07 Nov Are Terms Deals Worth the Wait?
Are terms deals worth the wait?
Well, you can decide after reviewing this brief overview, but terms deals involve multiple Paydays over the length of the term. So, are they worth the wait?
Unlike a traditional real estate transaction where everyone is paid out in one large transaction, terms deals involve multiple paydays over the course of the term, which is generally anywhere from one to four years or even more.
These drawn-out payment schedules sometimes scare people away from terms deals. So, is it really worth the wait?
Well, in most cases, the answer is clearly and unequivocally YES. Terms deals are far more lucrative than traditional deals and can provide consistent cash flow throughout the length of the term. You get a large payment upfront in the form of a nonrefundable down payment, monthly cash flow from the tenant-buyer, and then another large payment at the end of the term.
Don't believe us? Let's take a look at a deal from one of our Associates that is going to pay out six figures over the course of three years.
Three Years of Consistent Cash Flow
The source of this deal was a FSBO (for sale by owner) that our Associate found through her virtual assistant. The virtual assistant is trained to call on FSBOs and expireds, and if they find someone who is open to discussing a terms deal, they send it on to our Associate. This is a great, inexpensive way to call on hundreds of leads while only personally dealing with the ones who are interested. We want to speak to people who want to speak with us.
After talking to the seller, our Associate agreed to an owner financing deal with a purchase price of $534,900 on a 48-month term. She was then able to find a great tenant-buyer for the property, with a sale price of $579,900.
(We generally say that if you have a house that's over $200,000 on a term of 48 months or more, it will be a six-figure deal. This one is no exception, as you'll see below.)
There is one nuance that we should cover, however, before we get into the 3 Paydays on this deal. As mentioned above, our Associate structured a 48-month term with the seller. But she structured a 36-month term with the buyer.
Why would she do this?
This is a method we commonly use to give us and the tenant-buyer some room to pivot. If they are able to purchase the home at the end of 36 months, great! If something comes up and they need a bit more time, we have a year buffer to get them ready to buy. This is more common than you might think—oftentimes tenant-buyers will jump on the chance to extend the term because it gives them more time to sort things out on their end and get ready to be a homeowner and even put themselves in a better spot qualification wise which means more attractive mortgage terms for them.
And if the tenant-buyer does decide to extend the term, that just means more money for our Associate.
All 3 Paydays
Let's take a look at what our Associate can expect for All 3 Paydays on this deal. First, we'll look at the numbers assuming a 36-month term. Then, we'll calculate how much they'll increase if the tenant-buyer opts to extend the term to 48 months.
Payday #1 is the down payment, which will be the same regardless of how long the term goes. The total will be $57,000 and that starts with one initial payment of $17,000. From there, the tenant-buyer is going to pay $1,666 each month toward the down payment for 24 months (in addition to the monthly rent costs).
That adds an additional $40,000 to reach the full amount of $57,000.
Payday #2 is the monthly spread. Our Associate owes $1,757 to the seller each month and is getting $2,195 per month from the buyer. That's a profit of $438 per month or $15,768 over 36 months.
Payday #3 is the markup of the home, plus all the principal paydown that accrues over the length of the term. As mentioned above, our Associate agreed to a sale price of $579,900 with the tenant-buyer. That's a markup of $45,000.
And that monthly payment of $1,757? Well, that is all principal paydown. So that's an additional $63,252 over the length of the term. When you remove Payday #1, the total for Payday #3 comes out to $51,252.
Add up All 3 Paydays, and our Associate is ending this deal with $136,020 in her pocket. But what happens if it goes to 48 months?
Well, in that case, Payday #2 jumps to $21,024 and Payday #3 jumps to $78,084. The total is then a whopping $156,108.
So…Is It Worth It?
So, is this kind of money worth the wait? Well, you tell us. Regardless of whether it goes for 36 or 48 months, both situations come out to around $40,000 of passive income per year—and that's just from one deal! You can imagine how these numbers look when you factor in just a few deals per year. OH, and by the way, this was her very first deal with us! Congrats Lara!
As you ready yourself to spring into 2021, how many of these would it take to change your financial picture? Watch carefully in just a week or so we'll be announcing our Black Saturday annual promotion – not one to miss.