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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 get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!
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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.
1. Find out how much the buyer still owes after 5 years
2. 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!