Posted by Steve-WA on December 09, 2006 at 10:16:56:
this is spooky - I do almost EXACTLY the same thing.
Must be a good’n
breakeven point-do you consider it? - Posted by John T (WI)
Posted by John T (WI) on December 07, 2006 at 22:32:38:
I was playing with some numbers, and I got to wondering, does the length of time it takes for you to break even (get your costs back) on your investment affect if you want to do the deal or not?
For example, my “pretend” numbers came up with 24 and 30 months to the breakeven point (worst case scenerios), but my ROI was 127% and 81% respectively over the life of the financing.
John
Re: breakeven point-do you consider it? - Posted by John T (WI)
Posted by John T (WI) on December 11, 2006 at 11:04:10:
Heres another angle that occured to me:
While Lonnie tells us not to be obsessed with his numbers, I notice that that majority of messages that mention purchase price have a range of free to 3000, which means folks are close to Lonnies numbers.
Now, Consider that the home I was playing the numbers with was $2000, plus 3812 in fixup and holding costs for a breakeven point of 5812.00. My hypothetical numbers were 500 down and 250 a month.
Another way to look at this is how frequently I get “Lonnie deal money” back, say 2K. 500 down plus 6 months get me one deals worth back, then every 8 months gets me another deals worth.
I think thats something else that could be considered, especially if you already have the fix-up money.
John
Re: breakeven point-do you consider it? - Posted by Michael(KCMO)
Posted by Michael(KCMO) on December 08, 2006 at 06:12:47:
I want my break-even (BE) point w/in 14 months. I also want my total profit to be at least triple what I have invested, more if possible. I will consider less if it’s an easy transaction not requiring much effort/time on my part.
I have reached a point where I’m considering yield less and overall profit more. For example, I used to require a yield of 100% or more. Not hard to do, but they were usually smaller deals netting $5,000 or less in profit. Granted, that’s good - esecially when I only had $2,000 invested. What I realized, though, was that these smaller notes paid off too quickly and I’d just have to go out and replace them - i.e. “Lonnie Deal Treadmill”.
Now my model is this:
Purchase a nicer unit requiring less rehab time/expense/stress for no more than $5,000
Figure an additional $1,000 in holding costs, misc minor repairs, lot rent, utilities, referral fees, etc.
Holding costs canceled by $1,000-2,000 dn pmt so my basis is back to around $4,000-5,000
Sell for minimum $15,500
$275-300/month
5-7 year term.
(These are all minimum terms. Of course I try to do better any time possible buy my ability to get these terms are my criteria for determining whether or not it’s a deal I’m willing to do. I also try to balance what I give up. For example, if someone makes on the lower end of the dn pmt spectrum, I balance that w/ the higher end of the monthly payment amount, or perhaps raise the interest rate thereby stretching out the payment term closer to the 7 yr mark.)
On the extremes:
This model yields approximately 63-90% but over the term of the loan will give a PROFIT of $11,500-$20,200. My BE point is between 13-18 mos depending on total investment, dn pmt & monthly pmts.
That’s just MY model for this stage of my investing. When I started out I had to buy the $0 to $500 to $2,000 units and get my money back w/in 10 mos. Back then I had more time than money. Now I have less time and want to slow down the speed of the treadmill.
You’ll notice there is very little differenc in yield by extending the term. (To increase yield you’ll need to reduce total investment or increase dn pmt or monthly pmt) An increase in term will GREATLY affect overall profit. Granted, it still takes time to receive it all, but it’s more effecient when measured in terms of your own time, effort & stress.
For example:
A note 60 mo (5 yr) note paying $300/mo on a $5,000 total investment will yield 88.76%. Stretch out the term to 84 mos (7 yrs) and the yield will only increase to 89.79% but you gain an ADDITIONAL $7,200 in profit! On the extreme, stretch the term to 768 mos (a long time) and yield is STILL only 90%! You can figure the profit.
Some of you will be quick to point out that not many of my notes will go to term at 60-84 mos. Perhaps. I know I’ve had a very low default rate for the deals I’ve done so far. I’m still not worried if they don’t go to term, though. I just sell it again and start the clock over again - thus turning that 60 mo note into an 84 mo note and increasing my profit! I do want to make a comment on that: I don’t believe it’s ethical to sell a home for more than it’s really worth just b/c it’s terms they can afford. I never set a buyer up for failure. I truly do enjoy helping someone who’s working to improve their own lives or who is working as hard to help themselves as they’re asking anyone else to work to help them. I want people to end up owning their home . . . . but if something comes up and that doesn’t work out, my model is ok w/ that too.
My pre-coffee 5:30am thoughts,
Michael(KCMO)
Re: breakeven point-do you consider it? - Posted by JeffB (MI)
Posted by JeffB (MI) on December 07, 2006 at 22:43:07:
Absolutely, I consider it. I rarely do a deal unless payback is a year or less, regardless the yield.
You can have a high yield with a long payback, or low yield with quick payback. I’m not sure there is a right or wrong answer. For me, my personal finances require that I get as much money back, as quickly as possible, hence my need for the payback in one year or less. Others like to stretch it out, which might work fine for them but would be tough for me to deal with.
Jeff
Re: breakeven point-do you consider it? - Posted by Tony Colella
Posted by Tony Colella on December 07, 2006 at 22:41:30:
John as far as the Lonnie deals I did back when…, I usually kept it to 10 months on the first sale. I wanted my investment back in 1 year or less.
Most deals fell within that but a few did not. Those that did not I actually hoped I would repo so I could get a second chance.
Does this mean that all deals should? Absolutely not. As I often repeat here, value is defined by the individual. What works for me might not be sufficient for you. But if it works for me, does it matter? Vice versa. If it works for you don’t let anyone tell you it is not a good deal.
Listen to them if they point out risk you had not considered but when the numbers boil down to net income, you decide if its worth the effort.
Tony
Re: breakeven point-do you consider it? - Posted by Don(Tn)
Posted by Don(Tn) on December 08, 2006 at 23:37:30:
Michael,
Your excellent post has caused me to further consider the longer payoff approach with Lonnie deals. I like to get all of my money back in 10 months or less. When dealing with credit challenged customers paying on depreciating assets I like to minimize my exposure. But a higher priced, nicer home will hopefully attract a “better” grade of buyer.
In my market I view a monthly payment range between 175.00 and 275.00 with downpayments usually around 1000.00. Of course these numbers can vary, but they are in the normal range. So the difference in a jewel and a junker is usually about 100.00 per month with just a difference in the number of payments.
I took the liberty of playing with the numbers that were in your example with these results:
Option #1- 5k purchase,1k down sell for 15.5k 300.00 mo. for 68 months. Total cash received after 68 months is 21,400.00. Subtract the original 5k = 16,400.00
Option #2- Buy two trailers for 2.5k each sell each for 7,750.00 with 1000.00 down and 36 payments of 225.00 a month. Repeat after 36 months. At the end of 68 months I have collected a total of 34600.00 less my original 5000.00= 29,600.00. Four months of payments still remain totaling 1800.00
Total cash received in option #2 is nearly twice option #1 in roughly the same time frame.
Now option #2 requires that you do 4 deals. Might not be easy unless you live in a “trailer capitol” like I do.You have to deal with more people and potentially more problems. Of course over time more people get to know you as the guy who will buy their trailer that they desperately need to sell as well as the guy who helps people out by getting them in an affordable home.
Overall the same coin with two different sides. Either way there is money to be made. I feel that the lower priced quick cash out is better for a relatively new Lonnie dealer like myself. But I can certainly see the advantages for the longer payout for the more experienced investor. I think the key difference is your access to large amounts of cheap cash.
Great Post Michael! - Posted by Ryan (NC)
Posted by Ryan (NC) on December 08, 2006 at 21:35:33:
With that kinda thinking it ain’t going to be long til you’re going to be joining the UBA. =)
I do want to point out one thing, these deals are doable by anyone that has ran Lonnie’s system line for line a few times and gained the experience needed to do the deals correctly. With trailers a little dose of OPM goes a LONG way…
Best wishes,
Ryan Needler
Re: breakeven point-do you consider it? - Posted by Sailor
Posted by Sailor on December 08, 2006 at 20:32:57:
Bravo, Michael–I love it when smart folks agree w/me! A high
yield may not put much $$$ in your pocket. Yield can be w/out
great meaning in some very profitable deals. I’ve always
recommended dollar$ be calculated for each deal, as yield may
not even be a meaningful measure. Each deal must be considered
in CONTEXT, too; i.e. are there additional factors, such as an
entree into a new park, or a deal in the doldrums of the holidays?
I like your comment on ethics. I command pretty high prices for
my area, but I make sure my homes are truly that. We not only
pretty them up, but we do all repairs & upgrades in as if we were
working on our own residences. When I contemplate a rehab I
think of what I would do if one of my grandchildren was going to
live there. No matter what I charge, I want to feel I am giving
good value for the dollar$ I collect every month.
Thanks, Michael, for your lovely post–I’m sure it has gotten a lot
of wheels turning.
Tye
Re: breakeven point-do you consider it? - Posted by Ruben (KCKS)
Posted by Ruben (KCKS) on December 08, 2006 at 19:32:36:
Very nice post Michael. I guess you must be a morning person. If not I want to see what your thoughts are after you wake up at 8 AM.
Ruben D. Flores
Re: breakeven point-do you consider it? - Posted by John T (WI)
Posted by John T (WI) on December 08, 2006 at 11:58:33:
That is quite an analysis!
My play/what if numbers were for a park that I have permission to work in, but also has the highest lot rent of the bunch at 453.00 a month. Needless to say, this is very nice park, lots of open spaces, community center, etc. Its not for the average LD type end buyer, creditwise. They do mandate vinyl siding, wood sheds, and porches/decks of a certain design.
I’d make a profit all right, just that my BE point will take 18-30 months depending on a whole bunch of variables. Most of the FSBO homes need the siding for example. and I anticipate possibly a longer holding time due to finding a tenant that can swing this kind of rent and payment.
These numbers are all guesses and estimates of course. Like I said, I was just playing around with the numbers, such as 500 down, 250 a month, 42 months at 13%. I came up with figures of 98%-238% ROI, all depending on my cost.
Excellent analysis - Posted by JeffB (MI)
Posted by JeffB (MI) on December 08, 2006 at 11:27:53:
Very nice post Michael, I’m impressed. I think too often Lonnie dealers get wrapped up in calculating their yield, but fail to look at what the profit really is. And not gross profit, but after expenses of business operation have been taken out. With the tiny deals, there’s not a lot of fat left. Your example is a great real-world case which clearly illustrates how increased profit may not equal increased yield. And as someone once said, you can’t eat a yield sandwich!
And I’m especially grateful that, because of your explanation, I can now achieve that elusive 90% yield I’ve been chasing. Just gotta lengthen my notes to 768 months!!!
Nice Post Michael (nt) - Posted by Dr B. (OH)
Posted by Dr B. (OH) on December 08, 2006 at 09:51:52:
.
Re: breakeven point-do you consider it? - Posted by Michael(KCMO)
Posted by Michael(KCMO) on December 09, 2006 at 07:03:32:
Don,
You’ve certainly made a compelling argument, and you’re absolutely right about it too. Another benefit to your model is the added safety of having 2 payors for my one. If one of your notes goes bad you’ve lost only $225 in income and still have another $225 coming in. This is nothing new, as it was discussed in DOW. I just wanted to remind you of the benefit.
One of the biggest benefits I’ve found from working out my model is that I don’t have to do as many deals to maintain a certain level of income. Yes, you can make more overall from several smaller deals and if you have the time to do that many deals then you certainly should. What I’ve found is that TIME is my limiting factor. I only have X amount of time and can only do a certain number of deals with that time so it is important to make each deal as profitable as possible on an individual basis. Having said that, I don’t want it to sound like I pass up smaller opportunities when they’re in front of me. I balance each deal according to the profit it?s going to pay compared with the time and stress to achieve it.
Having worked out my model it has allowed me to do MORE deals. I no longer spend an additional $3,000 and one month of my time rehabbing a $2,000 home. I just pay $5,000 for a nice home up front, sell it and move on to the next one.
It is also a bit of a psychological trick I play on myself. I’m a very bad tightwad on certain things. I hate paying someone to do work that I can do better myself. This is why I’ve ended up doing so much of it myself. (yes, yes . . I know) By working out my model it has freed me up psychologically to buy something for $3,000 and spend $2,000 for someone else to do the work. I just keep my eyes on the bottom line . . . which is: $5,000 basis; $15,500 resale; profit of $11,500-$20,000. In the meantime, I’m marketing for another deal to buy.
Most of the time I’m not a very original thinker (other than my credit card idea). This model is the result of 3 years of experience, the influence of countless friends, colleagues and mentors, and the result of being repeatedly hit upside the head by several of them (thanks guys).
Regards,
Michael(KCMO)
Re: breakeven point-do you consider it? - Posted by Michael(KCMO)
Posted by Michael(KCMO) on December 09, 2006 at 07:47:17:
>I guess you must be a morning person. If not I want to see what your thoughts are after you wake up at 8 AM.
I’ve found my thinking goes downhill as the day goes on. A time of reflection and review when I first get up and before my mind becomes cluttered by all the tasks of the day is very important. Each morning I spend some time exercising on the treadmill (I don’t went to end up looking like my dad and figure it’s easier to prevent than repair). Posted on the wall in front of me is an outline of the timetable for my goals, affirmations and a description of the visualizations of my success in various areas of my life. I’ve found when we can see ourselves succeeding in our mind we’re much more likely to actually make it happen outside our minds. There is a quote (paraphrased for my own use) I review each morning that sums up this concept beautifully:
“My life is the outward expression of my inward beliefs and thinking. There are no obstacles to success outside of me. My only barriers to accomplishment exist on the inside in the form of fear and ignorance. By overcoming those barriers I will accomplish everything I imagine and believe. I will achieve my goals through persistence, focus and the disciplined application of my plan.”
Then some time is spend in the office w/ Marty Robbins or Willie Nelson and a cup of coffee planning my day and making sure that the steps to achieve my next goal are scheduled into my week. I recently realized the power of simply scheduling our goals. Break it into steps and put in on the schedule. Follow the schedule and success in inevetible.
I’m sure I’m not telling you anything you don’t already know. Heck, I get half my ideas from you!
Have a good morning,
Michael(KCMO)
Beware the trap - Posted by JeffB (MI)
Posted by JeffB (MI) on December 09, 2006 at 09:04:48:
“It is also a bit of a psychological trick I play on myself. I’m a very bad tightwad on certain things. I hate paying someone to do work that I can do better myself. This is why I’ve ended up doing so much of it myself. (yes, yes . . I know) By working out my model it has freed me up psychologically to buy something for $3,000 and spend $2,000 for someone else to do the work. I just keep my eyes on the bottom line . . . which is: $5,000 basis; $15,500 resale; profit of $11,500-$20,000. In the meantime, I’m marketing for another deal to buy.”
Michael, I have a similar model, different numbers but the same idea. One trap I have fallen into (repeatedly, I must admit) is paying too much for homes because that’s what my guidelines say I can pay.
On two occasions in the last couple months, I’ve paid $2000 for homes that I most certainly could have gotten cheaper, all because I figured I was in a great position if I could keep the investment under $3k, and that would leave $1k for fixup (writing checks). Sure, the homes sell for $10k and that’s good enough, but if the seller would have been tickled to get $1000, then I really did overpay. Once I realized my mistakes, I ended up “buying” a home this week where the seller paid me $1000 to take it (a nice 95 2/2) and he was happy to do it, so that helps ease the pain a bit. So although we are doing the same thing, I think it’s worth mentioning that we should be working up from zero towards our target price, to avoid overpaying. Lately, I’ve had a real problem getting sellers to name a price… I need to go back and read DOW again. Not saying you or anyone else has the same problem as me, I just wanted to mention it because it’s an easy trap to fall into.
Jeff
Re: breakeven point-do you consider it? - Posted by Joe
Posted by Joe on December 11, 2006 at 15:50:05:
“I recently realized the power of simply scheduling our goals. Break it into steps and put in on the schedule. Follow the schedule and success in inevetible.”
Very true. At one point in time I simply had trouble spending my free time on the tasks I know I needed or wanted to get done. Simply because when that time came, I found more fun ways to spend the time and forgot about those tasks. Then, I started writing all my tasks out that I wanted to get done. I would collect a bunch of them, then when I had a day off from work (most of the stuff needed to be done m-f 9-5) I would do them all. In the end, I was completely amazed at how productive that day off was.
Stepping over dollars??? - Posted by Ryan (NC)
Posted by Ryan (NC) on December 09, 2006 at 21:17:08:
Jeff, I personally think you are being to tough on yourself over a very small amount of money! If a home is worth 10k and you can get it today for 2k then it’s a deal even if the seller will likely come down to 1k in a month or two.
Yes, I do leave some money on the table every now and then but if you cheat yourself out of one deal over a possible 1k discount you are loosing 8k in profit. That will pay for a lot of 1k possible reductions in price!
I’m not advocating over paying for homes! But if the home is worth 3k in your mind and you work Lonnies system and get quoted 2k but think you might be able to get it for 1k if you wait 60 days greed is ruling your decision making on that deal IMHO.
I guess what I’m trying to say is if the deal works and I have inactive funds, I’ll do it today rather than wait 60 days to try to get an extra 1k discount. (which is really only about a $500 discount cause I’ll have already collected a couple payments)
Just my 2 cents. Then again this line of thinking may be why I’ve never been paid to take a home…
Best wishes,
Ryan Needler
Re: Beware the trap - Posted by Michael(KCMO)
Posted by Michael(KCMO) on December 09, 2006 at 20:36:49:
>One trap I have fallen into is paying too much for homes because that’s what my guidelines say I can pay.
I remember that discussion a while back. Question . . if the numbers fit your model then did you really overpay? Mostly a rhetorical question. We should, of course, negotiate the best price we can but at what point in the negotiation process to you say to yourself that the price is good enough, let’s tie it up and start finding the next one.
I’m probably still mourning “the one that got away”. Super-nice older home on a great lot that was worth $5,000 and I wouldn’t have had to do a thing to it. I could’ve bought it for $4,000. I wanted it for $2,500-$3,000. While I’m over here trying to hit a home run someone else offered $5,000 cash and I was suddenly out of the game.
It was then I realized that singles and doubles were ok. Not EVERY deal had to be a home run. Your point is well taken and agreed - beware the trap on either side.
Regards,
Michael(KCMO)
P.S.
Good advice in the rest of the thread on price negotiation strategies. That’ll be a keeper post.
Re: Beware the trap - Posted by Tony Colella
Posted by Tony Colella on December 09, 2006 at 09:21:08:
One technique I had used on me and later addopted when the seller would not name a price was to simply say something to the effect of “mam, I can’t buy it if I don’t know what you are asking for it.”
That simply line or something like it gets the negotiations back on topic. The seller will usually then name a figure and from there the traditional lonnie deal counter negotiations can begin. Usually the seller not naming a price is a big indication that they are not motivated so the deal may come down to the walk-away technique.
If it boiled down to me using the walk-away technique (handing them my card on my way to my car) I found that these deals usually became what I termed the 60 day deal. After two months of paying lot rent the seller would call me back. At that point I was in the negotiating position of strength.
Hope that helps.
Tony