Making the Most of a 24-Month Term

We always recommend making your terms as long as possible. But what happens if the seller insists on a short term?

When you’re doing a terms deal like a lease purchase or owner-financing, it’s almost always better to structure it with a longer term rather than a shorter one. We generally opt for four years or more if possible, and sometimes even longer.

Why do we do this? Because with these deals, you’re generating money every month from your profit on the monthly spread and the principal paydown. The more months there are in your term, the more money you’ll make in the end! It also gives you more time and less stress to get your buyer cashed out.

But what happens when you have a finicky seller that insists on a short term? You make the most of it! In this post, we’re going to look at how one of our Associates was able to make the most out of a short, 24-month term.

A returned postcard

The source of this property was a FSBO (for sale by owner). Our Associate had sent out postcards to a list of non-owner occupied properties and one of them found their way back to him via returned mail. He contacted the sender and found that he had recently bought a house and renovated it, with plans to live in it.

But some things came up and he didn’t want to live in it anymore. He also didn’t want to rent it out and be a landlord, yet he wanted to maximize whatever he could get out of it because he owed so much on the home. He was going to sell it on his own, but was intrigued by our Associate’s postcard and our model of buying on terms. Our Associate ended up structuring a sandwich lease purchase with a term of 24 months.

So… why 24 months? This is far shorter than we normally would recommend, but the seller was insistent on using a shorter term. He wasn’t too sure about a terms deal and he wanted to get his money as quickly as possible.

In the end, it was either a 24-month deal or no deal at all—so our Associate made the right call by going through with it. He knew he could still squeak out a sizable profit in the end, and he was right! It’s important to be comfortable with the home when you have a shorter term, but also to make it contingent upon finding a buyer. That contingency gives you the assurance that you’ll only take it over with the right buyer who gets pre qualified to be mortgage ready on or before 24 months.

The 3 Paydays™

Our Associate was able to purchase the home for $62,000. It was a small house in an up-and-coming neighborhood, so he was then able to turn it around and secure a sale price of $89,000.

Payday #1 was a down payment of $9,000. In this case, though, there was an interesting nuance. The buyer couldn’t afford the full down payment at the time and wanted to find a way to borrow it.

So here’s what happened…

The buyer was able to pay $4,000, and then he borrowed $5,000 on his own (privately) which was paid to our Associate as additional down. This is just one example of how you can get creative with terms deals. And it shows how we can help buyers who would otherwise be unable to purchase a home. In this case, it was a great move by our Associate because it ended up sealing the deal for the buyer!

Payday #2 was the monthly spread. Even though this was an inexpensive home, our Associate was able to get a nice spread here. He secured $580 per month in profit between the money coming in from the tenant buyer and then going out to the seller. Over 24 months, that’s $13,920.

Payday #3 is, of course, the markup on the sale of the home plus the principal paydown. In this case, the principal paydown was very low—just $100 per month. So that’s $2,400 over the length of the term, plus the $27,000 in profit from the sale of the home.

When you add those up and remove the down payment, you’re left with $18,000 in profit for Payday #3. And when you add all of those numbers up, you’ve got $43,320 for all 3 Paydays™.

That’s over two-thirds of the initial cost of the home! $43,320 in profit on a home that was purchased for only $62,000.

So while we do always recommend structuring your deals with long terms whenever possible, this is a clear example of how you can create a sizable amount of money on terms deals with practically any home in any market.

What’s the shortest term you’ve ever done on a terms deal? Were you still able to turn into a worthwhile deal? Let me know in the comments below.