How to Take a Term From a Few Months to 10 Years

By reframing this deal, we were able to turn a house into a long-term retirement investment for our seller.

How often can you create an investment out of thin air with no money down and no prior experience? Most people would say not often, or even never. But in the terms business, we see it all the time. What does “all the time” mean? Well, as of the month of this being written, we secured 20 new properties—almost one per day!

In this case, we’re going to look at a first-time deal from one of our Associates. He had no prior experience in real estate, put no money down, and was able to work out a deal that is going to pay him out over the course of ten years—with one sizable down payment in the beginning, monthly payments throughout the term, and a nice Payday at the end. That is the 3 Payday system that serves us and our investors quite well—and hopefully you someday soon.

This deal was also done in Southern California, a tough market with lots of competition. We hear people say that you “can’t do terms deals” in areas like this—it’s just not true. Here’s the proof!

Going from a few months to 10 years

Our Associate first made contact with this seller in December. The house was an expired listing. Right away, the sellers made one thing very clear: they absolutely needed to sell the house by April to avoid capital gains on their taxes. This was their primary residence so if they’re not in the home 2 out of 5 years, that can trigger the Capital Gains Tax—so in most of those cases, we structure 36 months or less on the term.

Obviously, that doesn’t quite fit with every terms deal. Our deals are spread out over years, so the house doesn’t actually sell until the end of the term. But that doesn’t mean we can’t work something out... Here’s what we did.

With the help of one of our coaches, our Associate sat down with the sellers in their kitchen to propose an alternate solution. The reality is that they could make a lot more money in the long run with a terms deal instead of selling right away. So they told them that.

Our Associate and his coach talked to them about turning this property into a long-term investment for their retirement. Instead of getting a lump sum right now they’d have guaranteed income over ten years—with no effort on their part, unlike if they were to rent it out on their own—and a nice Payday at the end.

They liked the sounds of this, but still wanted to try their luck with a realtor, so they put it on the market. Our Associate kept in touch with them, checking in every few weeks…

Lo and behold, a few months went by and they hadn’t gotten a single offer on the house. They came back ready to set up a deal! (We are seeing this more and more with the Covid-19 making things tougher on sellers, but this particular deal was well before Covid-19.)

The Paydays

For any new readers, we always structure our deals with three Paydays. Payday #1 is a down payment. Payday #2 is the monthly spread between the rental money coming in from the tenant buyer and the payment we owe to the seller. Payday #3 is the back-end profit when we sell the property to the tenant buyer, plus all the principal paydown that accrues over the course of the term on the underlying loan.

When we start these deals, we make it clear that we are not “purchasing” the home from the seller right in the beginning (when doing a lease purchase). What we’re doing is simply paying off their mortgage and giving them the remainder in cash—both at the end of the term. This works out in our favor because the principal on the house will be going down throughout the term as we make payments. When it comes time to cash out the seller, we’re able to take that difference.

With this deal, our Associate was able to “purchase” the home for $865,000. But really, the seller had about $605,000 in equity. So our Associate was agreeing to pay off the remainder—$260,000—and give them the $605,000 at the end of the term.

The term, by the way, was ten years. This is a great deal for our Associate because it means more sustained profit over the long run, and it worked out well for the seller because they were now looking at this as a long-term investment for their retirement.

Payday #1 was ten percent of the purchase price—$86,500. For a house of this value, we always recommend going for a 10 percent down payment. Most down payments fall between six and eight percent, but when you’re dealing with a house that’s close to a million dollars you want to get as close to 10 percent as you can (if not over!).

Payday #2 was the monthly spread. In this case, the seller was already renting out the home for $3,800 per month. They owed $2,300 in PITI (Principal, Interest, Taxes, and Insurance), so they were making $1,500 in profit each month. They wanted to keep that profit, which is understandable.

Our Associate was able to rent the property for $4,100 per month to a tenant buyer—meaning he’d get a $300 monthly spread while still paying them the $1,500 they’re used to. Over ten years, that comes out to $36,000!

Payday #3 is the final back-end profit. This deal is still under way, but our Associate anticipates selling it for around $890,000, meaning $25,000 in profit. But there was also $570 per month being paid toward the principal, which adds another $68,400.

When you add those together and remove the initial down payment of $86,500, you’re left with $6,900 for Payday #3.

When you add up all three of those Paydays, the total comes out to $129,400. You can also add in the first month’s rent, since we always structure our deals so that we don’t start making payments until 30 days into the term. That means we capture the first month’s rent, which is an extra $4,100 in this case.

That means this deal comes out to $133,500! Not bad for a first-time deal with no prior real estate experience!

Terms deals can function perfectly as long-term, retirement investments. Have you ever structured a deal for someone’s retirement fund? Let me know in the comments section!