That’s a Great Deal at $30K Profit or Is It?

Evaluating Your Real Estate Investing Profit Closely

real estate investing profitA listing agent told a Student that he had a buyer for the property the Student had under contract for $30,000 above the Student’s price.  Thirty thousand dollars doesn’t sound bad but let’s look at the reality of the complete transaction.

To a casual observer this “shinning profit” may not be all it seems.  I asked the Student if the end-buyer was a cash buyer and he said “no”.  That greatly complicates the transaction on the B – C leg.  In fact, the unknown nature of the end-buyer’s lender could mean a seasoning period restriction, delays that run for months or no financing at all.  A quick solution would be to have the end-buyer have at least 25% of the purchase price as his down payment as this gives lenders a warm and fuzzy feeling.

Purchase Price                                $370,000

Sale Price                                         $400,000

Expenses

  1. Closing Costs (est.)              $    4,000   (A – B leg)
  2. Hard Money Points (2)          $    7,400   (needed because B – C is getting conventional financing)
  3. Mortgage Recording              $    2,500
  4. Carrying Costs (1%/month)   $    7,400   (2 months only)
  5. Closing Costs (est.)               $    3,000   (B – C leg)
  6. Realtor’s commission (2.5%) $  10,000
  7. Total Expenses (est.)             $  34,300

In the above example, the $30,000 potential profit that the agent sees turns into an actual loss of $4,300 and possibly much more if the end-buyer’s conventional lender had a seasoning period of 90 days!  A seasoning period is a self-imposed cooling off period to keep an investor who is selling from flipping too soon – stinking thinking by the bank.

If the end-buyer was a cash buyer the Student could have saved money on #2, #3, #4 for a total of $17,300 but he would have paid $3,700 for transactional funding on the A – B leg.  These changes would mean the Student could have made – $30,000 – $17,300 = $12,700 less transactional funding fee of $3,700 = A “net” profit of $9,000 – if everything fell into place.

A final option for a cash transaction would be to have the end-buyer  pay the Student’s closing costs (not uncommon if end-buyer is motivated) and the agent to take 2% commission on the B – C leg.  The result would be an estimated profit of $9,000 + $3,000 (#5) + $2,000 (#6) = $14,000 estimated “net” profit.

In this example, the Student having no money in the transaction, isn’t a bad real estate investing profit.  However, the deal killer here was the end-buyer needing conventional financing and the uncertainty of actually getting timely financing.

real estate investing profitI wish you limitless success,

Dave Dinkel

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