Creative Case Study: How We ‘Flipped’ This Dud Into a Deal
Hey guys, Cody here. I wanted to share a great question that was recently asked on our Facebook page:
“Have you ever had a real estate deal that didn’t go as planned and you guys had to get super creative in order to get out of the deal and still make some money?”
Well, of course we have. Creative wholesaling is kind of my thing, ya know. And, this happens to every real estate investor at some point during their career.
So, I’m gonna share a particular deal with you and explain exactly how we had to get creative so we could make some money.
The ones is a big gulp – but I’m gonna break it all down nice and easy for ya – so stay with me…
Meet the Beast: 6614 Cheery Lynn Road
Let’s call this one the little case study at 6614 West Cheery Lynn Road in Phoenix, Arizona.
Now, as wholesalers, we purchased this property in order to wholesale it out and make a wholesale fee. So, on the acquisition side of the transaction, we purchased this property at trustee sale for $40,000. As with all real estate transactions, there were other costs involved. So, I’m going to break them down for you…
First of all there was a bird dog. We actually had somebody else bring us this deal who said, “Hey! Take a look at this. This is going to auction today. This could be a really good deal.“ When we ended up purchasing the property, that bird dog made a cool $1,500.
Now, whenever you buy a property at trustee sale, normally the ‘old’ homeowner, who used to own it, hadn’t been making their mortgage payments… and, therefore, had not been paying any of the taxes. So, taxes are kind of like a lien. But, it’s one of the expenses that actually passes through a foreclosure auction. And so, on this particular property, there was $1,186.50 in back taxes out.
So, if you’ve been playing along… we have bird dog fee. And we have back taxes.
Plus, the property was very dirty. There was a lot of trash left over from when the old homeowner moved out. Oh, and the property was left unsecured. So, we sent in our regular guy who goes in to secure it and clean it. That costs us $180 big ones.
But wait, there’s more…
Whenever we purchase a property at a foreclosure auction, we always get title insurance. We always want to make sure that we’re bidding on a first lien position and that it’s a clear title when we buy it. So, title insurance costs us $476. (A lot of times, title insurance is tied to your purchase price, which is how the cost of title insurance is typically determined.)
Now, we leverage a lot of our funds because we’re buying so many properties down at the auctions. We ended up borrowing hard money on this property at 18% interest. The good side of that hard money is you can find hard money lenders who can act very quickly. They’ll fund your deals when you purchase at trustee sale. As long as they’re used to funding deals that quickly, you can get hard money. Now, we put $10,000 down on this particular deal. We borrowed $30,000. So that means, every single month, we would have a hard money fee of $450 a month.
So, we purchased this property with all the expenses, total all in for $43,792.50.
Now, the problem with that is we ended up spending more on our expenses than we initially planned, which now started to change our original game plan because, the after repair value on this property was $55,000 at BEST.
So, in order to wholesale a property out, we were looking for somebody who wanted to put this into a rental portfolio because there was a big enough spread to do a fix and flip, for example. We were going to try to make anywhere between $3K to $5K and just wholesale it out.
That was our initial game plan.
So, as soon as we got access to it, we cleaned it out, took photos, made property flyers… and started hammering all of our investors. We sent it out to our email database, put it online, social media marketing… everything.
We turned everything on to find a buyer who would buy it for $3,000 to $5,000 more. The problem was, no buyers came for it. It simply wasn’t that great of a deal.
Taming the Beast: Creative Solutions
So, my business partner and I thought, “Well, what are we going to do? We have to be able to do something to turn this deal around.”
We did not want another low-end rental in a low-income neighborhood. We had plenty of those. So, we started getting creative. We started brainstorming.
We sat down and said,
“Okay, two to three weeks, we’ve owned this property. Our hard money fee is going to come due soon. We’re going to have to make a payment and it’s going to decrease our overall potential profit, so we want to get out of the property as soon as possible.”
So, we shifted from our initial plan.
Most savvy real estate investors know that a lot of times, your deals are not going to go as planned. So, we sat down and we said, “Okay, we’re going to have to retail this.”
And, in order to do that, we’re going to have to find a buyer who wants to buy in that type of neighborhood. It was a heavily Hispanic area, so we started calling our Hispanic bird dogs.
We put it out to people we knew who were very active wholesalers in the Hispanic community. And, we found one who had a buyer and they liked the property. The problem was, they didn’t have enough money to pay as cash for the property.
So this is how we got creative on the sale side…
Beating the Beast: Note the Creativity
This bird dog wanted $3,000. It’s quite a bit of money, but he had a buyer so it was worth it for us to pay him his $3,000.
The buyer was willing to pay $51,500. The problem was, they didn’t have $51,500. They had $30,500 as a down payment.
So, my partner and I thought, “Let’s create a note, and then go back out to our network and see if somebody wants to buy the note.” And, the way we’re going to do it is, we’re going to start creating and marketing the note at the exact same time.
So, I’m going to teach you guys how to create a note. It’s very, very simple…
We have a note application that the potential borrower fills out. We get a copy of their driver’s license and social security card. We want to make sure that they’re a legal resident.
We then create a straight promissory note. What that means is, it’s just a simple interest note – there wasn’t anything created and it was just a note. And, the terms in the note were “2-year note, 24 months.”
The buyer was going to put $30,500 down, which means they were going to borrow $21,000. But, we added $400. I guess you would call it a “paperwork fee,” which is just more profit.
We added the $400 into the note. So, they borrowed $21,400 at 18% interest-only. And, that’s why we have a straight promissory note at 18% interest-only, 24 months.
Hang with me, the big reveal is coming soon…
We then secured it with a deed of trust. So ultimately, the note secures our fund. The deed of trust secures the property to the note and to us. And, we also got proof of insurance that they were going to have insurance because you never want your money at risk.
Now, how we did this by calling up one of our Power Team members – our escrow officer – and said, “Hey, we want to create this note and a deed of trust.”
She said, “Great! No problem. Send me over the terms and I’ll go ahead and create the paper work for you.”
See how we’re leveraging our Power Team members so we don’t have to do all the work ourselves.
Now, as we’re creating this, we get back on the phone, back to our online network, back to our email database, and start hammering everything again. All the marketing starts going out.
Remember the first time we barely got any interest?
Well, the second we created this note at 18% interest, we had a mile-long list of investors who wanted to buy this deal from us. It was totally awesome.
So, just by simply repackaging the deal and getting a little creative, we had a ton of interested buyers.
Selling the Beast: The Big Finale
So, we sold the note by creating a letter to the borrower, letting them know that the note was being sold and that they need to now make their payments – their monthly payments. It was about $450 a month.
We also created an estoppel letter. This estoppel letter protects the end note buyer. Basically, it means that any terms or conditions or anything that we said about the note is true.
So, for instance, the borrower of the money never let us know or gave us any indication that they’re not going to make payments. There’s no unrecorded liens or encumbrances that we haven’t fully disclosed. So, this is basically anything that the end note buyer wants to add in there to protect themselves.
Then there’s the “Seller’s Agreement to Correct Errors and Omissions.” It’s a document that basically says that my partner and I will come back to the table if there’s something wrong with any of the original notes’ paperwork.
Because we knew that everything we created was good to go, we were cool with that.
We then created the “Terms and Conditions of Sale Agreement.” That’s basically almost like a real estate purchase contract but for the note. And, the last thing we created was a “Promissory Note” and “Deed of Trust Assignment.”
So, when we created this, it was assigned. And, when we found a note buyer, we assigned it. It really was that simple. (Mind blown yet?!)
So, all those documents created the note AND helped us sell the note.
So now by the time we paid the original $43,792.50 purchase price and the $3,000 bird dog fee, our all-in was $46,792.50.
The buyer paid $51,500, minus our all-in of $46,792.50 = $4,707.50. Boom!
Yes, because of our creative and clever thinking, we turned a deal that nearly ended up as yet another long-term rental into a profit.
This all happened within exactly 30 days. Two weeks trying to wholesale it the first time; then another 2 weeks to get all the note paperwork created, close the deal from the bird dog, and finally getting the money wired over from our end note buyer.
We banked $4,707.50 on a deal that we thought was going to go totally sour.
So hopefully, you guys learned that creativity pays.
Never let anything get in your way. A savvy real estate investor never takes no for an answer or lets roadblocks get in their way.
They just use their education and their experiences to go out there and try to go around and over or under anything that’s in their way in order to make a profit by investing in real estate.
So go out there and be creative!
Until next time…
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Tags: Agreement, Back Taxes, Bird Dog, Deed, Estoppel Letter, hard money, Promissory Note, Title Insurance
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