​Overpaying and Under Selling – still make money

Did that get your attention? Is it better than saying, “Buy wholesale and sell retail!”? Let me explain. I purchased a performing loan in a nearby city about a year ago. The balance was $86,000+/-, no balloon, 6.25% fixed rate, payments of $595/month. (Market value of the property was $160,000 and the borrower had not missed a payment in 91 months) I discounted for yield at 16% for a total purchase price of $43,000+/-. Recently I was visiting with a bank in that city, asking if they had any problem loans that we may be able to purchase. Like always, they said that all of their loans were great but they did have a list of property that were REO, real estate owned, which obviously came from some loans that were not in good shape. One of the properties was in pretty good shape. It was a modular home that is located in a good rural area. I negotiated for some time trying to get them to come down on their price to no avail. We had looked at the cost to rehab and figured that it would take about $20,000 to make it marketable for the area. Purchase price was $280,000, rehab was to be $20,000 and the ARV or after repair value was about $360,000. Total time in the deal would be about 5-6 months.

The deal – We agreed to buy the home for $280,000 if they would loan 100% plus the rehab cost of $20,000 with no interest for the first 6 months and no origination fee. They questioned why they should do that. We said that we would give them an assignment of a note secured by real estate in their community and gave them the details of the note and mortgage as additional security. We also agreed to guarantee the note. Why? Because it was in our best interest. After a week, they had done their own appraisal of the note and would like to purchase the note outright and give us the credit against the purchase price. We agreed but reserved the right to repurchase the note on or before one year.

Final deal looked like this. New loan on the property of $220,000, no interest for 6 months and ½ point for the loan origination which would be added to the loan, interest rate of 6%. We closed, did the rehab, sold the property for $365,000, paid off the loan and repurchased our note back for the unpaid principle balance. Time frame of 5 months. Net profit???? Gross profit of $60,000 at a cost of $1,100 for the ½ point. Interest? Loss of $595 for 6 months on our note. They were happy with the note and really did not want to sell it back to us. Why did we buy it back? Because, we want to do it again. We could have just let them keep it and we would have made a profit on the note and a profit on the house, but by using the note, we did not have to pay hard money rates for the purchase and rehab costs so we could actually make more return on our investment. We could have let them keep the note and sold the house for less money and still have made a tremendous return.

It never hurts to carry back a mortgage or purchase one for a discount to help you in the fix and flip world.

This type of transaction, use a CPA and and attorney for advice.

Let me know if you have ever had to carry back a mortgage to get away from a property or have used similar techniques to buy other property.