Request from Seller for Loan Advance on Seller Financing - Math Help
Investor · Member since 2018 · 259 posts · 74 votes
Request from Seller for Loan Advance on Seller Financing - Math Help
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Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2yYou’re dismissing a 25% return on your $100k? Admittedly it’s over 4 years, so it’s really only a guaranteed 6% return. But that means you have to have a guaranteed return higher than that to dismiss this out of hand, much less say it’s bad for you.
I guess if you want to get greedy or set a bad example if suddenly you need help come extension time or when that runs out. Then sure stick it to them after all they’re the idiots that gave you 0%.
Personally I’d take it partially because it’s a good deal for the buyer, partially because you’re helping someone out that helped you out a year ago. Plus it will help with your refinance. If you feel the need to WIN at the buyer’s expense without taking actual cash out of their hands agree with the option period being extended to 4 years. That will cost the buyer a boatload of money, but not actual cash out of hand.
29 Replies
- Investor · Member since 2018 · 259 posts · 74 votes2y
Quote from @Jonathan R McLaughlin:
@kim
@Kim Hopkins can't imagine why that was confusing! Reread it and I didn't understand it :)
I meant that if you did nothing with your 100K other than keep it in a savings account or buy treasuries with it you would earn 5%/year or 20K over 4 years. So keep that in mind when you compare alternatives.
His giving you a 25k reduction of principal is essentially equal to the same amount you would earn in a savings account while keeping the 100K liquid
I think thats what I meant :)
Thanks @Jonathan R McLaughlin, and yes, totally agree! That's why I think the counter needs to be closer to $80-90k (versus $25k) which I don't think he'll go for, but I couldn't have determined a number without getting this better understanding so it is what it is!
- 2yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Quote from @Henry Clark:
Option 3 is your opportunity cost. In our business model, those are the returns we would expect in your loan scenario. We would expect a 2,000% return in 2 years. Our normal model we shoot for 400% return in 2 years, with Capital Gains Tax rate. Not one-off deals, can do 1,000 of these deals. Your seller financing and the $100,000 discussion changes the calculation.
Your returns might be lower based on whatever your business model is. Just incorporate your downpayment into the equation as I noted above. Then note or develop for the Seller some form of guarantee (personal, or other unencumbered property) so they take a 2nd lien position or have no lien position on this property.
You're offering your team a Finance explanation and options. I would include a business solution also, include the potential leveraging in this business deal. Your Operations Manager, Controller or CFO would want to look at that option.
All depends on your downpayment on the deal. I assumed the owner did $750k loan but required a $750k downpayment. Adjust to your true downpayment. If you got 100% seller financing, then disregard my option C.
Again, we are talking Real Estate, which to me is leveraging. If you offered me a Financial investment with a 15% guaranteed return on a AAA investment, that compounds annually, I would turn it down every day of the week. Someone will talk about Passive investment. It is a lot of work to find a 15%, guaranteed return on a AAA investment. The work I do is 1 + 1 = 2 type work other than site location, but even that is easy after you have done it.
This is the BEAUTY of real estate investing. While one man (me) would jump on a passive 15% return, another man @Henry Clark wouldn’t even consider it. Henry, please send me all your low risk, AAA 15% investments that you turn down!
- 2yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
REI is fun. That's why I like BP. You get to see many angles of other peoples and situations. If I run into a 15% AAA annual return investment will send your way definitely.
Each person has their own Risk Reward. Different resources, background and expectations.
Like this post, which is unusual because it starts with a great deal. And a small decision which possibly opens up renegotiating on the seller financing.
Assume they did a 50/50 split of the original purchase price. $750 down./$750 loan. You could throw in the $240k payments but won’t. Add $100k.
Now you have $850k equity. Change to boots on the ground info.
Cross collateralize with same bank.
They give you 65% collateral on the $850. Or say $550k.
Each of us has our own business model.
At 25% down we could do a $2,200,000 deal.In a market with Self storage 10x20 unit at $150 per month. That becomes worth over $4mm the day it is running with no occupants.
Hold for 12 months for capital gains tax rate. Even at 30% occupancy.Did not count monthly income.
That’s a 2,000 percent return on $100,000 investment. Your other value was tied up not being used.
If you did a straight cash downpayment then it’s a 400% return over 2 years.
The original post was financial only. It doesn't address the leveraging and deal making component of REI. Just another option for the management team.
A. Taxes. Ordinary income versus capital gain?
B. 1031 exchange vs paying taxes?
C. Passive? Self storage development definitely takes time and experience. But, how many deals have to be analyzed to find the comparable dollar magnitude at a 15% annual return on a AAA investment?
D. Risk- I would think Self storage is more risky, but once you have done it, it’s not that risky. You can analyze the market, current competition and future competition up front.
E. Repeatable- Just a magnitude statement. I could see doing $6B of investments easily. So not talking one off deals. Your deals I’ll go with repeatable also, but 15% AAA is hard to look for.
F. Not going to do the math. Starting with $550k which is better? Compounding the $550k annually 15% at ordinary income rates and reinvesting. Or doing a 400% capital gain return every 2 years and reinvesting and leveraging at 25% down. After deal 1 you can do 4 deals after you pay your taxes.
Someone do the math for 10 years and let me know the figures.
It's your money, you're always right even if you're wrong. Another thing I like about REI. If I'm wrong it's my fault. - Investor · FL · Member since 2017 · 134 posts · 66 votes2y
Wow what a fun brain tickler indeed! I buy rehap and sell retail centers so my suggestion may be a little biased.
Pending how much equity you have in it at the moment, I would either sell it on the market for a profit and to satisfy both parties bank account desires.
OR
Seller finance it to someone at the new buyer putting 30% or more down. This would put $100k+ in your pocket and his while you continue to collect cashflow.
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