May 3, 2016
By Alberto Sangalli
A person's home is often the single largest investment in his or her lifetime. Financially, a home used as your dwelling is usually not a great investment after taking into account the interest costs to pay off a conventional loan used to purchase it. I hear it all the time, "I bought the property for $100,000 years ago and am selling it for $225,000 for a $125,000 profit!" For $90,000 borrowed thirty years before at 7% and diligently paid every month, the homeowner would have paid in an additional $121,808.21 in interest payments AND another $37,500 in property taxes! So the cost basis before maintenance and insurance is approximately $121,808.21+$16,000 (down payment and closing costs) + $37,000 (property taxes) + $38,000 (property insurance) = $212,808.21. Maintenance is typically estimated at 1% of the purchase price per year or another $30,000! Final cost would be at least $242,808.21 which represents an actual and very real financial loss of $17,808.21. Now you can make a case for the fact he had to have a place to live, he may have gotten a tax deduction for his interest expense and he had the pride of ownership and, by the way, the horrors of maintenance. The IRS even gave him a break on capital gains tax when he sold it despite his losing money in this case. The homeowner is now ready to sell and an investor makes a cash offer which can be closed in a few days! The homeowner didn't realize it when he started his home ownership but he actually entered into a forced savings plan. It didn't feel like a traditional savings plan where a sum of money is taken out of a paycheck weekly and saved in a retirement plan or savings account. Hopefully the homeowner didn't take his equity out via a home equity line or by refinancing and cashing out his equity. The homeowner is thinking he has a profit in his property of $225,000 - $100,000 and his investment was a winner. His thinking is such that he is envisioning a net cash amount of $225,000 since his loan is paid off or less whatever amount of his equity line or mortgage balance from refinancing. This "Net Out" amount is the focus point for the homeowner and can be used to help the investor get the deal.One way to get the deal is to first determine what this "Net Out" amount will be and ask the seller what he's going to do with the money. If he is not buying another home, he typically puts the money in the bank for the interest income. Interest rates banks or credit unions pay savers nowadays is pathetic. Offer the seller two options, one for a quick closing and cash and another offer about 15% higher if he does "Seller Financing".
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