That’s a Great Deal at $30K Profit or Is It?
Evaluating Your Real Estate Investing Profit Closely
A 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
- Closing Costs (est.) $ 4,000 (A – B leg)
- Hard Money Points (2) $ 7,400 (needed because B – C is getting conventional financing)
- Mortgage Recording $ 2,500
- Carrying Costs (1%/month) $ 7,400 (2 months only)
- Closing Costs (est.) $ 3,000 (B – C leg)
- Realtor’s commission (2.5%) $ 10,000
- 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.