How to Turn an Expired Listing Into Over $215k in Profit
This is a cookie-cutter deal that will show you how to turn expired listings into massive profit centers.
We often talk about how terms deals are flexible and allow you to pivot in many different directions. When we (or our Associates) take on a new property we always plan out the deal based on the information we know, including some of the different ways it could change over time.
In this article, we're going to do exactly that. This is a deal from one of our Associates that is still in the works at the time of writing, but we worked with him to plan out All 3 Paydays™. This will give you an idea of how we set up these deals and how we think through everything in advance. It's a "cookie-cutter" projection that you can apply to many other deals.
The three questions
When we first get in contact with an interested seller, we always ask them three questions:
- What's the net cash out you were thinking you’d get (notice not price so we can work the underlying debt and other variables but in this case it’s free and clear)?
- If we agreed upon that cash out net to you, what's the least you'd be willing to take per month as a principal only payment?
- Hypothetically, if we could get you both of those, what's the longest term you'd be willing to go before we cash you out?
From there, we can begin to formulate a deal based on the numbers they provide us. We do this by using a mortgage calculator to calculate the estimated mortgage payment that a tenant buyer would have if they were buying it (this is on free and clear homes primarily which is our owner financing niche within the niche).
Once we have all those numbers, it becomes very simple. We can figure out what we need to charge the tenant buyer in order to get a monthly spread for Payday #2, and we can estimate how much we'll be able to sell the home for at the end of the deal to get the markup for Payday #3. We already know the monthly principal paydown and term length, which allows us to calculate the total amount of principal being paid down. And finally, we can make an estimate on the down payment to determine Payday #1.
So let's take a look at how it worked out in this deal and how our Associate will likely be able to turn this expired listing into well over $200,000 in profit!
All 3 Paydays™
As you can tell from the title, this particular property is an expired listing—expireds are one of our most common sources because they are easy to find, contact, and the seller is usually very interested in finding an alternative way to sell their home (it’s a bit different for our Canadian students so expireds are primarily for our U.S. students).
The seller of this property has multiple homes and is looking to get rid of this one as they plan on spending more time at their main property. Since the house had been sitting on the market for so long, they were thrilled when our Associate told them he could take over the property.
The house was originally put on the market for $969,000 and then later the price was bumped down to $945,000. Based on those three questions above, our Associate has already agreed upon a purchase price of $930,000 for the home, and the seller said they would be willing to agree to a 4-year (48-month) term.
So let's take a look at the projected Paydays for this deal.
Payday #1 is the nonrefundable down payment, which we'll initially calculate at a simple 10%. Our Associate will likely get more than this by scheduling additional payments throughout the term, but for our purposes we'll stick with 10%—which is around $97,000. If the area warrants a jumbo loan we may require 20% to be completed over the term so we are setting the buyer up to win as we always seek to do.
Payday #2 is the monthly spread. Now, our Associate already knows that he will owe the seller at least $3,500 per month. With that in mind—and based on the estimated mortgage payment he has calculated for the tenant buyer—he is estimating that he can get about a $1,000 spread on this deal. That means a payment of $4,500 coming in from the tenant buyer each month.
Over 48 months, that comes out to a clean $48,000 for Payday #2.
Payday #3 is the markup on the sale of the home, plus the principal paydown that has accrued throughout the term, minus the down payment. Our Associate is estimating that he can sell the property for around $979,000—we think this is on the conservative side, but we'll leave it there for our calculations.
That's a markup of $49,000. There's also $2,500 being paid toward the principal each month (this is within that $3,500 payment from Payday #2) which comes out to $120,000 over four years. When you add those two numbers and remove the down payment of $97,000, you're left with $72,000 for Payday #3.
Add up All 3 Paydays™, and our Associate is looking at $217,000 in total for this deal.
And the best part? These are all conservative estimates. There is a high likelihood that our Associate will be able to get a bigger monthly spread and a larger markup. He also may be able to extend the term to be longer than 4 years, which would just continue to increase the profit from Payday #2 every month while also making Payday #3 larger with the additional principal paydown.
So there you have it! That is how we turn expired listings into profitable deals.
Do you plan out your deals like this beforehand? What's your method? I'd love to hear about it in the comments below.
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