Hey there, real estate folks! We have a doozy today; you’ll definitely want to read on to find out how I turned a loser investment deal into $4707.50 in 30 days.
And the best part is this: you can do the same thing, too.
We recently got a terrific question on my old Facebook page: Have we ever had a real estate deal that didn’t go as planned? One in which we had to figure out a creative way to get out and still make money?
Of course! Most real estate investors have been in this situation! It’s par for the course in our industry.
But I do want to address this topic with a real life situation we had, by walking you through the situation like a case study – step by step – with the numbers from a deal that’s a perfect example of this.
We bought a property in Phoenix at a Trustee Sale for $40,000.
Here’s the breakdown of our expenses associated with this purchase:
- $1,500 – Bird Dog Fee – This guy basically brought the property to us, with all the pics, info, research, etc.
- $1,186.50 – Back Taxes – When a property is purchased at a trustee sale, usually the taxes haven’t been paid in a while, so you need to figure this into your expenses.
- $180 – Cleaning/Secure Premises – The place had been vacant, so we paid to have it cleaned and get it secured.
- $476 – Title Insurance – Because the property was bought at a foreclosure auction, you’ve gotta get title insurance, which is generally tied to the purchase price.
- $450 – Monthly Payment – we borrowed 30K of hard money at 18% interest – the good thing about borrowing hard money is you can typically find hard money dealers who can act quickly.
Our total expenses came to $3,792.50, which was actually a bit more than we initially planned to spend.
So with the purchase price and our expenses combined, we were all-in for $43,792.50.
We then learned that the after-repair value was only $55,000, at best.
And since “Plan A” had been to earn 3-5K by quickly wholesaling the property, we realized that it was now time to begin considering “Plan B”…
We busted-out all the marketing stops:
- We posted pics
- We posted property flyers
- We called investors
- We sent marketing collateral through our email database
- We posted on social media
It was all-systems-go to unload this property.
The problem was, this just wasn’t a good enough deal and no buyers came forward.
(If our scenario had been a cartoon, this would the time when Scooby Doo says “Ruh Roh”.)
We didn’t want to keep the property as a rental, because we already had enough low-end rentals in low-end neighborhoods – which is what this property was.
We needed to get out quickly, so we jumped into a creative brainstorming session.
We scrapped our initial wholesaling plan (“Plan A”) in order to begin seeking a normal retail sale of the property (“Plan B”), hoping to find a buyer who wanted to buy in this type of neighborhood – which happened to be mostly Hispanic.
We called all of our Hispanic bird dogs, one of whom quickly found an interested buyer. But the buyer didn’t have enough cash to buy it outright.
This particular bird dog wanted $3,000. That’s definitely high for a bird dog fee, but certainly worth it, in our view, considering the situation we were in.
The buyer was willing to pay $51,500 to buy the house, but only had $30,500 as down payment. And this is where we had our “light bulb” moment (aha!):
We created a note, and we went back to networking, to find a buyer for the note. In other words, we created the note and marketed it at the exact same time.
Repackaging the Deal
Let’s first look at the documentation we needed for the Note Creation:
- Copy of Driver’s License or Social Security Number
- Proof of Insurance
- Straight Promissory Note:
- Simple interest note at 24 months
- Buyer put down $30,500
- Buyer borrowed $21,400 (we added $400 as a paperwork fee)
- 18% interest only
- Secured with a Deed of Trust
The note secures the funds, the deed of trust secures the property to the note.
Next we leveraged one of our “power team” members, an escrow officer, to create the paperwork, so we could continue focusing elsewhere. Now, as the note is being made, we are feverishly marketing. (Hence – focusing elsewhere!)
(If the note is created, but if you have no one to buy the note, then what’s the point? So we market!)
What happened next was pretty remarkable…
In the initial deal, there was barely any interest to be made. But because we repackaged the deal and added the 18% interest, loads of interested buyers suddenly came at us, in rapid succession.
Now, let’s look at the documentation we needed for the Note Sale:
- Letter to the Borrower – This letter let the borrower know that the note was being sold, and that they would be making their monthly payment to the new note buyer.
- Estoppel Letter – This protects the new note buyer, by saying that anything said about the note is true. (eg. The borrower never gave indication they wouldn’t make payments, or there are no unrecorded liens that haven’t been disclosed.)
- Seller’s Agreement to Correct Errors and Omissions – More protection for the note buyer. This says the note seller(s) will come back to the table if there ends up being anything wrong with the original note’s paperwork. (We had no problem with this part, because we knew the paperwork was good to go.)
- Term Conditions and Sale Agreement – This is like a real estate purchase contract, but for the note instead.
- Promissory Note and Deed of Trust Assignment – This just said that the note was assignable to the buyer.
Okay… Now, let’s run the numbers again – and watch the magic happen!
You’ll remember that, for the initial deal, we were all-in for $43,792.50. And the second bird dog’s fee was 3K, taking us to $46,792.50.
The buyer paid $51,500, minus our “second all-in” of $46,792.50, which equals an awesome profit of $4,707.50! (Bam!)
All of this happened in exactly 30 days. The initial deal of us buying at the auction took two weeks, and then repackaging the deal and reselling took another 2 weeks.
Because we got creative and planned smartly, we were able to make a pretty good profit – on a deal that looked like it was going in the trash.
You see, when “Plan A” doesn’t work, you’ve gotta learn how to ask yourself the questions that will help you get creative and come up with a “Plan B”, or maybe even a “Plan C”.
Never let anything get in your way. Go around the roadblocks, or over the roadblocks, or under them. Just never take “no” for an answer – and just make it happen.
Plan B’s turn out to be all around you, when you start asking the right questions, and thinking creatively.
There has never been a better time than now to invest in real estate – just use your noodle.
(BTW – We love the questions y’all post on the ol’ Facebook page; keep ‘em coming!)
Helpful Tips for Wholesalers:
Wholesaler Tip #1 – When buying properties at foreclosure auctions, always overestimate expenses when running your numbers!
Wholesaler Tip #2 – A good wholesaler will leave enough “meat on the bone” for the end user/investor. This mindset will keep your investors coming back to you again and again.
Wholesaler Tip #3 – Get creative and repackage the very deal that’s headed south. By doing so, we found a whole new set of potential buyers, and we pre-sold the note before we even created it!
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