We just had one of our investments grow up and cash out.
It worked so well for us that I thought I would share it with you.
A little over ten years ago, someone responded to a mailing we did to find leads on houses to buy. They were homeowners who were having a bad time, but they did not really want to move out of their home if possible. They didn’t want to sell, but they needed money badly to solve some pressing problems. No one would lend them more money, and the credit cards were maxed out. They were calling us to borrow money.
They were behind in the payments several months and facing foreclosure. The air conditioning had just gone out, and the roof was leaking. To ad insult to injury, the transmission went out on the husband’s car, and his job was in jeopardy if he didn’t get it repaired soon. They had a lot of deferred maintenance because they just couldn’t catch up with their bills, but their debt was catching up to them. They needed a solution fast.
It’s not really our business to lend money, but it is our business to buy things. We bought an option on their house for $10,000 cash that was in a self-directed IRA. The money was first applied to the back payments and the repairs to bring the house back to good condition, and to the car transmission, and then to the rest of their other bills. It solved their most pressing problems, and they were happy. They wrote us a letter saying that we had pulled them out of the quicksand.
The option let us purchase the house at any time in the next twenty years for the value we agreed to back then of $89,500. This was above their mortgage balance, but it was below the fair market value of the house at the time. Now time has gone by, and the house just sold for $203,723.
The homeowners collected about $42, 000 at the closing for their equity. We collected $109,300 after the smoke cleared due to the appreciation over the ten years. We had no management, no vacancies, no negative cash flow, and no further payments after our initial option consideration. Best of all, the gain was in the IRA. The sellers stopped the foreclosure that was threatening them, saved the husband’s job, and fixed the house on the option money. They didn’t have to move, and they didn’t have to make payments to pay back the option money. They only had to give up the upside potential of the house.
If N=10 years; PV=$10,000; FV=$109,300; and PMT = $0; I get a yield of about 27% average annual compounded return on the money we invested. This is not too bad compared to CD or money market rates over the last ten years.
You might want to try something like this if you have an IRA that’s not working hard enough.