How to Make Huge Profits With Real Estate – Even When “Selling at a Loss”

selling at a loss

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The information in this article can be impacted by regional legislation and other unique variables. For the real deal, always consult with a qualified legal professional before taking action.


Today I wanted to give the stage to Joe Edgar, co-founder of TenantCloud.

Joe took some time this past week to write a guest post for the REtipster Blog, and I thought his perspective was pretty brilliant. Why? Because he illustrates that a great real estate investment doesn’t always boil down to the “buy low, sell high” mentality that we’ve all come to know. Your ability to make a profit on any property isn’t always what meets the eye…  and it is entirely possible to sell a property “at a loss” while still making a killing along the way.

My hope is that you’ll walk away from this blog post with an entirely new perspective on what can be done if/when you’re ever in a situation where you need to sell a property for LESS than you paid for it. With the power of seller financing and a little ingenuity, you can turn this kind of situation into a very profitable outcome. Take it away Joe!

During the recent recession, selling real estate at a loss became a common (and usually very unwelcome) event for many real estate investors. Some may think that selling an investment property at a loss means you “bought a lemon” but in many cases, you can use lemons to make lemonade.

I experienced my first “squeeze” in real estate when I was just 14 years old.  I had bought an old, run-down house, fixed it up and added some “sweat equity” to the property. I put down $3,000 I had saved from mowing lawns and then convinced my local hardware store to extend a line of credit so that I could buy my supplies (this was very difficult, but it’s a subject for another time). After some long, hard nights and 60 days later, I managed to sell the house for a profit.

This sale wasn’t just my first real estate deal, it was my introduction to compound interest and the bitter taste of capital gains tax. If being a teenager from an impecunious family of 13 (who wore his sister’s hand me down jeans) wasn’t already unripe, I now had to figure out taxes and interest. What started as an acidic experience with mathematical formulas, soon became a once I peeled back the math.

mathequation

As it turns out, these sour looking formulas aren’t nearly as complicated as they appear, and the capital gains tax structure is focused solely on the selling price and costs accumulated along the way. The two formulas are uniquely different in taste. One flavor has price minus expenses as the sole focus and the other, rate and time. Once I understood the receipt, I was able to mass-produce deals like lemon bars.

I could buy a house that needed some work and put $3,000 as a down payment for a loan from a bank. The loan terms had to include a fixed rate and time no longer than 15 years. I would then drop the price by $5,000 and try to sell it right away. The selling terms were:

  • $3,000 down
  • 0.5% more than my original loan’s interest rate
  • 20-year term (for homes valued $200,000 or less)

I would not require the buyer to get a loan. Instead, they would make payments to me through a title company, who would track the loan, make the payments for my original loan and then send me the difference for a small fee (this is otherwise known as a “wrap”).

Just like water and ice are the same substance (and a necessary part of any glass of lemonade), so is taking a loss at the right time. By selling a house at a loss, I was able to report a capital loss (tax deduction) instead of a capital gain. It also enticed buyers to purchase the house quickly, and the fact that my properties came with their own built-in financing, the selling process became much easier. By increasing the interest rate, the buyer’s payments covered my loan payment and like a spoon full of sugar, and a 20-year loan meant the buyer would be paying me for 5 years after they paid off my loan.

And to top it off like an added strawberry, I wasn’t the owner any longer. This meant that I wasn’t responsible for property taxes, insurance or any maintenance issues on these properties. The home was fully sold but was still collecting the juice.

I don’t recommend a full glass of this strategy to any real estate investors, but rather a sip of the principle. Don’t be so focused on the price… because the real value is in the terms. If you find yourself underwater on an investment property, start by looking at the terms you can offer and start making some lemonade!

JoeEdgarJoe Edgar is an experienced entrepreneur and investor, a member of the US Treasury SSBCI Venture Capital Working Group, co-founder of TenantCloud, a cloud-based marketplace involving tenants, landlords, and service pros. Joe is also active in the community as a member of the Central Texas Angel Network and volunteers time with Community Tax Center helping low-income families file their tax returns.

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  1. guptapromoters says:

    we can earn more for real estate buy at lower price and sale at higher price. In Every Real Estate Deal we have some benefit

    1. Seth Williams says:

      That’s great to hear – thanks for sharing!

  2. Patrick says:

    If he is selling with owner financing not sure why sell lower price to avoid capital gains. From what I understand he would not get hit with large capital gains tax if he is getting paid installments. Is the article saying he doesn’t even pay tax on the monthly income because the sale price is a loss? That’s nice if true. But also wouldn’t it make sense to still pay capital gain tax because that means you did in fact make money on the deal?
    Also he must be using private financing and not a bank to buy.

    1. Seth Williams says:

      Thanks Patrick – I actually wondered the same thing about his source of financing (and your question about capital gains raises a good point too)… maybe Joe can chime in and let us know.

  3. Joe Edgar says:

    @Patrick great questions and @Seth thanks for posting. The first question as to why I would sell at a loss: diversification is needed for a portfolio and that includes diversified strategy. While picking low hanging fruit from small deals as explained above I also did investments that would net larger capital gains. The capital losses would become very useful with other properties that I bought to fix up and sell, because the losses would offset the gains and thereby have a positive impact on cash flow due to the lowered tax burden. The interest income that is ongoing is taxable as dividend income (lower rate than income tax), but the principal is not taxable – given the loss. The real benefits are 15 years later when the loan I borrowed was paid off and the buyers refinanced the house which left me with a net of $50,000 that wasn’t taxable. Not taxable because it was principal of which I already took a loss on and didn’t own long enough to utilize any deprecation.

    Loans are a great topic as I went from borrower, to lender, then an equity investor, then an Angel investor and on to Venture Capital. Real estate is actually more like venture investing than many might think (for another post:). The first loan was an owner carry, of which I convinced my parents to sign for as I was too young in the State of Oregon to be a borrower. However, when I finally turned 18 and had many deals under my belt I would do this same strategy with conventional financing. Bank loans required lending doc review to ensure no due-on-sale clauses. This strategy would be more difficult with hard lending given the higher interest requirement and short term balloon payment.

    1. Seth Williams says:

      Thanks for your feedback Joe! That’s a helpful explanation of the details.

    2. Patrick says:

      Thanks joe. Offsetting gains makes sense.

  4. Justin says:

    Very interesting strategy and I can see how it would be useful. As Joe pointed out in the comments above, be sure your bank doesn’t require you to pay off the loan once you sell. Otherwise you could be in some serious trouble…

  5. Jordan says:

    Definitely an interesting take on selling. It included stuff that’s a pretty good refresher but also some different strategies I hadn’t considered before. Thanks for sharing your insight!

    1. Seth Williams says:

      Thanks Jordan! I’m glad this proved both a good refresher AND some new ideas for you. 🙂

  6. Helen Chong says:

    I personally did something similar. Had a property, which was still on loan. I found a customer, whom I ensured purchased my property for a cost that I had incurred on purchase and renovation. Till this time, I was facing a capital loss to say. But since I was still paying off the loan for the property, I forwarded the loan to the client on a higher interest rate, which made for some of my profit. It was an easy way to sell of a property for a limited profit margin in the falling market.

    1. Seth Williams says:

      That is fascinating. Thanks for sharing Helen!

  7. Sooner House Buyers says:

    Thanks for making my search quick and easy

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