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Another Way to Flip

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THE SCENARIO Recently, a customer (call him Ron) asked me for some help determining his yield on a deal he'd recently done. I've changed the numbers here, but the basic structure of the deal is the same. Ron flips houses. That is, he buys them at a discount, fixes them up a bit, then re-sells them for a profit. The unusual thing about Ron's method is that he sells them on terms, that is he takes payment for the house over time, rather than getting all of the money in one lump sum. The question: If Ron buys a house for $50,000 and sells it for $80,000 with 10% down, and carries the balance at 8.5% for 15 years, what return does Ron get on his money? For simplicity, we're going to ignore the "fix them up a bit" for this calculation, and we'll assume that Ron buys the house and then sells it on the same day.

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THE SOLUTION This one is relatively straightforward, and has two parts:

1. Find out what the buyer is paying Ron every month.
2. Find out Ron's return on the money he still has in the deal.

First things first, make sure the calculator is using 12 Payments per Year. Step 1: Finding the payment N: 180 (The buyer pays for the house over 15 years, which is 15 x 12 = 180 months) I/YR: 8.5 (The buyer's interest rate is 8.5%) PV: $72,000 ($80,000 minus a 10% down payment is $80,000 - $8,000 = $72,000) PMT: (This is what I'm trying to find) FV: 0 (At the end, the buyer owns the house free and clear)

The buyer pays Ron $709.01 every month for the house.

Step 2: Finding Ron's return Note: After receiving the $8,000 down payment, Ron has $50,000 - $8,000 = $42,000 left in the deal. N: 180 (The buyer pays for the house over 15 years, which is 15 x 12 = 180 months) I/YR: (This is what I'm trying to find) PV: -42,000 (Ron has $42,000 left in the deal) PMT: 709.01 (The buyer's payment from Part 1) FV: 0 (At the end, the buyer owns the house free and clear)

Ron makes 19.07% on his $42,000.

That's a pretty nice return, particularly as it's consistent over the whole 15 year payment period. If the buyer pays off the loan early, that improves Ron's return even further, but we'll cover that another time.

What do you think? If you could, would you buy a house and then resell it over time rather than right away? Do you see anything about this that's better than owning a rental property? Or worse? Let us know in the comments!