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But What If They Refinance?
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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THE SCENARIO
Last time, we
covered a scenario where Ron buys a house at a discount and then sells it on terms rather than taking all of the sale money right away. Ron can make a very healthy return on his money by doing this, as we saw.
However, that's not the whole story.
What if the buyer was ok with 8.5% interest to start, but after 5 years is able to get a lower rate and decides to refinance the loan? At that point, Ron gets all of the money that's still owed to him, which will change Ron's investment yield.
The question: Ron has $42,000 left in the deal after buying the house and receiving a down payment during the sale to the end buyer. The buyer starts out owing $72,000 and paying $709.01 per month (8.5% interest) on a 15-year amortization schedule. If the buyer pays Ron off after 5 years, what's Ron's ROI?
THE SOLUTION
This one is pretty straightforward, and it has two parts.
- Find out how much the buyer still owes after 5 years
- Find Ron's ROI
First things first, make sure the calculator is using 12 Payments per Year.
Step 1: How much does the buyer owe after 5 years?
N: 60 (The buyer pays Ron off after 5 years)
I/YR: 8.5 (The buyer's interest rate is 8.5%)
PV: 72,000 (The buyer starts out owing $72,000)
PMT: -709.01 (The buyer's monthly payment is $709.01)
FV: (This is what I'm trying to find)
After 5 years, the buyer will have to pay Ron $57,185.21.
Step 2: What's Ron's ROI
N: 60 (The buyer pays Ron off after 5 years)
I/YR: (This is what I'm trying to find)
PV: -42,000 (Ron has $42,000 in the deal)
PMT: 709.01 (The buyer's monthly payment to Ron is $709.01)
FV: 57,185.21 (From Step 1)
Over the 5 years, Ron makes an annualized return of 24.06%.
Note that after 5 years, Ron receives back $15k more than he even had in the deal, and he got a monthly payment of over $700 in the meantime. Not bad!
What do you think? Do you like this style of selling a house? Have you ever tried it, or bought a house this way (on terms from the seller)? Let us know in the comments!
