I have an investor client who is looking for a 25% annualized return on his investment. I have the opportunity to provide this for him and we have agreed I will make a commission above what puts him at a 25% ROI/yr.
An example would be a deal where the investor puts down $14,500 to make $7,737/year. Clearly a great a great return as it stands at a 53% return but what is the max commission I can take to make this a 25% return for the investor.
I have a limited mathematical education and thought it would work for me to put it together as such:
I guess I don't get it. Sounds like the deal is he gets a 25% return and you get whatever profit is left, so he gets 0.25*14500 = $3625 and you pocket 7737-3625 = $4112.
Your commission = profit - (down payment * 25%)
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Last edited by Trolly McTrollson; 09-22-2017 at 04:02 PM.
I guess I don't get it. Sounds like the deal is he gets a 25% return and you get whatever profit is left, so he gets 0.25*14500 = $3625 and you pocket 7737-3625 = $4112.
Your commission = profit - (down payment * 25%)
.
Yes that is part of the solution, but this commission is to be paid up front which increases the investor's cash outlay. I can do this with arithmetically by guess and checking, but I was hoping for something that related to the fact that the commission variable affects both their profit and initial investment.
It's not guaranteed but it is contractually enforceable by other individuals.
We are essentially finding contract for deed buyers who are 1-2 years away from qualifying for a traditional mortgage who have good income but some sort of issue that affects their current on paper creditworthiness (previous foreclosure or bad credit due to a medical issue for example). A lot of these people want to be in an ownership position on a home so we are funding their purchase through contract for deed essentially as a bridge loan.
They put at least 10% down, enter a free credit repair program we have through a lender we work with and agree to buy the home for 5% above the purchase we are able to get it for per year of the contract, while also paying a slightly higher interest rate (~7% compared to our 5.25% standard for a commercial loan like this).
Their down payment heavily subsidizes our own required 25% down payment which is what pushes the ROI higher to roughly 50% on average/year. In 1-2 years a traditional lender comes in and takes us out of the investment.
We set everyone up for success and while our sample size isn't huge (~25 or so) we have only had 1 default over 4 years. The investor is protected because they keep the down payment. The buyer loses here in that rare instance but they have to pretty aggressively not follow directions from their credit repair adviser because we are pretty thorough and conservative in our screening.
