Did this get your attention? If I had made the title “Buy at Wholesale and Trade at Retail” would you have been as interested? Probably not; but this is exactly what we are talking about. This technique transpires frequently by experienced investors. Here is my story, but it is the concept that I want you to learn, not the specifics.
I found a house where the owners inherited a single family residenceand lived out of the city. The property was in a lower/middle economic neighborhood and the owners would become ill when the address of their property was even mentioned. At that time, the house was worth $40,000, and the owners had agreed to carry back financing. Everybody who had made an offer had low balled them on price. Even though they were eager to sell, they were also reluctant to take a price that was substantially low.
I made them an offer over their asking price, with 0 down. All they would have to do is accept a note I had, which had better collateral than their house. My note was for $43,000. After I showed them the appraisal of the house that was security for my note, which was in the $60,000 price range, they were more than happy to accept my note. I even guaranteed the note. Why would I do that? It was to my benefit, that’s why. There are several ways to guarantee a note. That is another lesson, watch for it.
Are you beginning to see what I am doing? Why would I trade a $43,000 note for a $40,000 house? Besides being able to trade a note at face value in on real estate (that is a great technique itself, it was thrown in here as a freebie), I paid only $25,000 for the note. I now have a $40,000 free and clear house for which I paid only $25,000 .
I rented it out for about a year, and then, all of a sudden I was in need of cash. (Ever been in that position?) This was at a time when investor refi’s were out of the question.
The house had appreciated to about $44,000. I found a quick buyer for $38,000 cash NOW. So by higher mathematics, I paid $25,000 for the note, traded the note for the house, and sold the house for $38,000. That is a $13,000 profit for overpaying for a house and then selling it for less than I paid for it. To add gravy to this deal, I also enjoyed monthly rental cash flow for a year.
As I mentioned earlier, this is a great technique for those of you who have taken back notes. It is MAGNIFICANT for those who purchased notes at wholesale, or a discount.
Offer to trade the notes in at face value for property, and see what happens. If an owner is willing to carry back a note from the beginning, it often is not a difficult task to trade your note for the same real estate or for any other personal property for that matter, such as cars, boats, planes or even swimming pools. That is another lesson, look for it.
To prevent a taxable event for both the seller and me, I actually created a note that was secured against the note I had purchased. I even had some substitution of collateral clauses in the contract where I could have moved the note around.
What are substitution of collateral clauses? That, too, another topic; look for it. I still do not get an “A” for this deal. Why? Because I did not get built in discounts if I paid my note back early. The note I had purchased was paid off a couple of years later. If I had built in discounts in my note to the sellers, I could have pocketed another couple of grand.
As always, CONSULT an ATTORNEY and CPA before trying any of these techniques, or doing any real estate or note deals. Try this technique out.Contact the Professor and tell me how it worked. I love success stories
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Tom Henderson
a.k.a. THE NOTE PROFESSOR
