Backend Profits

[JerseyJeff 0]

Here I go again.

 

Say a contract is set up for a house that we sandwiched for $200,000 and we have a t/b in place with an option to buy for $250,000. (Hey, it's an example, so why not create a nice spread?)

 

After a year, they exercise their option. Their option money and rent credits add up to $25,000. That still leaves a $25,000 difference.

 

I've heard people say backend profit, make a note for the difference.

 

Can someone explain in english on how this situation is handled?

 

Thanks again for all the help.

 

The one thing about this board is you don't feel bad asking alot of questions. I hope I am not bothering anyone with all the questions I've been asking. I am new, and I guess my brain is starting to work thinking of what/if's, etc.

 

I just hope the questions I ask are ones others on here have thought about but never brought forward.

 

Thanks again,

 

JerseyJeff

[MichaelC 160]

No problem, Jeff. Asking questions and answering them is the reason this board is here.

You have the choice of collecting the back end profit either in cash or by writing a note. What that means is the purchaser will be paying you, as they would a bank or lender, an agreed to amount each and every month. All terms can be negotiated. For example, let's say you agree to nine percent, interest only, for 60 months on that $25,000 note. You would receive $187.50 monthly for those sixty months. At the end of that time, the purchaser must then refinance that loan you gave him and repay you all $25K, since in this example it was an interest only loan. You earned $11,250.00 for playing the part of bank.

Cash is good; notes are good. It depends upon your needs and preferences.

[JerseyJeff 0]

For example, let's say you agree to nine percent, interest only, for 60 months on that $25,000 note. You would receive $187.50 monthly for those sixty months.

Why are we just doing interest only for 5 years? To make it easier for the T/b?

 

How did you come up with $187.50/mo.? When I multiply 25,000 by .09 I get $2,250. What am I missing?

 

Also, if the T/b wanted, could we set up a note for principal and interest for 5 years to include the payment of the $25,000 ?

 

At the end of that time, the purchaser must then refinance that loan you gave him and repay you all $25K.

He is then required to give me a check for $25,000? He refinaces the loan with a typical lender (bank, etc.)?

 

JerseyJeff

[NickC 0]

Just one other thing, MichaelC. Wouldn't you want to secure the note with a mortgage on the property? You would want to protect your interest in the deal (you profit) wouldn't you? You'll still be getting paid, but gotta protect yourself incase they don't pay. Minimize your risks.

 

Thanks.

Nick

[MichaelC 160]

Jeff, that was just one example. The terms can be whatever the parties involved agree to.

How did you come up with $187.50/mo.? When I multiply 25,000 by .09 I get $2,250. What am I missing?

You didn't divide that yearly interest by twelve.

He is then required to give me a check for $25,000? He refinaces the loan with a typical lender (bank, etc.)?

That's correct.

 

Just one other thing, MichaelC. Wouldn't you want to secure the note with a mortgage on the property? You would want to protect your interest in the deal (you profit) wouldn't you? You'll still be getting paid, but gotta protect yourself incase they don't pay. Minimize your risks.

 

Thanks.

Nick

Of course, Nick. That note would be a lien on the property.

[JerseyJeff 0]

How did you come up with $187.50/mo.? When I multiply 25,000 by .09 I get $2,250. What am I missing?

 

You didn't divide that yearly interest by twelve.

Being it is a 5 year loan, wouldn't I divide by 60 instead of 12?

 

JerseyJeff

[-Tony- 0]

How did you come up with $187.50/mo.? When I multiply 25,000 by .09 I get $2,250. What am I missing?

 

You didn't divide that yearly interest by twelve.

Being it is a 5 year loan, wouldn't I divide by 60 instead of 12?

 

JerseyJeff

JerseyJeff, no because the interest is annually. makes for a nice add bonus aye!!!

 

Tony