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My Second *Creative* Success Story

by John Butler   

I actually completed these deals back in November but just got around to writing them up now. My first success story is, $24,000 Cash, $138,000 Equity and More. This will give you a little more info on my background and experience. As in my first deal, two properties and two different financing plans came into play on this deal.

It started when I saw an ad in the paper from an individual who had four properties listed with his name and phone number. The one that caught my eye was 3-bedroom, 1.5-bath house that was rented for $350 with an asking price of $25,000.

Well, even in St. Louis, $25,000 for a 3-bedroom house is low, so the price excited me. I also knew that the 2-bedroom, 1-bath apartments in a 4-family I had in the same area were renting for $400. I felt that the rents could definitely go higher than $350.

I contacted the owner and found out that he did own it "free and clear" and had bought these properties to retire on the income. After he retired, he found out that he would enjoy traveling more, and didn't want to have to be there on the 1st to collect the rents. He seemed somewhat motivated and the fact that the property was owned "free and clear" appealed to me.

I explained that the way I normally buy property is to purchase it with a nominal amount down with owner financing and plans to refinance it within 90 days (sort of a "90 days - same as cash"). While he was not thrilled with the idea, he figured that as long as he did receive the money in 90 days, that is pretty much the same as today.

The offer that I came up with was this: $20,862 (always use those uneven amounts!) with $862 due at closing and the rest in 90 days. I was very afraid that this offer was too low and might insult him so I prefaced it with, "I don't want you to be insulted by this offer, but it is just a place to begin negotiations."

We went over the contract line by line explaining what closing costs I was responsible for and what he was responsible for and then got to the total amount. I let the silence fall as he saw the purchase price and we must have sat there for three minutes.

He then said, "If you can take care of my closing costs, then we have a deal." What? No negotiations on price? OK with me. Sold! The interest rate? NONE! I didn't include it in my contract, and he didn't question it, so I wasn't complaining.

Well, this deal went to closing and I ended up paying ~$400 to close on this property (remember by closing on the 2nd of the month I receive the security deposit and the majority of a prorated rent ~700 in this case). So, I now owned this property and had 90 days of free rental income before I had to come up with the remaining $20,000.

I then went in and notified the tenants that the rent would be increasing to $500, and they would have to sign a one-year lease with me to stay. Of course they then moved out, but that allowed me to go through the property and fix all of the deferred maintenance (neglected repairs) on the property.

I spruced up the outside somewhat. I ran an ad in the paper at what I though was an aggressive rent of $550. I was deluged with calls and had $1,050 in hand (security deposits and rents) within two weeks of placing the ad.

Now that I had my ducks in a row, I began to work on financing. Using my mortgage broker I had used before, I had the appraisal done and it came back at an aggressive $50,000. At the time, I was planning on getting a 70% LTV no income verification loan. It was at this point that I found the second property involved in this deal.

I saw an ad in the paper for a 4-family in the area where this property was with two bedroom units for $59,900. I called the broker and found out that it had been under contract once and fallen through due to financing and had just gone back on the market. Since the rents in this one should be the same as my other 4-family, that meant $1,600 a month in gross rents. Nice!

I went to the broker and ended up getting it on pretty nice terms. I would get a new mortgage on it with a sales price of $57,000. However, the sellers would pay $1,500 of my closing costs, and the broker agreed to take a note for half of his commission (another $1,700). This reduced my out-of-pocket expenses by $3,200.

My plans were to use the proceeds from the first property's refinance to pay for the down payment on this one. Now, just like last time, things did not go as planned.

Two weeks before my 90 days was up on the first property, my mortgage broker tells me although we had almost finished the refinance, the company had decided to discontinue the loan program I was using. This seemed strange until I learned that the lender was Southern Pacific Funding, which ended up going bankrupt one week later.

When the chips are down and you have a balloon note coming due in two weeks and another purchase that is contingent on those funds, you REALLY get creative.

What I came up with to get me out of this predicament was a note sale. Since I had read so much about this on this site, I said, "Why not?" I created a note for $40,000, 30 years at a 10% interest rate that had a payment of $351/month. With the rent income of $550, this should be no problem I figured. I then discounted this note and sold it to a buyer I had found on the Main Real Estate Forum for $36,000.

While I probably could have gotten more for it if I had time to shop it around or season it, I had to close quickly (less than a week and a half), and this buyer could deliver in that tight of a time frame.

So we closed and I ended up leaving the note sale closing with a check for $15,555. I then ended up using $11,000 of this to close on the 4-family building (with 20% down).

What it came down to was this:

  • Two buildings purchased with only ~$400 out of pocket initially

  • An extra $4,000 in my pocket after the purchases were complete

  • Equity of $10,000 + $11,400= $21,400

  • Rental income of $400 x 4 + $550 = $2,150/month

  • Payments of $351 (House mortgage) + $432 (4-family mortgage) + $78 (broker commission) = $861

This leaves $1,289 each month to pay for insurance, taxes, maintenance, and most importantly--cash flow!

Well, this may have been my most complicated deal so far, but it seems easier after you get one or two under your belt. This might also account for the "War and Peace" size length of this Success Story. I apologize, but I like to go into detail, so I can answer any questions before they are asked.

My most important advice to those of you getting started is get the most education and information on creative real estate investing you can. This knowledge will give you the tools you need to think creatively when you find those deals.

Many times the deal as you originally planned it changes, and you have to adapt to the changing situations and be able to switch gears to a backup plan when the unexpected occurs. This is when your creative education is most useful.

The only other advice I would give is this: When you find the deal and you have done the legwork and the necessary analysis, then DO IT! The first one is the hardest, and it is all downhill after that. (You will feel like you can rule the world after that first closing!)

Hope you enjoyed it, and I wish all of you the same success and happiness in real estate investments that I have achieved.

 
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