with the down payment – cash flow for five years – and a large spread at the end when the buyer refinances or pays us off. There you have it – a hybrid that makes money.
But here’s the catch – you have to find these buyers. They’re not working with Realtors. Why? Because most Realtors don’t know what seller financing is and sellers don’t usually advertise on the multiple listing service.
We get our buyer leads from Craig’s List, our website and radio ads. We’ve had more success finding the buyer FIRST and then locating a house that meets their needs. This is easy to do right now because of all the bank-owned properties on the market. As I sit here today we have six buyers waiting for us to find them a home – they are all well qualified with $10,000 or more and solid income. The only reason they need us to finance them is because their credit is dinged up from a recent short sale and/or foreclosure.
What more could you want? You get an above average return without the leaky toilet in the middle of the night phone call from your tenant. With the extra time and money maybe you could take up bird watching.
Check out this video to learn more about our seller financing business model: