Another lot in St. George potentially sold – please help me decide what to do
December 5th, 2006 by KenricWow, things are picking up in St. George.
So here is my situation:
- Offer #1 – $73,000 cash, close in two weeks
- Offer #2 – $77,000, 20% down, owner finance the rest at 8%, 3 year balloon
Assumptions:
- Assume that I can get 11% return on my money for any cash I receive
- There is a 80% chance that the buyer of Choice #2 will pay off the loan within 1 year
Somebody want to do that math?
- Choice #1 – $73,000 at 11% = $669/month
- Choice #2 – $15,400 at 11% = $142/month + $61,600 at 8% = $411/month = $553 / month (but my sales price is also $4,000 higher)
Which one would you pick and why?
Posted in Real Estate | 8 Comments »
Stumble it!
Option #1- cash out and keep your money moving. You’ll be able to make far more than$4000 off that money in the next year. PS- I checked out those West Gate town homes today-
By prlinkbiz on Dec 5, 2006
I’m curious. You state that you’ll make 11% on any money you receive. So in option one, you multiply by 11%. Yet in option two, you multiply by 8%. Why the difference? For a fairer analysis, shouldn’t you use 11% in both?
By Clifford on Dec 6, 2006
Cliff, in option 2, I am owner financing the lots to the buyer. He is willing to pay 8% interest.
So I’d get 20% down payment which is $15,400 and invest that at 11%. The rest of the balance, the buyer is making payments of 8% interest.
By Kenric on Dec 6, 2006
What can you sell the 8% note for? It is not a done deal until it is paid for in my mind.
If you could sell the 8% note for $61K (and there are a lot of people who will buy an 8% note I suspect) then this seems like a good deal. Actually, if you can sell it for $58K, it is a good deal, and you can wash your hands of the lot.
If you are up for the work, I suggest seeing what you can sell the new note for and run your calculations from there. If not (personally, it would be too much work for me), I would take the first offer and be done with it and moving on to my next conquest.
Thejester
By thejester on Dec 6, 2006
One more quick note, owner financing makes me believe the buyer would not qualify for bank financing and therefore I would be suspect (wow, I must be getting old)…
By thejester on Dec 6, 2006
I did a rough net present value calculation using your 11% discount rate and assuming interest only on the loan till the end of the third year and no risk of default and they are pretty close then. If my assumptions are correct and your discount rate is really 11% you should take the $73K cash, I think as I haven’t factored in the hassle factor!
By moom on Dec 6, 2006
Thanks Moom, when I did the math in my head real quick it seemed like a wash to me. The only variable was whether or not the buyer would pay the loan off early, if he did then taking the payments would come out ahead.
By Kenric on Dec 6, 2006
Jester, I never thought about selling the note. I probably wouldn’t want to go through that trouble to find a buyer.
I’m going to take the cash offer.
By Kenric on Dec 6, 2006