How I Was Able To Get My Investor Client 26% Cash On Cash Using Seller Financing

[Jimmy Lieu]

I'm a local investor and agent here in Columbus Ohio. I wanted to share with you a quick client story of mine (happened just a few weeks ago!) where I helped my client close a 26% cash on cash return deal using seller financing. I found this deal from someone within my sphere of influence.

So I found this deal in the Hilltop area, absolutely turnkey 3 bedroom/1.5 bathroom house with around 1500 SQ ft. From a normal purchasing standpoint, it doesn't really make sense and the ROI doesn't look great because with today's interest rates around 6.5-7%, it kills any sort of cash flow possible. However, I pitched seller financing, and the seller was okay with it! The worst thing they can say is "no" so why not ask??

The asking price was $155k, the seller wanted 25% down, was okay with seller financing the rest at 4% interest rate (amazing freaking interest rate!), and balloon payment within 5 years. The buyer can easily rent this property out for $1,600/month, or most likely even more! The buyer's plan was to rent for a few years, get positive cash flow coming in, and by the end of the 5 years, with all the accumulated positive cash flow, appreciation, loan down payment, etc., they will be able to easily refinance and get most of their money out! Best of all, this was a turnkey property, and is able to be rented out from day one!

Moral of the story: if a deal doesn't work from a numbers standpoint, always make sure to ask about creative financing!

If anyone has questions about how creative finance works, would be happy to answer any questions

[Ed W.]

@Jimmy Lieu A tip of the hat for a good use of creative financing.  However, with all due respect, a 5-year balloon sounds like a good deal but that 5 years will go by in a flash and there is nothing set in stone that says the interest rates will be lower.  I don't even remotely expect it, but peak Fannie/Freddie interest rates went to 14% in the early 1980's (prime was over 20% for a short while), I think they were 8ish in the early 1990's and, with relatively minor fluctuations, ended up 3ish and even lower in our recent history.  It's easy to find graphs that are more accurate than my memory that give a more comprehensive "look" than my feeble memory can provide.  

I grant you that over the next 5 years Columbus is far more likely to show appreciation than stagnant or lower prices but that is a likelihood, not a certainty. Who predicted Covid in 2015, 5 years before it turned a lot of the economy upside down?  Is that likely to happen again?  I doubt it but if China or Russia or North Korea become more bellicose or some significant blunder happens in another country that has great effect on us - it can hit the wall again.   I told a group of investors - guys like me - on a conference call in 2020 that while (in my belief) it was important to print dollars to keep the country afloat and help people trapped in their homes to have a way to eat, heat their homes, etc., the end result would be inflation.  Was I right?  I don't know, our inflation today may or may not be entirely the result of that needed cash or even related at all. 

The point is, none of this stuff is easy for the Fed to figure out and the average person on BP - especially me - is far less equipped to figure it out. I believe a better circumstance for the buyer would be to have an option to "buy" another 5 or 7 or 10 years of balloon extension for some enticing payment of principal (say, 5% or 10% of the outstanding principal or of the original purchase price) or, and far less ideal but that may prove to save your client's butt, some hopefully lesser amount of a payment that doesn't get applied to principal but that buys a good extension.