I have been waiting a long time to tell a Success Story, but here it is! I have purchased a couple rental properties conventionally, but this was my first creative real estate deal.
My business partner and I attended a real estate club meeting where another investor was talking about a call he got from a very motivated homeowner. He put the details of the deal on the board for everyone to see. No one seemed interested in the deal–including me. But my partner said, “Let’s try it!”
I knew that the numbers could work–barely, and there were a couple of different entry and exit options, so we decided to go forward with it. The house was a 3 bedroom, 2.5 bath in a great middle class neighborhood. The owners owed $471,000 with a $17,000 prepayment penalty, effective for six more months.
The loan was an adjustable, set to float in eight months. In excellent condition, the house was probably worth about $525,000, but it needed about $10,000 in work to get it there.
Plan A: Get the deed; sell the house
The owners were not behind yet, but told me that they did not have enough money to pay for this rental property after the tenants moved out. They were willing to do anything, so we decided to work with them.
However, in this case since the numbers were so tight and the house needed work, we told them that we couldn’t agree to make their payments; we would just do our best to figure something out.
They were fine with that, and they signed a written agreement to that effect, full disclosure. They were willing to let it go into foreclosure anyway, so they said trying is better than nothing. The first thing we did was get the deed.
Our first plan was to sell the property on an agreement of sale to a potential homeowner. In order to mitigate our risk with the adjustable rate loan, we were asking for $525,000 with 10% down and $3,800 per month. We put in $2,500 to do some minor touch ups, like paint and cleaning and marketed it for three months.
Our efforts were unsuccessful, and we had to go to plan B because the owners were now behind enough that we couldn’t profit if we had to make up their back payments. In hindsight, the property did not show well enough to command what we were asking.
Plan B: Short sale with the bank
Oh well, plan B: short sale. This was the first time we did one, and we kind of fumbled through it using a couple of different courses that I bought. It took us another three months to get the short sale accepted, but we were finally able to short it to $390,000. This was good enough to make it work.
We went about looking for a buyer with the goal of doing a simultaneous close. We put some flyers out at the Hawaii Real Estate Investors (HiREI) meeting and were fortunate enough to find a solid buyer that night!
We were able to close with her in 30 days, and after we paid off all the back taxes, our expenses, referral fee, etc. we walked away from closing with about $20,000 in pure profit. A small profit here in Hawaii, but a great learning experience.
If we didn’t find a buyer, we were prepared to close on it ourselves, put about $15,000 of rehab into it and sell it on a 5-day sale. If the 5-day sale was unsuccessful, we could always sell the property on an agreement of sale and get a large down payment and monthly cash flow.
It was a win for everyone involved. We never had our credit on the line and only about $2,500 of cash at risk. The original owners were able to keep a foreclosure off their record and didn’t have a deficiency judgment against them. The investor who bought it from us fixed the property while it was in escrow and did a 5-day sale the very next weekend! On to the next one!