Buying a House With a Tax Refund? Here’s How We Did It

If you’re having trouble moving a property, you need to get creative.

What should you do when you’re having trouble moving a property?

The short answer: don’t worry.

The long answer? That’s what we’re going to discuss today. In this post, we’re looking at a great example of a deal that looked like it was going nowhere—but we were able to move it along and make a good spread by getting a little creative, thus tallying up 3 great Paydays.

Here’s how it happened.

The 120-day deal

The deal we’re going to be looking at started as an expired listing in Connecticut. It was a sandwich deal, and the owner was a nice woman who was a teacher at a nursing school.

This property ended up being on the market for around 120 days. Scary stuff, right? We find that a lot of people start to get scared when they have a property sitting around the 90 to 120-day mark, and it’s understandable. But these things happen, and you shouldn’t get scared even if you’re getting close to 120 days. It’s important to figure out why the property has been sitting for so long, and then use that knowledge to find a solution. Also, when you’re new, you’ll always make your deals contingent upon finding your buyer anyway so that you’re not taking on anyone’s payments.

So, why was this property sitting so long? Well, there were a couple of reasons.

First, this was a small town in Connecticut with a limited market. There just wasn’t much activity in this area, and we see that a lot. It’s not the end of the world.

Second, the owner’s payments on the property happened to be high because she had a first and second mortgage. Plus, Connecticut has high taxes, which made things worse.

Here’s what we did. We started by dropping the price as low as we could go and eliminating the taxes from the PITI (Principal, Interest, Taxes and Insurance) payment. As soon as we got a buyer to the buyer meeting, we put the taxes back in—because the buyers are going to have to be paying taxes as soon as their homeowners. The videos we use to educate the future tenant buyers explain all of this very well, so they show up at the buyers’ meeting well prepared.

That move drew some people in. And there’s one really interesting piece to this deal… which is that it happened during tax season. The reason the buyers were able to come to the table with a down payment is because they were using their tax refunds! They literally received their tax refund, turned around, and used it as a down payment on this property.

How cool is that? There is no other business where you can buy a house with a tax refund.

So, we had our buyer. Let’s look at the numbers.

Payday #1

The purchase price on this property was $220,000. The term was 36 months, and we sold it for $259,000. There were three paydays in this deal. Here’s the first one.

The buyers—a young couple that lived in the same neighborhood—came to the table with $7,000 (their tax refund) and the first month’s rent, which was $1,800. Now, the way we structure our deals with the sellers is that we make payments 30 days after the tenant (buyer) is in the property. This allows us to pick up an extra month’s rent almost for free, which is important on deals like this which have small spreads. It’s actually already built into our agreement with our sellers.

We ended up structuring this deal over the next 24 months, although they had the option for an extension to 36 months. We were able to structure an additional $14,000 in this 24 months through, you guessed it, their tax refunds over the next two years.

Now, it’s important to clarify that although this whole tax refun d thing is exciting—not everyone will be able to buy a house with their tax refunds like this couple did. The buyer needs to have a good income and great debt to income ratio. They need to be well-qualified. But if that stuff all looks good, it can be an amazing option. In fact, you may want to work it into your marketing during tax season—no one expects they’d be able to buy a house with their tax refund!

So, the first payday came in around $21,000 (thanks to those tax refunds) plus the first month’s rent. Around $23,000 total.

Payday #2

The second payday ended up being small. We had to keep this one low in order to get a buyer into the house, because the rent we were charging—$1,800 per month—was pretty high for this area.

The spread for this ended up being $34 per month. Yes, you read that right—thirty-four dollars. Not $3,400. $34. It was an incredibly small spread. Over the next 36 months, that totallted to $1,250.

And if you’re confused—the spread we’re talking about here is the difference between what we have to pay out to the seller and what we’re collecting from the buyer. That difference was $34 each month.

So, why did we do this? Well, we were in this for the long haul. The market showed us that the overall profit (three paydays) we could make on the property was large. The house sold for $259,000, which is a spread of $39,000 before you add in the principal paydown benefit..

The principal pay down is huge. It ended up being around $600 per month. Starting to get the picture?

Payday #3

Now it’s time to add everything up for our last payday. We bought the house for $220,000 and sold it for $259,000. That’s a $39,000. Take away the $21,000 we received initially, and you’re left with $18,000.

But the principal pay down was $620 per month over a 36 month term. That’s $22,320. Add that to the $18,000 from above and you’ve got $40,000 for the third payday.

When you add that to the first two paydays, the all-in total comes to around $64,000. That’s $64,000 going into our pocket on a $220,000 house. A house that, let’s remember, was bought with tax refunds. Pretty cool.

The lesson here is simple. If you’re approaching the 90 or 120 day mark with a home, don’t panic. Instead, look for creative ways to find a buyer. In this case, we lowered the price as much as we could and took advantage of the time of year—tax season—to get a buyer into the home who would’ve never imagined they could buy a house.

Next time you’re dealing with a property that won’t move—get creative! It could result in a bigger payday than you thought possible.