Did you close this with a hard money loan?

I wouldn’t want to hold the loan for too long, so ideally it would be a 5 year term, presumably ballon payment at the end.

My plan is to buy the house subject to their existing mortgage, renovate the property, refinance it and pay off their remaining loan balance using the money from the cash out refinance.

There is a reason banks don't make loans on stocks.

Even after one year, that property may provide thousands of dollars worth of appreciation, you will pay down your loan and build some equity, and you can depreciate the asset. 

Points for the loan 1-2 points, so now you are in $3,413 roughly. 

You are going to want to find some good wholesalers in your area that can help you find distressed properties, or network/cold call some home/duplex owners in your area to see if you can find a discounted distressed properties, use the heloc to get hard money loan.  

Thank you.I've personally bought and sold over 15 properties, was a Realtor in Texas for 5 years, and a loan originator for almost 10.

I'm guessing an investor who could afford an $800K house wouldn't have trouble getting a loan, but maybe they would like being able to make a small or 0 downpayment. 

The substitute of collateral was more of a scenario where you sold for $155K, and instead of paying off the $88K loan in your scenario, those funds stayed at the title company and were used on a cash purchase happening nearby in date.