ACTUAL CASE STUDY: One of my real estate investor mentoring students will make over $400,000 on a single probate real estate deal this year.
She mailed out a few probate letters and found the owner of a free and clear house he inherited. He complained about having to maintain the property and he really wanted to sell it now but the market was slow. The house was worth about $250,000 and needed only minor clean up. It has a good floor plan and sits on a small lake in a desirable residential community. Since the house was free and clear, she offered to buy the house for $200,000 with terms to pay him $1000 a month until paid. Because the house needed a little work and she needed time to find a buyer, payments would begin 90 days after closing. You read that right, she asked for the payments to begin 3 months after closing and he agreed. Do you see what happens when you ask? You can negotiate anything!
Her plan is to rent this property at $1300 a month for the next 10 years and then sell it with 40 year owner financing for about $350,000. In that time, rents and values will rise and by that time she will only owe the original seller $80,000 and have a house worth $350,000. She’ll have created $270,000 in equity. And when she sells it for $350,000 with the owner financing it, she’ll collect over $2,500 a month but only pay out $1,000 a month. That’s right; she will clear about $18,000 a year for about 7 years. Once the underlying mortgage is paid off, she will still collect $2,500 a month in revenue with no outgoing payment. That’s $30,000 income a year for the remaining 29 years.
But let’s say her buyer sells the property in 80 months, which is the same time the underlying mortgage is paid off. It would look something like this:
Rent spread first 10 years $ 15,250*
Interest spread next 80 months $120,000
Remaining equity due $322,563* *
* After taxes & insurance, assumes a 3% annual rent increase
* * Based on a 7.75% interest rate paid by the buyer
A couple of other softer benefits include the fact that her profit will be taxed at the long term capital gains rate. Her other income will be offset by the expenses and depreciation during the period she holds the property as a rental, and she now has an excellent income stream to supplement her retirement. That’s what I call maximizing her intellectual capital!
If you’re interested in reading some additional articles related to Probate Real Estate, check out:
What the heck is Probate Real Estate? by Ron Mead
Probate Real Estate, Hidden Gems? by Herb Daly, Jr.