You’re Not a Rehabber!

In the TERMS business, we don’t do rehabs. We’re real estate investors!

When you take on a terms deal that spans multiple years, there’s a chance you might need to handle some repairs or renovations if the buyer ever defaults. And some people may even think it could be a good idea to put more money into renovations to get a better sale price on the home…

But we don’t do that. We’re real estate investors, and we’re not interested in flipping homes or spending large amounts of money on renovations. That’s why, in most cases, we pass those costs on to the buyer with full disclosure, a game plan for when they’ll do them, and all the other details.

Here’s one example of a deal where we were able to pass on a major renovation to the buyer at no cost to us. And this isn’t a bad thing for them—they were happy about it!

A 5-year deal resurfaces

The deal we’re looking at is an old one that goes back six or seven years.

It originally started as a five year lease purchase deal, but the more we talked with the seller, the more he became interested in getting off the deed. So we ended up switching it to a subject-to deal and bought the home. There was a first and second mortgage on the home, which stayed in his name.

Well, as it turned out, the buyer had to leave towards the end of the term. They didn’t default financially, it was just a couple that ended up separating. The wife wanted to move on and get out of the home, which is understandable. No hard feelings!

We were able to pull in around $40,000 from that portion of the deal. We got Paydays #1 and #2, but missed out on Payday #3 because the buyer left.

So we reposted it as a “rent to own or owner financing” and got a new tenant buyer in the home. And this is where things get interesting…

A $40k septic system

When we reposted the house, something came up. This is an old New England home with a cesspool, which is no longer acceptable when selling a home in this state and if getting traditional bank financing. To make a long story short, if anyone were to buy this home and finance it through a bank, they’d need to put in a new septic system immediately.

And a new septic system would cost about $40,000 in this case.

As you can imagine, we weren’t too keen on taking a $40,000 hit on this property. So we passed on those costs to the buyer. They take on the house as is, knowing it will need a new septic system when they purchase at the end of the term. Conveniently, the tenant buyers were actually rehabbers themselves, so they were comfortable handling this.

Let’s go over a little background information first, and then we’ll get into all the details on how we made this happen.

So, as mentioned before, there were two mortgages on this home. The first was for $174,973, the second $41,000—coming to a total of around $215,973. We were able to settle on a sale price of $259,900 with the new buyer. It would comp out higher, so we left money on the table for the new buyer to do work.

A large down payment

Payday #1—the down payment—in this case ended up being $30,000. That’s an initial down payment of $20,000 plus two payments of $5,000 over the next year or so.

If you’re paying close attention, you’ll notice that’s over 10%! That’s a pretty high down payment.

Now, in a situation like this where we have a good tenant buyer with a high down payment, we will often look into owner-financing the deal ourselves. This means they won’t have to go to the bank, which is a big deal in most cases but an especially big deal with this septic system situation. This is possible for us as we have no clock (term) ticking to cash it out—remember, we bought it subject to the existing financing.

Basically, we say to the buyers, “Because you have a strong deposit, we will consider owner-financing you. If you’re not late on your two scheduled down payments, not late for 6 (sometimes 12) months on your rent payments, and if you increase the deposit to 20% over the term, we’ll consider owner-financing and you will never have to go to the bank.”

You would not believe how happy this makes people. The stress of buying a home melts away.

If you don’t have to go to the bank, that means you avoid the underwriting process, you avoid $15k to $20k in fees, and you avoid all of the hassle and uncertainty that’s involved. But most importantly in this case, it means the buyer doesn’t have to immediately replace the septic system.

The house is still habitable with the cesspool and they will need to replace it eventually, but they’ll be able to choose when they want to do it. Plus, they’ll have saved enough on fees that it will lower the overall cost significantly.

And that is why these buyers were more than willing to take on the septic system themselves. It ended up being a great deal for them!

So, moving on with the Paydays…

Closing out the deal

For Payday #2, we had $1,357.72 going to the mortgage with $1,776.42 coming in from the tenant buyers every month. That’s a monthly spread of $418.28, or about $10,000 over the course of the 24-month term.

Payday #3 was lower than usual because the principal paydown was so low on this particular deal. It’s an equity loan, meaning it’s interest only. In the end, the principal paydown was only around $5,825 for the length of the term. The price markup was $43,927, which is great, but we still need to take the down payment out of the equation.

After you remove the down payment, the total for Payday #3 comes to $19,752.

For All 3 Paydays™, that’s $59,790. It’s below our average, but remember—that septic system would have cost $40,000! And when you factor in the $40,000 from the first part of this deal, that’s actually $99,790 in total.

This is not a needle in the haystack type of deal. We’ve done many deals like this where we pass on renovations and repairs to the buyers. And we’ve also done many deals where we end up owner-financing at the end. It’s all about knowing how and when to pivot, and how to properly engineer the deals.

Have you ever had to deal with an unexpected renovation like this? How’d you handle it? Did you pass on the costs?