Acquisition

I came across this deal from a wholesaler. Originally was asking 75k. I hit them at 35k and struck a deal at 40k in the end. No one else was touching this deal from the wholesaler’s network of buyers and that’s why I was able to get it at a steep discount.

This one needed a complete renovation, probably needed to be demolished in the end but I made a deal out of it just cleaning it up. My very first walkthrough is below comepltely unedited. The backyard was also a mess, but it’s not shown in the video.

Rehab

Never factored in doing a complete renovation, this was essentially going to be a wholetail scenario. Lots of trash out, yard clean up, tree cutting and tire removal. There were a ton of tires in the back yard and you can’t just throw those into a dumpster, have to take them to a recycling facility. Here is a video walkthrough, half way through the rehab.

The clean out took about 30 days, and cost about $16k.

Resale

Looking at comparables, a rehabbed mobile home could fetch the 160k mark. Due to the fact I was selling this as-is, as a fixer, I went with 110k as the asking price. Before I even put it on the MLS, I threw it on craigslist and facebook market place.

Got quite a bit of response in a couple days. There were two buyers extremely interested that walked it within days of our post. Within a week we were under contract with a couple. They were looking for a fixer and needed me to carry the paper, which I was glad to do.

We agreed to a price of $98k with 35k down, and a note of 58k for 12.5 years at 9.974% interest. Buyer to pay closing costs, their agent (came in after the fact) and survey. Closed within 2 weeks of the executed contract.

Final Numbers and ROI

Forgive my excel breakout but there was a number of ways to analyze this ROI. My total out of pocket for the project, straight cash out of my account was $58,228.80. This includes the purchase, closing costs of the acquisition, utilities, insurance, rehab, etc.

On the resale, I received back $34,437.70 which was the downpayment of $35,000 minus some closing costs. Not a complete 1-1 from what’s shown on the closing statement, as there were other costs outside of closing.

After selling the property, and creating the note I was still out $23,791.10. The note pays $678 a month which puts my break even month right at 35 months. At the 36 month mark, if I look at the amorization schedule, my net profit is just shy of $50,000.

Netting 50k on a out of pocket of almost 24k at 12.5 years, what kind of return does that really break out to? A way I look at is it, what if I sold my note at a discount of what my out of pocket is and calculate its return?

33.66% ROI, first lien position, and passive monthly income. Seems like a decent deal in the end. I’ve got a few more note deals coming soon.

Subscribe now

Subject To (otherwise known as a Subto) is a way to purchase properties and leave the existing loan in place. In a majority of cases, when someone purchases a property subject to, they mean purchasing it subject to the first lien (mortgage). You can also purchase properties subject to the second, third, or fourth lien.

This means you acquire the property in your name, the deed actually transfers from the seller to you. The existing lien/mortgage stays in the seller’s name and is still attached to the property. This is critical to understand. The buyer of the property will be making payments on the lien/mortgage on behalf the seller. The seller is essentially trusting the new owner to keep the loan current.

This is different than a Assumption. When assuming the loan, the buyer will notify the mortgage holder that they want to take over the property and loan associated with the property. The bank/lien holder will underwrite the new buyer to make sure they are qualified before allowing an assumption. Once that is approved, the seller will deed the property over and the bank will move the loan into the buyer’s name.

Subject to’s are a riskier form of ownership. Every mortgage out there has a specific clause in the loan documents called a “Due On Sale Clause”. This allows the mortgage holder to call the full balance of the loan due whenever there is a transfer of ownership. There are a number of ways to mitigate this risk and I can write a small book about it. From my conversations with title companies and other investors, as long as payments are made on time, the banks don’t have a reason to dive deeper into the file. Just know they absolutely have the right to call it due with written notice.

Acquiring the Deal

This property was acquired from a cold calling campaign from my virtual assistant. The deal was a mobile home with land over in the Canyon Lake area. The sellers were motivated to sell as they wanted to travel in their RV and their kids didn’t want to take over their place. I spoke to them and asked how much cash they needed to move out. The amount was actually pretty small, with that in mind, I offered that I could give them more money in their pocket if I instead took over their loan. It’s a win-win because I don’t have to pay for lender fees and higher interest, I can pass the savings onto the seller.

I requested a copy of their loan information and worked the number backwards on the net amount they needed to walk at closing. All in all purchase price was 119k with taking sub2 of 92.5k first and a 4k HUD lien. Payments (PITI) came out to $860 a month, with 21 years left on a 30 year loan at 4.5%. I could easily rent this out at $1600 for great cash flow. Instead I opted to rehab and flip this. Closing statement on acquisition below.

Payments, Insurance and Rehab

Since the loan stays in the previous owner’s name, I had to make sure I could always find the sellers if something came up with the bank. I wasn’t as worried about the due on sale but more so the insurance. One of the biggest tips where a bank might look into a sub2 is when the insurance information changes. If this place were to burn down, the beneficiary of the policy is still technically the previous owners. It’s these minor details that could cost me a fortune. I had the sellers sign an agreement stating any overage on a potential insurance payout would go to me.

On top of that, I grabbed their personal information and login information for the loan servicing company. These deals require a lot of trust of be had between the seller and buyer.

Rehab was all done myself, it was mostly cosmetic consisting of new flooring, inside and outside paint, mud/texture, cabinet refinish paint, yard clean up, toilet replacement and removal of countertops.

Rental and Resale

As you can tell from the pictures above, I was on the tail end of the rehab. What was left was mostly touch ups and countertops. I happened to find a buyer during this time. He walked it knowing it wasn’t completed. He was willing to take the property as-is if I cut him a deal. In the end we agreed to a 195k resale price (no agent commissions since it was off market), and he wanted to lease the place while he worked up the money for a down payment. The rest of his financially profile was solid, I wasn’t worried about him not qualifying for a mortgage.

I structured a lease with option to purchase with the buyer. $1800 a month till he closed the loan. About $950 in monthly cash flow with a estimated net profit of 55k.

125k Purchase (and closing costs) with 15k Renovations and 195k Resale leaves about 55k in Profit. The rental income for the next few months will off set the resale closing costs on the deal, call that a wash.

Future Projects

I’ve got a great write up on a deal I am working a “wrap” on. I purchased a place with seller financing at 0% interest. I am then reselling that property to a buyer at 5% interest. This deal should be closing mid March. I initially put $800 down to close it and with interest payments over time, it’ll net me shy of $250,000 over the life of the mortgage.

Thanks to this newsletter, I’ve partnered with a private money partner via joint venture to acquire a property over in the Seguin area. It’s a small development deal that’ll be posted here and I may do some video on that one if there is interest.

Lastly, I’m closing on a fix and flip in the Canyon lake area this upcoming week. If anyone is looking to put some capital to work, please reach out. This property is coming with the lot next door and I’m looking to raise some money to install utilities on it. First lien position!

Subscribe now

This is a deal I did a few years ago and it’s a perfect case study on what to look out for when buying a very old mobile home.

Finding The Deal

This one was an interesting deal as it came across my table from a wholesale company that no longer operates in Texas. Funny enough, I trained a few reps that worked there back in the day and I’ve always kept tabs on their deal flow. I spoke with one of their reps and asked them if they ever come across mobile homes, and they actually had one but no one wanted it.

That remark right there is a huge reason I love this asset class, so many people write off mobile homes which allows me to purchase them at deeper discounts. To keep it short, did a quick walk through and bought it all in right around $78,000. Couldn’t work out a creative financing deal, so it was an all cash purchase. I also couldn’t secure a hard money loan. I’ll detail why below.

Mobile Homes vs Manufactured Housing

Something to note when purchasing older mobile homes is that you must look out for the year build, specifically the cut off year of 1976.

HUD (Housing and Urban Development) has a run down of why this is so important. I’ll link it here.

Here’s a quick summary of the link above. Manufactured homes built prior to 1976 are not built to HUD code, which basically means they will not offer financing via government backed loans (FHA) on these houses. If I can’t get a borrower to secure a standard mortgage on these properties, that means I also can’t secure a hard money loan to flip these properties as they will not underwrite a deal with no exit strategy.

This home is also a single wide. Even if it was built after 1976, most lenders today do not lend on single wide homes for whatever reason. I do have one lender that will on a case by case basis, but the underwriting criteria is strict enough that it shrinks my buyers base by a large margin.

Renovations and Resale

A few pictures of the property below. On that second picture, we had to remove that tree branch to secure insurance before closing.

The renovation on this was pretty easy. All in all the property was in great shape. The biggest ticket items was the tree branch removal, new appliances, new electrical panel and a dumpster. The rest was minor touch ups.

The rehab, utility cost, survey and insurance totaled out to just a smidge above $10,000.

Finished pictures are below.

Selling The Property and The Note

How do you flip a property that’s basically not financable? You have to sell it owner finance then sell the note.

We listed this straight on the MLS and located a buyer without an agent fairly quickly. Saved a little on the commission there. I had the buyer do a basic loan application like anyone would if they were applying for a normal loan. Created loan terms that made sense for their financial profile and closed the deal through title.

The Loan Figures:

I resold the property at $150,000 with a $20,000 down payment which created a $130,000 note or mortgage. I seasoned or held onto this note for about 3 months. Afterwards I located a note buyer that was willing to purchase the entire loan balance at a discount.

It was actually right around $96,000 factoring in earnest money, closing costs, etc…., the investor was targeting a 12.5% return on their money.

So the net profit after all is said and done was around $26,000.

• 96k (Note Sale)

• 20k (Downpayment)

• 3.3k (3 Month Loan Payments)

Gives you $119.3k Gross Profit

• 78k (Acquisition)

• 10k (Rehab)

• 5k (Closing Costs/misc)

Right Around 93k in Costs

119.3k - 93k = 26.3k NET PROFIT

26.3k/93k = 28.3% Cash on Cash Return over 6 months

Side Note

In my absence, it looks like we got a number of new subscribers and quite a few people reaching out directly. For all agents, wholesalers and deal finders, I’ve got a buy box listed on my main website or you can click here for what I’m looking for.

Currently all of my projects are under contract and I’m waiting to close them out. I’m actively looking for more deals on top of capital partners to keep my pipeline going. I may do a few posts on locating and assessing deals if you guys want to see behind the scenes of it all.

Finally, I am working a mobile home deal that has legs. Details are below. Looking to find capital to put this one together as my hard money guys won’t touch it and I’ve tapped out of my current private lenders. Give me a shout at thomas@sa2austin.com if there is interest.

Acquiring The Deal

This one took a minute to close. Initially this deal came off a cold call from one of my virtual assistants. The owner of the property was extremely difficult to work with as she was hard of hearing and never returned calls or text. It took a number of trips to personally door knock and get her to sit down and sign a contract.

The contract to purchase was done in April of 2023 after months of back and forth. The purchase price at the time for the property was $75,000. It was in great shape and was a easy turn around rehab. Contract was submitted to title and we were looking to close it within 60 days. 60 Days turned to 90 days, then the seller kept falling in and out of touch. She wanted us us to close on a moments notice out of the blue, then disappeared for weeks.

To get a hold of the seller, I found her daughter’s address and knocked on her door and also mailed them a letter explaining the situation. From having the daughter talk to the seller, I was able to finally get the deal back. I had to do a final inspection before closing as it had been months since I last walked it.

This became an big issue as the property was now in an entirely different condition than when I put it under contract. The roof was completely shot, the house was stuffed with so much trash that it was next to impossible to walk through.

The video above is after we did a complete trash out of the place. At this point I had to renegotiate the price before closing. My new price was $40,000 down from $75,000. The seller did initially agree to it but just before signing the amendment, she wanted more money. So I pitched the idea of having her carry the balance and pay her $50,000 in 12 months after I flip the property. Basically instead of having to go to a hard money or private party lender and pay all the extra fees, I would have her be my lender instead.

Creative Financing - The Numbers

We want back and forth and the final loan terms we agreed to was:

Purchase Price: $50,000.00

Down Payment: $5,000.00

Loan Amount: $45,000.00

Loan Terms: No monthly payments, 5 month balloon, first lien position.

Interest Rate: 0%

I would have to come up with $5,000 to close this plus closing costs, which is about $2,000 give or take. To make this happen I structured a piggy back second loan. Essentially I found a private money lender that was willing to lend me the money on a second lien position for the down payment, closing costs and a little bit of rehab monies.

For borrowing $10,000, I gave my lender an 18% APR, 5 month balloon, zero payments, second lien position. I had title draft up all the loan docs for both loans and scheduled closing.

As you can see from above, the two loan ares shown on the closing statement. I actually received money back at closing, I brought nothing to the table. The deal was completely funded with no money out of my pocket. I now have 5 months to get this thing resold.

“Prehab” and “Wholetailing”

After finding out that the roof was shot and leaking throughout the place, I switched how I viewed selling this home. I did not want to deal with a complete rehab as I busy with other rehabs. The resale of the property is probably closer to $200k.

A purchase of 50k, rehab of 70k, leaves a gross profit of around 80k. There is definitely a good chuck of change I’m giving up but I also have to weigh out the time I’m spending on managing this thing.

What a lot of investors do in this place is called prehabbing or wholetailing a deal. Prehabbing is when you just clean up a home and make it look more presentable to a end buyer who is looking for something at a discount and is willing to put in some sweat equity. Wholetailing is the strategy of closing on a fixer upper, “prehabbing” the deal, then listing it as-is on the market for a quick buck. It’s different than assigning a contract before closing, as you typically take ownership of the property when wholetailing. Closing on the deal allows you to list it online which opens up a larger pool of retail buyers instead of selling to investors.

For this project, we filled up three 20 yard dumpsters to clean up the interior and some of the yard. We cut back the trees up on the roof, which were the cause of all the leaks. Cleaned up the back yard. A few plumbing leaks were fixed and that was it. Came in right at budget.

Here are the final images for resale.

Creating and Selling The Note

I put this on the MLS at $115,000.00. Got a number of investor offers out the gates from 25k to 50k. Took some time to find a buyer with a couple of price reductions. In the end, I found a buyer off facebook. Within walking it once, the buyer was ready to sign the contract. The gentlemen was a contractor himself and had the cash to close but preferred to keep some of it in reserves to complete renovations of the property. Here is what I pitched and he agreed to:

Purchase Price: $90,000

Down Payment: $60,000

Note: $30,000 First Lien

Rate: 8% rate

Term: 16 months

Payment: $2,000

Buyer had no issue closing outside of title to save on closing costs, so I handled the pro-ration of taxes, transfer of the HOA docs and recording of the Note, Deed, Deed of Trust and lien releases. From contract to closing it took about 5 days.

I used the 60k to pay off the first and second lien. I now have a paid off property and a 30k note at 8%. Instead of waiting 16 months to get my money back, I pitched this to my note buyers. Within 2 weeks, I resold this 30k note at 28k.

As you can see, I’m giving up about 2k of principal and 2k of interest on the full loan. I’m giving up $4,000 of profit for getting my money upfront. The investor buying the note at 28k is receiving a return of 18%+ on his capital. Not only that, the loan is secured against a property that’s worth 90k as of today to 200k once fixed up.

I’m currently finishing up a rehab not to far from this project so my hands have been tied. It’s another mobile home deal that I may flip or do a “wrap” on the loan. I took the property “subject to” the first mortgage from the seller at 4.5% interest. so this is another great project to utilize creating financing on the resale. I also have a Houston project that’s structured similar to this one I laid out, the seller agreed to finance his home at 0% for $800 down for 15 years. One way or another, I’ll do a case study on “wrapping” a loan.

Subscribe now

The Final Numbers

We got the sewer lines installed on all lots, water and electric installed on 2 of the lots. We did decide to purchase a very old mobile home and move it onto one of the two lots with utilities. Intention was to fix it up a bit and owner finance it out. That idea was scrapped as we didn’t have the time so we cut our losses and sold it as-is for cash. We did take a small hit on it.

The land was marketed via the MLS, Zillow, Facebook Market Place Craigslist and a sign on the property itself. Here is a breakout of how each lot was sold.

Lot 49: Vacant Lot. Sold to neighbor. In-person lead for $5,000 cash.

Lot 48: This is the mobile home lot with utilities. Sold via sign in the yard for cash at $15,232.

Lot 46 & 47: Sold together to buyer off Facebook. Total Price $16,000 cash.

Lot 44 & 45: Active for sale at $6,500 each.

Lot 42 & 43: Sold together from buyer off of MLS with agent for $10,000 cash.

Lot 41: Sold owner finance from buyer off of Facebook. Sales price $6,000. $306 for 16 months.

Below is the full break out of everything from costs, gross profit and the true net profit. Obviously the lots to be sold are not yet reflected in the bottom line but overall this project is projected showing a 100%+ return. Percentage return is great but the actual amount made on the deal was low. Was it worth all the time and effort? Not really. Most of the work was done through the city for the utilities so we didn’t have to manage much of anything, it was more of a waiting game. Other than that, showing a piece of land requires no agent or anyone to be present, so for marketing purposes it didn’t require much time out of my day for prospective buyers to take a look at the property.

All in all I knowingly took a flyer on a land deal in an area I’ve never been to and still came out ahead. Learned quite a bit of the area and I will plan to farm this area for off market land deals that could pan out better in the future. There is a strategy that I am employing for one of the two remaining lots. The idea is to pre-sell a mobile home on one of the lots. I’ve already spoke with a mobile home reseller and I can get a 3 bed/2 bath, 900sqft single wide, brand new, transported and set up for just under $60,000. Utility lines and hook up will run around $7,000, lets round up to $10,000 for anything else miscellaneous.

I plan on marketing the full package at $99,900 for a brand new 3 bed / 2 bath. Buyers are able to purchase a mobile home separate from land with chattel financing via the reseller. Very similar to a car loan. I can then owner finance the land for the difference. The reseller can also roll in some of the development/hook up costs for the land into the chattel loan. This allows me to play with the difference of $29,000 of gross margin plus interest of owner financing the land.

The true value add for land development is right here, adding the housing. I am now almost 5x my net profit with a mobile home on top and I don’t even have to pay for it upfront. I’ll do an update down the line once I resell these final two plots.

Food For Thought

A big reason of why I purchased the land above was to test case the appetite for affordability despite the location. I would love to tap into this at a larger scale and I am looking at raising capital down the line to do so. If you want a larger proof of concept of the appetite for affordable housing and utilizing mobile homes to satisfy that demand, look no further than Colony Ridge in Cleveland, Texas. Proof of concept is there at scale.

Despite the political and legal issues surrounding the developer of this massive project, the company is satisfying the need for housing in the area and it doesn’t look like it’s slowing down at all.

It’s a great read to see the scale of it all. Click HERE.

Here is a snippet of the insane growth that this community has had in the past decade.

“In 2013, the district had fewer than 3,300 students. By the end of the 2023-2024 school year, enrollment reached more than 12,000 students. To keep up, the district built three additional elementary schools and a middle school.”

This is one of the bigger developments out there but there are smaller ones littered all around Texas. Immigration isn’t slowing down anytime soon, which means there is a big opportunity here to provide land and housing for all of southern Texas.

I’ve got a great owner finance case study coming up. I’m finalizing selling the note in the next week or so, and once that is finished, I’ll publish it all. I’ll also include a wholesale deal that I did earlier this year off a bank foreclosure found on the MLS.

Subscribe now

Buckhorn, Canyon Lake TX

Sold Price - $90,000.00

Down Payment - $60,000.00

First Lien Note FOR SALE - $30,000.00

Note Rate 9.235%

Loan Term 16 Months

Monthly Payment $2,000

Interest Earned Over Loan Term - $2000

LTV - 33.3%

I also threw this up on crexi, full address is in link - Note Information

It’s a mobile home with land. It’s been entitled, home is located on septic. Has working utilities with city water and electric. Buyer/Owner of the home I financed it to is a contractor who plans to fix it up himself. More info will be provided to serious buyers. Thomas@Sa2austin.com

Covid, Real Estate, and Warren Buffet

Travel back in time with me to the first quarter of 2021. Covid was just starting to hit the United States. We all experienced the social distancing, market turmoil and the like. I want to go back and recap what it looked like from working at a larger real estate investment operation and how it all circles back to buying this piece of land for cheap.

At the time, I was working at a real estate investment company that operated all over California. I was overseeing the wholesaling division. Anything the company didn’t want to purchase outright to flip or put into their rental porfolio, my team would flip the contracts to other buyers.

One morning when we were still coming into the office, I was told to wholesale everything we had on the board. We were not looking to take down anything at this time. It struck me kind of odd as the company as a whole was extremely well capitalized to purchase these outright and weather the storm. All of the deals had a lot of equity built in as well. The overall sentiment of the market was unknown so a ton of our buyers were on pause to purchase anything further. That same week I learned of a large lender pausing all commercial lending which also spooked a lot of local investors.

It was fairly difficult to find active buyers at the time to pick up our deals, even at discounted prices. Our team in the end found a few investors who could absolutely care less about the current Covid market conditions, and we did sell most these properties to them at a extreme discount. I’m talking 40% of market on some of them.

The reason for this story is this, despite working at a real estate investment firm that had a large warchest at it’s disposal, in the middle of a market crisis where real estate was almost at its lowest point in years, the company decides to sell off all of its deals (in the short term) instead of closing on them. It reminds me of the Warren Buffet quote:

“Be fearful when others are greedy, and be greedy when others are fearful."

In this moment, the few investors who closed on those deals we had, made an absolute killing once the market started turning. They bought as close to the bottom of the real estate market as you could. I recall checking property values on these deals about 9 months later, and they could’ve easily sold these deals for a 80-120k profit as is. Mind you these deals were mostly under $200k purchase price.

What’s the point of this story? Two things.

We bought this piece of land close to the bottom of the market during Covid. Took a risk, but it’s hard to lose on buying 9 lots at $10,000.00 with road frontage and utility access. I was working in California and this piece of property is located in the middle of nowhere Texas. Never even drove by the place.

Also, history doesn’t repeat but it rhymes. The Fed has recently lowered rates a half a point. History shows that a slowdown follows when rates start coming down. If/When the market starts turning south, it’s not a sign of the world is ending, it should be a sign as everything is going on sale.

Underwriting Land - What To Look For

Did my best to try to find the old zillow listing but with everything being syndicated to other sites, you can see the info from the pictures above. Price was slowly being reduced until we just jumped on it at $10k. You can see it via the zillow picture. I find it funny one site is valuing this property over $100k, goes to show those numbers can be way off on estimating value.

When looking at land, a few big items to make note of:

1. Road Frontage

2. Utility Access/Availability - Sewer or Septic/Water/Electricity

3. Easements

4. Zoning

You can see just buy the position of this lot that it was located within a subdivision on a standard road. We confirmed it had city water and access to put in electrical. There was no sewer at that portion of the street so we did have to factor in extending a sewer line nearby to service the lots. All this information can be gathered through talking to your local city or county office.

Anytime when you’re closing on vacant land, you’ll want to get a survey. All in all it was about $12k to close this deal. Being our own broker, we did save $600 in commissions applied to the deal. 10k for the land, 2k for the survey.

Buy the barrel, sell by the bottle

Land development takes time, you can’t go out there with a backhoe and start working on the place. Permits and utilty hook ups take time.

During that time we talked to the owner adjancent to the right most piece of our property. He had a shed that encroached on our property. We immediately struck a deal with him and sold him that portion of land for 5k cash. No title company involved to eat up closing costs, just a cashier’s check exchanged for a deed. Don’t have a closing statement to show but contract is below.

Per the city to install sewer lines to our lots we had to pay for a pump on top of the line install. The reason we were told was the road was at a slope enough to justify needing a pump. All in all it costed us $10k and the lot at the very left end of our property got a free sewer hook up courtesy of us.

We also threw up 2 electrical meters on two of the lots, which ran about $4,000 each.

I’ll end the write up here. In part 2 I’ll break out the full excel sheet showing the costs we incurred for each lot and the profit on each sale. I’ll also dive into mobile home / chattle loan land sales. We plan on marketing one of our last two lots as a land home package.

“$99,000 3 bed / 2 bath - Brand New Mobile Home /w Land”

There is a way to make housing affordable. I’ll dive into the numbers in the next post.

Subscribe now

This isn’t your convetional type of lender for home loans, most flippers utilize this type of commericial lending which is called “hard money”. If you were ever home buying and attempted to buy a home with mulitple offers and the agent responded that most of them are cash offers from investors. Cash, in the real estate business, actually means hard money. It’s kind of understood. It’s considered cash in the fact that this type of lending can close extremely quick, with very minimal underwriting guidelines which is typically just an appraisal, with no inspection or repairs needed.

Terms for hard money typically range from 8-14% interest rate (interest only monthly payments), 12 month term with a balloon (full payment due at end of term), and a couple origination points upfront. The intent for these loans is to be in and out of them quickly. Most will lend anywhere from 80-90% of the purchase price, or 70% of the ARV (after repair value) which can include a rehab account. This is crucial on how I was able to close with minimal out of pocket on this property.

Everything is Negotiable

If you have ever purchased a home with an agent, there are these rules or standard practices put in place. For example, deposits should be 1% of the purchase price, the seller should pay for the title policy, buyer should have access to inspect the property, etc…. Lots of real estate agents do not want to steer away from these practices and are adamanat about having their clients stick to those terms.

Wrapping your head around the fact that every single thing on that real estate contract is negotiable can drastically increase favorable terms to you as the buyer.

In this case, the seller was motivated to sell as this property was inherited and the owner needed money as well as plenty of time to move out. The seller could care less about how much money I put down and was not set in stone on a specific close date.

The only times I’ve ever had push back from a seller about deposit amounts had an agent involved in the transaction. For $10 I got 30 days of inspection and for $100 in deposit I locked up this deal for 60 days to close.

The rest of the transaction was straight forward as we performed our inspection, had an appraisal done on the property and did a small extension to grant seller more time to move out.

There was an issue I had to sort through with this seller which is typical for most deals when the owner is still living in the property. Having cash on hand and extra time to move out is an issue especially when the seller doesn’t have the resources to do so.

To make this deal happen the seller requested $3,500 before closing to be able to afford the move. The money was used to secure a lease for another property and a deposit for movers.

To secure ourselves, we created a second lien that would be recorded if the property did not close. This would minimize the risk we had out on the deal. The $3,500 would be credited towards the price at closing.

Lastly, the seller requested some time after closing to make sure they would have everything removed from the property in time. In this case we structured a lease to be in place, with $10,000 of seller proceeds to be held back at closing and charging them $30 a day. Once the seller was completely vacated of the property, we would release the last of their monies minus the per diem.

Closing, Rehab and Resale

No surprises on closing day, and the seller moved out within a couple weeks. The closing statement is below showing my cash to close.

The cash to close for this deal is listed at the bottom, the deposits and credits for the advances are also broken out above. I did secure a loan which is highlighted in blue for $70,000. My purchase price was $80,000 so I’m out the difference plus closing costs. Since this is a purchase only loan, I have to fund my rehab out my own pocket. Despite only needing $6,359.06 to close, plus the advances to the seller, I would still need to have reserves for my rehab and interest payments to the loan. There are loan products that do include renovation budgets as part of the loan amount, I did not elect for that in this case.

This is the rehab budget that I had to put together and submit to the lender. In the end the rehab came in a little lower and some of the items listed above were not needed, but just like every rehab, other renovation issues popped up and funds were used to cover those expenses. It evened out in the end.

Got this thing turned around fairly quickly and listed on the market. It fell in and out of contract 4 times. Locked in a buyer at $132,000, all cash with zero concessions except paying for title. All in all a decent real estate deal, final numbers are below. Utilizing leverage, the return on this deal was north of 50%. Rounded up figures to make it easier to read.

For the next case study, it’ll be an land deal that we are almost done selling off. It started as a land purchase we got off zillow for $10,000 and got 50% of our money back shortly after closing by selling off a small portion of the land to a neighbor. You don’t need big bucks to do land development.

A Dose of AI

Prompts - American Football on the moon

The cashiers checks will have to be in a combination that allows the buyer to make any sort of bid amount possible. In my case, it would be at least one $80k, a $30k, two $5ks and some $1k checks. The checks will have to be made out to the owner of the account. This allows the person to just endorse the back of the check to whoever the trustee is to make the purchase.

Texas Tuesday - Day Of

Checks in hand, it’s now showing up to the county steps early in the morning. It’s worth bringing a chair, water and a book to read. Most of the day is spent waiting around.

As you can see in the excel sheet, each notice of foreclosure will post not just the date, but the window in which the property will be auctioned off. The window is typically 3 hours. For example if a starting time is 12:00pm, the trustee can show up and start anywhere between noon and 3pm. There can be multiple properties within that window, and multiple auctions can be happening at the same time. Having the legal description on hand will help differentiate the property going up for sale as most trustees will run off that instead of the common address.

On top of all of this, the foreclosure can be pulled on the day of the sale. It happens quite a bit, waiting for a property to be sold for 3 hours and no one shows.

In the case of this property, the actual auction was handled by auction.com. It’s a little more organized as they have employees at the county steps wearing gear with their logos and have up to date information of when their properties are pulled or not.

The auction officially starts as the trustee starts to pull out their notes or iPad and start reading a lot of boiler plate disclosures, the legal description or the property address and then the opening bid amount. Everyone typically gathers around the trustee to listen in. The bidding starts, and typically goes up in amounts of $1,000.00, if there is a bidding war they can start going up by $5k or even $10k at a time. There is a reserve that must be hit for the property to sell, it’ll only be known once the final bid is in.

It’s just as you would imagine, people raising their hand, the trustee stating the current amount and if anyone is willing to go higher. Once a price is locked in, it’s “going once, going twice” sold to “X” bidder, forever hold your peace.

With this property, we did go over our MAO (max allowable offer) as we were competing with another investor who was bidding via proxy (over the phone). In the end we did secure the winning bid at $118k. Right after winning the bid, you are required to step aside with the trustee and write over the cashier’s checks. They typically give you a receipt of some sort, and I’ve attached the one I got below.

Once the monies have been receipted, it’s now another waiting game. The trustee mailed me the deed for the property about 3 weeks later. For about 3 weeks or so, I could not legally show that I was the owner of this property. This meant I could not put utilities in my name, insurance and/or risk walking the property with no proof to show ownership if asked by police or neighbors.

A Little Luck and A Lot of Profit

Wasting no time, as soon as we confirmed our winning bid we went over to the property that same day and drilled out the locks, and re-keyed the doors. Pictures of the day we walked it are below.

Expecting a trashed out interior, we lucked out and got a home that hardly needed any work except a little clean up. Not to mention, no tenants or squatters at all. The rehab only consisted of a power wash, cutting the lawn, replacing a few 2x4s, trash out and clean up. The turn around on this project was extremely quick.

Listed the property and quickly received offers for the home. One of the hurdles for us to sell this property was the holding rule for FHA loans. FHA underwriting may require flipped properties to be held for at least 90 days before closing a loan. Since it was such a fast turn around, we accepted a contract knowing that we would probably have to rewrite it once we hit the 91st day. During the waiting period, the buyer could complete their inspections. Lender asked us for a couple easy repairs but all in all, a pretty easy transaction. Final break out below.

For the next case study, I’ll detail out a standard SFR flip bought off market utilizing hard money. Flipping a property with only $6,500!

A Dose of AI

Prompt - Interest Rates, The Fed, Realism

This type of auction is specific to mortgages from banks, private parties and HOAs. There is another type of auction which is the tax sale auction. This type of sale happens on the same day and can be riskier than your standard foreclosure sale. It has to do with delinquent property taxes and I’ll do a write up on these types of auction types later. A big reason tax sales are riskier is the original owner of the property has the legal right to buy it back from you (right of redemption period) as well as the fact that you are only buying the tax lien, not the underlying mortgage. So you could purchase a home for $10,000 that is worth $150,000. Not knowing that there is a delinquent mortgage for $175,000 which doesn’t get wiped out at the sale.

Building a list and checking it twice

So where are all these foreclosures? Is there some list posted somewhere that shows these homes going to auction?

All homes that go to the auction block must have public notice from the note holder (typically the bank) giving the home owner time to bring the loan current. A home owner can be one payment behind or 10 years behind, it’s up to the loan holder to start the process of foreclosure. There is no set time after a borrower misses their payment that the clock starts. The clock starts whenever the note holder decides it’s time to foreclose and gets their attorney involved.

Since these notices are a matter of public record, you can search in each respective county clerk’s system (if they have an online search) and start working up a list of these properties.

This is pulled from Bexar County (San Antonio). I’ve sanitized the personal information but the key data points are listed in here. The date of the original loan, legal description of the property, sometimes they give the common address, the trustees, the bank info, the original loan amount, and the date and time the foreclosure happens.

There is a lot of data to keep track of and a lot of public documents to go through. You can either do it yourself or utilize a third party service that will organize and provide an excel file showing all the pertinent information of each foreclosure every month. Bigger counties sometimes even aggregate the data for free like Bexar County. https://maps.bexar.org/foreclosures/

At this point, most new investors are thinking, can’t I just reach out to these owners ahead of time and try to buy it before it hits the auction? Absolutely, my previous case study, I did just that. This list isn’t that hard to pull and most investors are already cold calling, mailing and door knocking these leads the moment they see the notice is posted. It’s a competitive marketing list to snag deals from, but there is opportunity to be had.

However you get your list together, you put all the properties for the next month into a big list and the next step is underwriting these properties. The first thing you have to do is weed out the properties that are underwater or anything without equity.

What I mean by that is a property could have a loan being foreclosed on for $200,000. The property could only be worth $210,000. It’s probably not worth pursuing this lead as there is no equity to be had unless this loan is on the back end of it’s amortization schedule.

Remember, in the foreclosure posting, the ORIGINAL loan balance is listed as well as the date of when it originated. So in this example above, the loan stated is $200,000, property is worth $210,000 but if the loan only as 2 years left on its 30 year mortgage. This means that the property actually has a ton of equity and is worth diving into.

The foreclosure notices also list the original loan document, which specifies the terms of the mortgage, which you can then reverse engineer the estimated equity of the property. At that point you can guesstimate where the starting bid will come in at.

I found an old excel file for the month we were bidding on this deal. Not everything was filled out in its entirety but gives you an idea of what I was looking for when going to the auction. I was missing the equity or the estimated loan balance on this sheet, everything else is accounted for. I also sanitized this list of personal data.

Driving for Dollars

You weeded out all the underwater properties and cultivated a smaller list of homes to bid on. The next step is to drive by them. Remember, these homes are not owned by banks or associated with a real estate agent (typically). You can’t walk up and ask to see the inside (well you can, but tell me how that goes). Going on the property without the owners permission is trespassing! The best thing you can do is drive by the place, and also drive the area to look at comps and the like.

Driving by the home can tell you a lot about the property in itself. First thing I look for, is there a car parked out front? When buying at the auction, everything is bought “as-is” including potential occupants whether it’s the owner or previous tenants.

The second thing I lookout for is the roof and just the overall exterior condition of the home. Is it well kept? Is someone cutting the grass? Broken windows? You have to figure in the worst case scenario when purchasing properties sight unseen but a quick look around will help give a better idea of rehab.

The final thing I do, is to knock on the neighbors door. They will probably have a better scoop of the situation than anyone. Is it vacant, how long has it been vacant, does anyone take care of the property, is the owner alive, what’s the owner’s situation, etc…

Here are some of the pictures we got of the place. Seemed to be in good shape, surrounding area was not cut for a while, assumed it was vacant. That means not having to factor in an eviction. With the exterior in decent shape, also don’t have to factor in much rehab on that end.

I typically put a dropbox folder together of every property on the list, take exterior pictures of each home and the neighborhood. File it away under each properties respective folder, I also include the public tax data, foreclosure listing notice, original loan documents, and comps. That way I can access each property’s data quickly from my phone. You never know, the owner of the property might be present and is willing to strike a deal on the spot, got to have all your ducks in a row to present an offer!

The Short List

Now you’ve got pictures of all the properties to bid on, you weed out the ones that may have to much work involved, or the deal may be to skinny after factoring in a eviction. The list gets a little smaller. The next step is to see if the property is even going to hit the auction block. There are a variety of reasons for a property to be pulled from auction such as:

1. Owner already sold the home.

2. A loan modification was done, or a refinance.

3. A shortsale was started, which can postpone the date.

4. A TRO or some sort of legal filing was taken place, which can postpone a foreclosure

5. The owner files bankruptcy

6. The bank just decides to pull the file

7. Notice was given to the trustee of the owner being deceased, the bank must postpone once given written notice

8. Owner does a deed in lieu

Those are the ones I can think of, off the top of my head. A majority of the properties you see scheduled to go to auction, never actually make it there in the end. Just the name of the game. What you can do to confirm, is to call the trustee listed in the notice. It’s typically a attorney’s office. Good luck getting a hold of someone in a timely fashion.

I reserve this close to the tail end of underwriting instead of the start. It happens where you are three weeks out of the auction date, and you call the trustee and they state it’s still heading for the auction date. That doesn’t mean it won’t be removed the next week.

Now we’ve come to the end, one week away from Texas Tuesday, you scrubbed the list of underwater homes, drove by all the houses, called the trustees to make sure it’s still on the scheduled and now you have to do a title check.

The final underwriting you should probably do, is to get a title report or do a title search on the property. This will tell if there are any other liens on the home that you may want to know about like IRS tax liens, junior liens, judgements, etc…

Have to know what you buying when heading to the auction. If you are bidding on a HOA lien, you may think you are getting a steal but if there is a first mortgage in place, you are inheriting that debt with the property. Most people think of foreclosures as first mortgages but not all foreclosures are first liens. You have HOA, private money mortgages, second/third/fourth(!) liens. If you are purchasing a junior lien, you are taking it subject to all the liens above it.

For example, you want to bid on a home with a $100k first mortgage and a $20k second. The loan going into foreclosure is the second lien, not the first. You can bid on the 20k, win it at auction but you are still responsible for keeping the first lien at 100k current and paid for.

What happens when you bid on a first mortgage, with a second? Any junior positions are wiped out at foreclosure. Also, IRS liens TYPICALLY get wiped out as well. The trustee of the loan should give notice to the IRS ahead of the foreclosure, its up to you to call up to verify.

This was the final list after weeding out all the other deals. Our minimum bid that we estimated which is essentially what we think is owed on the property, I could’ve worded it as “estimated opening bid” as well. MAO means “max allowable offer”, the top end of what we should bid on each deal. Looking back at this old excel file, I am missing the trustee column. It’s good to know who’s actually auctioning off the property when at the steps.

Part 2 I’ll breakdown what happens on the day of the auction, getting into the property, and the actual figures of flipping this mobile home.

A Dose of AI

Keywords - Fred Flintstone, Hyper-realism, House

A couple things to note on this case study. This deal was a anomaly, the numbers shown are not typical of your average owner finance deal. I was able to purchase the underlying property at an extremely great discount. I seller financed this deal instead of flipping it.

Finding The Deal

This property was found off of a cold calling campaign. The campaign specifically targeted properties that were in and out of foreclosure (often categorized as a pre-foreclosure) located in the San Antonio area.

This property was scheduled to hit the auction block the first Monday after New Year’s Day. In the state of Texas, all foreclosure auctions in every county happen on the first Tuesday of every month on each county’s courthouse steps. There is nothing stopping anyone from attempting to purchase it prior to the auction directly from the owner.

In this case we were able to contact the owner and work out a deal to purchase the property. I utilized my own cash to close this deal. We closed the Friday before the auction, the day before New Years.

Acquisition and Closing

Since this property had a mobile home, I had to both purchase the land and the mobile home. Sometimes the mobile home isn’t “entitled” which means being attached to the land. Not just psychically attached to the property but also in a legal sense, having title incorporated as a matter of public record. In this case, the loan that the bank was foreclosing on was secured against the land, it did not include the mobile home. We purchased the land for $47,500 (market value at the time was 85k-115k). We made a separate agreement to purchase the mobile home for $8,000.00 outside of closing as there were title issues.

I had to clear title for the mobile home since the current owner purchased from a gentlemen who was now deceased, who also purchased it from someone that was deceased. The current owner never registered the mobile home properly with the state. Needless to say, it took a minute to clean up title before we could “entitle” the mobile home to the land to be able to resell it properly.

Entitling a mobile home requires a few things; showing clear ownership of the mobile home an d paying off any existing tax liens as the mobile home is considered “chattel” property like a car. When entitling a mobile home with the state, you are essentially surrendering the mobile home title to the state of Texas to then combine it with the land. At this point, you submit all documentation to the TDHCA (Texas Department of Housing and Community Affairs) who will then register it in their system. Once all is said in done, you legally have a mobile home that’s considered “real property” which is now much easier to secure financing against.

Rehab and the Resale

Most of the rehab on the property was clean up. We spent about $18,000 or so in dumpsters, labor for clean up, yard touch up and plumbing/AC repair.

Took a while to get this properly on the market. It was listed on the MLS, took a couple of buyers falling in and out of contract before we landed on a couple who wanted to owner finance this property.

When owner financing a deal, you become the bank. It is up to me as the owner to fully underwrite the potential buyers. This includes, pulling credit, reviewing tax returns, asset statements, paystubs, rental history, calculating debt to income ratios, etc… Doing everything a normal bank would do when lending. I am free to underwrite buyers with below average credit or self employed borrowers who declare less income. Being stringent on underwriting not only helps you mitigate potential loss (having to foreclosure), but also allows you to potentially sell the underlying mortgage to another investor (more on that later).

All in all we sold the property for $260,100 with $20,000 down. The loan balance was $240,100 at 5.074% interest for 30 years which brings the principal and interest payment to exactly $1,300 per month. As we are the bank, we are not responsible for taxes or insurance. $1,300 per month is what I am receiving for the next 30 years.

The Hard Figures - Net Profit

Here is the full breakdown of it all. Calculating all payments made over the next 30 years, plus the down payment received, subtracting out the closing costs and initial investment amount, the (potential) net profit comes out to around $413,000.00.

$487,729.23 Gross Profit - $74,500 Initial Investment Amount + $12,000 in Closing Costs = $413,229.23

Something else to consider is the ROI for this asset type. The interest rate of the note/mortgage I created is 5% but my true return is actually closer to 20% (yield). My cost basis is 70k or so, then I also received 20k (down payment) back the day I resold it, factoring those numbers into my payments per month gives me a higher return than the actual note/mortgage interest rate. For the next 30 years, I’m making 20% on my money as a rough estimate. My money is secured as a first lien against the property, and once again being the bank, I am not responsible for the repairs, insurance, and taxes of the property.

The biggest drawback with going with this strategy is the fact that your money is tied up for a considerable amount of time unless the new owner of the property sells or refinances within a couple years. There is another financial instrument that you can utilize to recapture a large portion of your investment on a note like this.

Flipping Notes and Selling a Partial

When originating notes/loans, you can actually flip them to another investor. It’s done all the time. If you have ever closed on a house with a traditional mortgage, you will have received mail stating your loan is no longer with ABC Bank but with XYZ Mortgage Company. Your loan was sold and transferred to another servicing company and/or bank.

You are able to do this same strategy on a much smaller scale. I could list this note of $240,100 for sale and attempt to sell it at a discount. The discount is based a variety of factors from the actual asset itself (property), the borrowers overall financial picture, and then how long the notes been seasoned. I would take a lump sum for a discount off the entire price of the loan.

Another advanced strategy you can employ is selling a partial. A partial is selling a portion of the note for a upfront cash discount.

After 18 months of seasoning (owning a note while receiving payments), I listed this for sale. An investor reached out and was interested in making an offer for a partial. He wanted to make a 12.5% return on his money over 6 years. Since the note is at 5%, I would have to take a discount to make it work.

To find the amount of what the discount would be, I used a financial calculator. As you can see above, for the buyer to achieve his 12.5% return for 6 years (72 months), I would be taking a slight haircut off my payments.

$1,300 (Principal and Interest) x 72 Months = $93,600.

$93,600 (total money received over 72 months) - $65,619.29 (partial offer) = $27,980.71. Let’s just round up and say $28,000.

For the next 6 years, I will not be receiving my $1,300 per month but instead a one time cash sum of $65,619.29. The investor will be receiving those payments instead. After the 72 months have passed, the loan will revert back to me.

Is this a good deal? Depends on how you look at it. I now have money to invest again. Is it worth the discount I took? In my situation I do believe so, I can put that capital back to use and do it again.

There is one more thing to consider when doing a partial. Due to how a mortgage amortizes early on, the payments I forgo is mostly interest. Why is that important? See the graph below.

The orange (partial) is what I sold, the blue (original loan) is the remaining payments owed to me. Since I sold the front of the loan, when I receive my loan back to me after 6 years, a large part of the principal is still there. Specifically about $216,000. This is where the financial magic happens.

My original loan balance is $240,100. I sold $93,600 of payments. When I receive my loan back to me after 6 years, my balance is about $216,000. I only lose $34,000 of actual principal.

Why is this so important? The average American moves homes every 12.3 years. There is a large probability within that 12 year time frame of me getting my full loan balance paid since the home owner will sell the property within that time frame. Freddie Mac has reported that when factoring in refinances into that equation, the average loan balance gets paid back in about 6.5 years. Within that 6-12 year window, there is a high chance of getting this loan paid back in full.

There are other cool strategies you can combine with notes and partials, like utilizing a self directed IRA to fund these deals or a hypothecation, securing a line of credit against a bundle of notes.

I’ll be diving into another deal in the next post where I purchased a mobile home off the courthouse steps and how to underwrite these deals ahead of time.

A Dose of AI

Key Words - 2008 Financial Crisis Artsy

Subscribe now