Case Study – 2 Recent Sales

It’s all about the numbers, right?

In this video, I’m going to walk you through 2 recent sales, involving the most expensive land (per acre) that I’ve purchased, EVER.

Find out how it turned out and watch to the end to find out what my 3 key takeaways were from this very expensive transaction.

Also, if you are interested in learning more about our 2019 Accounting for Land Investors class, click this link as the class is now forming.

Transcript

Hey, it's Scott Todd and today I wanted to walk you through some sales that happened this week. I mean like, I think it's always cool to do a deal review, and in this case, I actually have two properties - there were purchased at the exact same time, from the same seller, and I want to show you really what makes this one kind of special and kind of cool. So, this is a longer video and I want you to hang in there. I promise if you, hang in there and you'll see the entire anatomy of this sale. And without wasting any further time, let's just get to it.

What happened was about a month ago, a person that I had bought multiple properties from - I've probably bought about, I'm going to say, I have purchased probably about 50 lots from this guy. He's a former land investor like us and basically, he was working to get out of the business and over a period of time he has kind of released to me some of the lots. But these two lots that he had right here - these two are in fact the premium lots in the area. These were his golden child lots, he was never going to get rid of these lots. However, something happened. And what happened was he was done and he needed the money. So, he called us up and he had originally asked for $25,000 for the two lots. Two lots. Now, these lots are literally 0.62 acres apiece. So, they are side by side. I'll draw them. They look like this. They're a top and bottom. They look like this. So, there's a 0.62 acre here and a 0.62 acre here. We'll call this one the north lot and we'll call this one the south lot.

So, he wanted $12,500 for each of them. And essentially, I gotta be honest with you, that's the most money I've ever spent on a price per acre ever - ever. And I delayed. I was like, ah, I don't know. It's almost that moment where it's like, is this thing too rich for my blood or what? Literally, my average purchase over the last four years has always been around $1600 and we sell these things for 7,200. So, the minute I heard $12,500 each, I kind of froze. I didn't know what to do. I mean I'm like trying to figure out the math, like how are we going to sell these for? How much are we going to sell these things for? And my sales team basically told me, hey listen, we have people all the time that call about these two lots or similar lots like this. I know that we can sell them for $25,000 each. And I'm like, well okay, I'm still doubling my money but do I want to do that - do I want to take all this money and put it in there - or would I rather just buy, go out and buy more of the cheaper lots that I’m accustomed to buying because this is a lot of money to deploy at one time, just for two lots. And so here it becomes like this whole thought process of this inner fight between myself. I'm like, I don't know. I don't know if I want to do this. I really don't know what I want to do. And I waited, literally about two days. I was thinking about it. I'm like, yeah, I don't know, I'm just gonna probably pass on it. I really don't know. I kind of wanted them because I wanted to try. I do believe that my sales team was right, $25,000 a piece, but I'm like, this is a lot of money.

So basically, what happened was I basically said, look, I'd rather be around $10,000 a piece, right? Like, honestly, I'd rather be around $10,000 a piece and I don't want to really be above that. So, $10,000, I think we could do the deal - $10,000 each. So, that’s a total of $20,000 we could do the deal. And they went back to him and he actually came back and he had actually offered to meet in the middle - instead of being $20,000, he said, well, let's just go to a $22,500.

And again, I delayed. I hemmed and hawed and finally, he came back and said, look, I just need the money. Let's just do the deal. So, by me delaying, I basically saved $5,000 of my investment. Now what happened here was… and what I'm gonna do is I'm going to draw this up. This is going to be my buy side over here. And over here I'm going to write my sell side so you can see what's going on over here. Now because these were more expensive properties and I really wanted to kind of do something that added value to it, a little bit more value to it, what I did was we went out and we found a surveyor who would survey the two properties for us and get the survey done so we could say, hey, the lots are surveyed, here are the boundaries, they're staked - to me it's a nice benefit. But again, I never do this. Never. So, this is kind of a unique scenario and that survey cost us about $800. So, when you look into this thing, we're invested here about $20,800. So, you know, my investment over here is another $400; investment over here for another $400. So that's how we're getting to these two numbers.

So, that was literally less than a month ago. It was about three weeks ago that we closed on this. And this week we actually sold both of the lots to two different people. And I want to walk you through the two deals that we did.

The first lot that we sold was the south lot down here. So, it was this one right here. And what happened was this person found the land on landmodo.com. So, they found it on landmodo.com and they contacted us. Now what I don't know is, I don't know because we started running Craigslist ads for these properties. I don't know if they saw it on Craigslist and then came to Landmodo. All I know is that they sent through the inquiry through a Landmodo. So that might've been the case, but it's not really traceable. So, therefore, I'm gonna mark it up that they found the land on Landmodo. So, our buyer, in this case, I'm on sale number one, the south property, they came from Landmodo. We asked them do you want cash or terms? And they were looking for a terms deal. So, what we actually agreed to - now remember, you've got to understand something, my Sales Team said $25K each, they told me $25K each. And so, in the first deal here. They actually sold the land for $33,865 and they took $2495 down as the down payment and we also did charge a $249 doc fee, so that puts it at$ 31370 and some change.

I'm going to leave the change out. So, we sold this property for more than what we thought we would sell it for. I mean I'm happy. I'm happy. Now, this is the thing, I know that land investing, we oftentimes hear, oh, make 300 percent cash flip up to a thousand percent and look this is not a thousand percent, do the math. Okay? Like I paid $10,000, I got $33,000, it's about 338 percent. Okay. It's not the thousand percent that you would think that you would get on a terms deal and that's just the way that it is sometimes. Sometimes I can get that thousand percent, sometimes I can't. Oftentimes I can. So, the mere fact that I sold the profit margin here for 383 percent or 338 percent, that's fantastic. I love it. Okay. Like that's a good deal for me. And I'm going to go through in this video here - I am going to go through and show you that I don't really worry about that number, that 300 to a thousand percent. I more care about the annual yield. And so, we'll break that down here in a minute, but just know that sale number one right there - $33,865.

About four days later, we had sale number two and sale number two actually did come from Craigslist. They saw the ad on Craigslist, they emailed us from Craigslist, we started talking to them. And so, I can tell you without a doubt that when did come from Craigslist. And sale number two, we actually sold this one for $38,495. So again, we blew through the $25,000 that we were hoping for. Got to $38,495. We did get a $249 doc fee and we also did the $ 2495 down, which puts the finance amount here at $36,000.

So, man, now I've got these two sales here. Okay. I've got two sales here that I'm really, really, really are exciting. I mean these two cells here are really… I mean like I am literally blown away by these numbers. I applaud my team for, one, believing that they could go do it; two, for going and getting more than what they thought. And there are some lessons in there. One, when you know your market and you know your numbers, you have the confidence to pull that these deals off because I can tell you like if I didn't work in this county frequently and I didn't know the numbers and believe the numbers myself than I would know. Like I wouldn't know. Like I would just be like throwing darts at the wall. But that's not really investing, right? Like that's speculating. Investing is when you know the answers, when you know the pattern, when you know the numbers - that's really the heart and soul of investing is when you know these things and without a doubt, you know what the next result will be.

I buy for 10, we'll sell it for 25, and then we are delighted when we sold for more than that. So, you know, this is really what I want everybody who's trying to learn land investing or for that matter, if you're trying to learn anything, everything revolves around the numbers. The guys on the Shark Tank say it all the time - know your numbers. And it's so true. Because when you know your numbers, then these opportunities, they just fall in your lap and then they work. The problem is when you don't have the confidence in the numbers because you haven't studied the market, and that's really what it's about. It's really about me becoming a student of that market and that's really what I want you to do that too. I’m hoping that you're doing that as you're becoming a student of your market. Like what are the numbers?

I mean, it's funny because I've seen, I see these, these markets in Land Moto. I mean I sit there and look at the listings and Land Moto all the time. Maybe I'm a land listing geek. I don't know, maybe that's a new name for me - the land listing geek. I don't know, but I study these markets. I study the counties, I know these numbers because I just become self-absorbed into these numbers. It's like that's what I do. It's a pastime. Maybe you as a child use to study baseball stats and knew everybody's RBIs and all the other stuff. This is what I do. I'm like the numbers man of these land counties that I work in and I want you to do the same thing.

Now we talk about the 300 to a thousand percent return and I just told you that has no bearing on me. I don't care about that because when we talk about 300 to a thousand percent, what we're really talking about is we're talking about profit margin and honestly if I were to go and manufacture something like this remote control for example, and I were to sell it and it cost me $9 to buy it, to try to assemble it, but it costs me $30 or I make $30 when I sell it, that's where profit margin really comes in. The profit margin's good to know. However, when you're taking payments over time, profit margins, not a very good way of looking at the numbers. The better way to look at it is not profit margin. The better way to look at this thing is annual yield. So, you know, think about that for a minute. Any investment that you're making, any multiyear investment, it's all about the yield. Everything is driven by the yield. So, you know, you go to put your money in the bank account, what's the yield? Two percent if you're lucky, on a savings account. A stock market tells you that the average is six to eight percent annual yield. Everything, every investment is measured by yield and I look at my investments , where the payments come back over time and I focus on the yield. To me, it's all about this. It's not about the profit margin. So, what I do is on every deal I go back and I calculate the yield and so I want to do that with you right now.

And the best way to do that - really, the only way you could do it is - if you have a calculator like a financial calculator, here's one that I use – this is the 10Bii financial calculator. You can get this in the Apple store, the Android store. I'm running windows 10. I got it from the Windows store. So you can get these things anywhere. And really what I'm focusing on the most here is I'm focusing on these four keys from the upper left-hand corner over - the N, the I/YR, the PV, and the present value. Now, let me explain what these are. The N is the term of the investment.

So, you know, when we look at this - and I'm going to give you the two yields on both of these sales that we just made - but we need to pay attention to the term of the investment. The next figure that you see or the next button that you see on there is interest over a year. This is the yield. And ultimately this is what we're going to calc for. So, we're going to calculate this because we don't know it. We're going to solve for that. That's our variable in this equation that we're going to create. The next box there is the PV. That's the present value. And what the present value represents is basically our investment right now - basically our investment after the down payment - how much money do we have an end to this deal where we created a new investment, which is the note that we're going to be collecting on. The PMT - this is the payment, this is the monthly payment our customer will pay us. These are the four components that we need in order to figure out - or really we only need three of these to figure out the fourth, which is the yield.

So, here's what we're gonna do. What I like to do is I like to set this up in a way to where it mimics the calculator. So, let's look at sale number one for a minute. Sale number one, okay. Sale number one, the N - when we sold property number one, we sold this for 84 months. So, they're gonna pay us over 84 months. Now we don't know what the yield is because that's what we're going to solve for. The present value that we're working on right here - this present value figure that we're working on right here – well, this is going to be our investment in the property minus our down payment. So, in this case, we invested $10,400. We received $2495 as our down payment. So, our investment in this property is this - $7905. Now in my calculator, I'm going to put this as a negative number and the reason I'm going to put this as a negative number is because the money came out of my pocket. I'm literally out $8,000, $7,905. I'm out of pocket that amount of money. Now I'm not including the doc fee because there's a long story for it, but basically, the doc fee to me is a wash because I have costs involved in that. So essentially that's a wash and it's not figured into this calculation here. $7905 is my remaining balance into this transaction, into this property that I bought.

The next thing that we need to consider is we need to consider the PMT, the payment. And this customer has agreed to pay us $373.46 for the next 84 months. So, let me just drop this down a little bit. So, for 84 months they're going to pay us $373.46. That's beautiful. But remember, I have to calculate my annual yield. What's my yield? So, let's go back over to our calculator here and in the calculator, let's punch in some of these numbers here. 84 goes into the months. The present value is $7905 and that's negative because remember the money left my pocket. So that's going to go into the PV. The PMT, that's the payment, is going to be $373.46 and that's positive because the money's coming back to me. So that's in there. Now all I have to do is hit this I button right here. Boom. And this tells me that my yield on this particular transaction is 55.41%.

Now that means while this note is still performing and they are paying me every single month, I'm earning 55.41% on my money. Think about that for a minute. Think about that. All of a sudden, all of a sudden, forget the banks has paid me two percent. Forget the stock market where I could make for six percent, maybe eight percent if I'm lucky. I don't know if they have a great year, I could go to 20 percent. I'm making 55 percent on my money and I am ecstatic over that. That’s a good number, right? Who wouldn't do that over and over and over again? And I'm glad that I'm able to produce that.

Now let's go to sale number two, and I want to refresh your memory here because sale number two, I sold the land for more money. We sold the land for more money. We sold it for $5,000 more. But the return is not always driven by the sales price. So, let's look at what happens here. Let's look at sale number two here. And I'm basically going to set this up the same way. I'm going to do my I, my interest or yield over the year, my present value, and my payment. So, in this case, what happened was we sold property number two. We sold this thing for 120 months. So right off the bat, you know that it's a longer sale process. Instead of being five, six, seven years instead of being seven years on sale number one, we're going for 10 years, 10 years, wow. And they're going to pay me over the next 10 years, literally $300 a month. That's a car payment for the next 10 years. I can go buy a car and have somebody else pay - just on these two transactions. I can go buy a car and have somebody else pay my payment. Between these two payments combined, I can buy a very nice car and the payments are made from the note that I traded here. That's something for a different Sunday, a different video. Not today. But that’s one we're going to take note of. We'll come back to that one. Now our present value again is $7905. It's basically the same thing as it was over here because I paid $10,400 for the land. I got the same amount down payment, the $2495. So now what I need to do is I just need to come over to my calculator and I just need to change up some of the numbers a little bit.

Instead of 84 months, we're going to do a 120. Instead of $373 a month for the payment, we’re going to do a flat $300. And now we're going to calculate our yield. Let’s see, our yield now is 44.99%. Not bad. I'll still take it. I’m earning almost 45 percent on my money. I'll take it. I hope you would too because that's a very solid return and as I said, I could literally go buy a car payment for that. I can make my car payment for the next 10 years, or at least seven years based on these two things. It depends on what kind of car you buy. So essentially this is two strong deals. I got a nice amount of money down on the down payment and I've got - these are quality properties, and I have no doubt that these, these two will not only perform, there are two notes will perform, but if for some reason they don't, guess what? It's okay because I know it will resell.

Now here's the deal. I wish I could tell you that that's the end of the transaction. Like, okay, we did it high five each other. We started collecting our money every month and that's it. Sadly, there's more to this and some of you are struggling with the numbers here and I want to just do one more step with you and kind of help to bring this piece to a closure. So, let me show you. Here's what people struggle with sometimes is they're like, listen, I don't understand why the yield, even though you sold it for $5,000 more, why is the yield lower on sale number two than sale number 1.

Well, basically what it amounts to is how long it's going to take me to get my capital back. So essentially the longer it takes you to get your capital back, meaning 10 years versus seven years, that's going to reduce your yield. So, a long-term note is not always a winner. In fact, the longer it goes out, the lower that margin is going to go. But here's something that you have to remember - and this is the way that I kind of see this and this is the way that we actually account for these transactions as well. And it's this. What you have to remember is that sale number one here, when this buyer, when they pay their $373.46 – ah, forget the cents for a minute, let's just leave it at $373. When they make their monthly payment, they're going to send me $373. Now that $373 is not all profit. I mean, it'd be great if it was, but it's not. You see, what you have to do is you have to figure out how much of that monthly payment goes back to the recovery of the cost of the land. Because essentially every payment that they're making, some of it is for the principal of the land and the rest of it is profit. So let me show you this for a minute. We bought that land for $10,400 and we sold it here for $33,865. So when I go over to the calculator, $10,400 divided by $33865. That means that I basically - the land cost about 31 percent, 31 percent of each payment. So, 31 percent of the down payment was recovering the cost of the land. Thirty-one percent of each payment that they make goes to the cost of the land. So essentially what we're going to do here is we're going to take their payment $373 times 0.31 So that means that when they pay the $373 here, the first $115. I think that was the change, but close enough we're 31 percent. The first $115 is the cost of the land. The profit is the balance. Okay, so the profit… I got the change right, look at that. Minus $373. $257.37. So every month that they make their payment, well total payment here, $257 of that is pure profit. $115 of that payment each month goes to the cost of the land.

And when we compare this to the other note on the other side, remember they're paying $300 as the total payment. I'll draw a box. It looks similar to this. Total payment. So, let's look at the cost of land over here. So over here we have, we paid $10,400 for the land and we sold the land for $38, 495. So, we’re going to divide that. So when we break out the calculator, $10,400 divided by $38,495. So that's 27 percent. So, remember now every time that they make this payment, 27 percent of it goes to recover the cost of my investment in the land. See, that's what makes the yield goes down, is that less of the payment each month is being recovered for the cost of the land. That's what's driving the yield down, plus the fact that it's 120 months versus 84. If it was a lower term well then the yield might be higher, the percentage might be higher, but then there's going to drive the yield up. It's kind of an inverse relationship there. So if 27 percent of that monthly payment... So, where they pay $300 a month, 27 percent, that's $81. So, $81 a month of their payment goes to recover the cost of the land. The balance of that payment, $219 is profit.

So essentially what it is important to remember here is that every time they make a payment, it's not all profit. It'd be great if it was, but you've got to account for the land coming back and you've got to really, you know, have a structure in place for that.

In February, this month I'm releasing Accounting for Land Investors, the 2019 edition and right below this video is a link to that. If that's something that you need to learn about the accounting for land investors and how these numbers all come in together and the journal entries that you would make and all the other components to that, well then please do yourself a favor and click the link and to learn more. This will be a live class over multiple days. There'll be six sessions, so click the link below to learn more about that and how you can participate in that live on the class call. So please do yourself a favor. If these numbers and the accounting for this and this profit margin thing is confusing to you or you need more clarification on it, do it because we're going to break down a whole bunch of components here regarding the accounting side of the land investing business.

The deal here and what I really want you to take away from this is that - I have a couple of takeaways here. One, I'd like to share with you. One, know your numbers. Know your numbers. You've got to know the numbers because when you do then these deals - then you can make them happen, but you've got to be a student of the numbers like learn them, memorize them. Forget baseball stats, football stats, or anything else. You're in the land investing business. Know your numbers. Research your county, be a student of it. Always be absorbing those numbers because it will make the difference for you. Two, if you have a team, I'm going to encourage you to trust your team that they know the numbers. They are dealing with people all the time. Maybe more. I know that my team deals with people more than I do, so you know, they're the ones on the front line. You've got to trust your teams and when you do, again, listen, but then if you know your numbers as well, this is the one, two punch. Boom, boom. It's all about connecting the dots together. Okay? The third thing that I'm going to encourage you to do, or the third thing I hope that you take away from today's lesson or video, is that really what it always comes down to is it comes down to yield. Forget profit margin, 300 to 1000 percent. Forget this, right? This number is great if you're selling TVs or something else. Forget that. You're making investments. You need to focus on yield, so know your yield numbers. Like literally I do this calculation every single time on every single sale that we make because it's the only way that I know whether I have a good deal or a great deal.

Look, I appreciate you spending the time with me. I know this is a longer video than the normal. I hope that you walk away from this having the appreciation of the three takeaways and as I mentioned to you, if you're interested in learning about the live accounting for land investors class, hit the link below and I hope to see you live in that class where we dig into making you a student of the numbers and really understanding why these transactions happen the way that they do and that way you can have the in-depth conversations that you need to with your accountant and CPA.

Thanks for watching and I'll see you soon.

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