My Presentation and the Power of NMD

My Presentation
I have been constantly hinting to my in-laws about them helping me out with our REI biz and making more money in a shorter amount of time and with less stress and physical labor than what they are doing now. The day after Thanksgiving, it finally must have hit them. They both quit their part time jobs at a local retailer. I then gave them both (and my wife) a 2-hour presentation on REI. I had given them a presentation almost a year ago, but I was very rusty, having only known about REI myself for only a couple of months. This time, I had the presentation fined-turned, and was able to answer the objections clearly andpositively. They both (as well as my wife) came away with a whole new vision of what it was I am trying to do. Matter of fact, the next day, my wife and I had to run some errands (okay, she calls them errands - I call them being drug to the stores to go shopping, unwillingly). During the time we were out (and even a couple of hours past that), my in-laws were scouring a couple of neighborhoods looking for vacant houses that met my criteria. In the 2-3 neighborhoods they visited, they found one. It just so happens this particular property was one that the owner called me about a couple of months ago. He was the investor who had a house on a L/O in which the tenants decided not to exercise the option and were going to leave at the end of their lease term (which was at the end of September, I believe). Evidentally, he wasn't able to unload it to anybody, and now it's sitting vacant. My in-laws also said they were going out today to go look at more neighborhoods. They also started giving me marketing ideas, like handing out flyers at flea markets, making Spanish-only ads in circulars, etc. Looks like I've finally got them hooked on REI. ;-)

The Power of No Money Down
We've all heard the benefits of acquiring properties with no money down. IOW, purchasing properties with other people's money (OPM), whether that means 100% financing or taking a property Sub2 or some other fashion. But I really never grasped the power that no money down can have for a seller. I've only looked at it through the buyer's position. What I realized over the Thanksgiving holiday was that there is a huge advantage of selling a property with no money down via seller financing.

I'm not really sure if the bandit signs I see sometimes that say "$0 Down - $xxx/month!" are the same thing I am referring to, but I'm guessing they just might be. Using the same real-life example I explained here, I'll show how one can buy a property with little or no equity, sell it for no money down, and STILL make a profit. Recall the numbers were as follows:

Existing Loan Balance: $87,500
Needed Repairs: $1,000
After Repaired Value: $87,500 (ie, no equity)

Since the owner wanted out with no consideration, I could have bought the house with no money down. In reality, though, I would have still paid for a title search, a house inspection, and probably a termite inspection. These would have cost me around $750-$1,000 total. So, no money down would have really meant about $1,000 out-of-pocket. So, I'm out $1,000 at the beginning. I then spend another $100-$500 on marketing the house, while I make the $1,000 in repairs. Max amount of money spent: $2,500. Since the owner financing market casts a bigger net than the traditional financing route, my days on market will be less and my prospective buyer pool will be more. Therefore, I'll figure three months max in holding costs: $1,000 x 3 = $3,000. Now, my total out-of-pocket expenses are: $5,500.

I could sell as in my previous example for $94,900 with $5,000 and the remaining $89,900 payable with a 30yr note @9.125% loan with a 2yr balloon and a 1yr prepay penalty (to cover the prepay penalty on the existing loan). This will have netted me the following:

$5,000 downpayment +
$127.73/mo cashflow x 24 months +
$88,645.57 (buyer's loan balance) -
$85,210.54 (existing loan balance) -
$5,500 (my out-of-pocket costs) =

$6,000.55

A little thin for my blood, but a profit none-the-less (although the ROI is only 9.1% over a span of 27 months, which is pretty lousy).

To get more interested buyers to purchase the property, I could instead use a no money down technique. Interestingly enough, marketing the home with no money down has a big advantage over asking for money down. Of course, the risks are higher the buyer may not live up to his/her bargain, since they have very little risk involved themselves. By asking for no money down, you are providing more options to the buyer. And, as I've said before, and cannot be stressed enough, when you have more options to give to a buyer (or seller), you have leverage. With a no money down deal, though, there must be a trade-off. The buyer cannot expect to "get it all" in a deal with no risk involved. Therefore, you can structure the deal by implanting the risk in the terms: a higher purchase price, a higher interest rate, or both.

Imagine the example above if I were to increase the purchase price from $94,900 to $99,900. Not only would I get the $5,000 difference from the price increase, but I would also make more money from how the deal is amortized. Financing $99,900 increases the monthly cashflow from $127.73/mo to $209.89. Also, the equity difference at the end of the term would be greater. Whereas with $89,900, the loan balance was $88,645.57, the $99,900 loan will have a balance of $98,507.42. This translates to a profit of:

$0 (downpayment) +
$209.89/mo cashflow x 24 months +
$98,507.42 (buyer's loan balance) -
$85,210.54 (existing loan balance) -
$5,500 (my out-of-pocket expenses) =

$12,834.24

So, instead of making just the $5,000 price increase as additional profit, making the total profit $11,000.55, we've added another $1,833.69 in addition to it. Now my ROI is 133.35% over 27 months, which is lot more feasible.

And this was just by increasing the purchase price by $5,000!

Imagine if I decided to also bump the interest rate by 0.5% to 1.0%. ;-)

And, remember, this was a deal that had $0 equity. Imagine if you have a property with 10%, 20%, 30%, or more equity alread in it!