Creatively Flipping A Dud Into A Deal

dud Have you ever wondered what would happen if a deal went South and you weren’t sure what to do? Did you wonder what creative strategies you might have to implement to keep moving and still make a buck or two?

If so, you’re not alone. I think most all investors wonder that from time to time.

And for some of you, it’s more than just wondering—you’ve actually experienced just such a situation.

Hi Moguls, Cody Sperber here, and I know I sure have.

As most of you know, I love creative wholesaling. So, in this lesson, I’m going to tell you about an interesting deal that forced me to become super creative. I’m even going to break it down into simple steps so you can learn exactly how I handled it.

Let’s go…

Here’s the Problem

This is the little case study on West Cheery Lynn Road in Phoenix, Arizona. We bought this property with the idea to wholesale it quickly, make a buck and move on. We got it for $40k, but of course—as with all deals—there are other expenses involved.

Let’s take a look at each one…

Bird Dog Fee

This deal came to us by way of a bird dog, so that means a fee was involved. When he contacted us, the property was on its way to the foreclosure auction. He thought it looked like a good deal. It was. We paid that bird dog $1,500.

Back Taxes

Whenever a homeowner is behind on payments, they’re nearly always behind on taxes as well. Taxes owed is like having a lien against the property; that tax amount is one of the expenses that passes through the foreclosure auction.

The taxes owed amounted to $1,186.50; we paid that off which added another expense to the deal.

At this point, we’re out the bird dog fee and the taxes.

messy Clean Up

The property was a mess—a large amount of trash had been left behind by the owners. Plus, it was unsecured. We have a team member that we can call on for just such occasions. We paid him $180 to clean the place and secure it.

Add that amount to the list of out-of-pocket expenses.

Title Insurance

When buying property at a foreclosure auction, it’s important in this business to get title insurance. We want to make sure that we are bidding on a first lien position; we also want to make sure that it’s a clear title.

Title insurance costs $476. (Sometimes, the title insurance is included in the purchase price, which is how the cost of title insurance is usually determined.)

Hard Money Loan

Because we purchase so many properties at auction, we’ve learned how to leverage our money. In this deal, we borrowed hard money at 18% interest. The great thing about hard money is that you can act quickly. When you have a good relationship with a hard money lender, they stand ready to fund your deal – and fast.

We put $10,000 down on this deal and borrowed $30,000. That meant we were faced with a monthly fee of $450. This is a great impetus to get it sold and out of our hands as fast as possible.

So far, we stand at a price – with all expenses factored in – of $43,792.50.

Not Looking Good

As the deal moved along, it wasn’t looking all that good. Our expenses were mounting up, and our ARV was probably no more than $55,000. Not much spread there.

Our prime prospect as a buyer would be someone who wanted to do a rehab and add it to their rental portfolio. There was enough spread for a fix and flip. We looked to make about $3k-$5k just wholesaling it out. That was our initial goal.

We moved over into selling mode. The property was cleaned, we took photos, made flyers and began to contact our investors. The notice appeared via email, online, social media—everything we usually did to sell a property.

The goal was to find a buyer willing to pay $3k to $5k over our price. No one stepped up. It wasn’t a very enticing deal.

It was time to come up with creative solutions. My business partner and I began to brainstorm. We knew there had to be a solution to our dilemma.

creative This wasn’t a property that we wanted for our portfolio—low-end rental in a low-income neighborhood. We already had a good stock of those.

What to do?

Creative Solutions

So, we got creative and switched plans.

We’d already had this property for 2 or 3 weeks by now. Very soon a payment would come due on the hard money loan. That would decrease our profit margin even more.

Whatever route we chose, it had to happen fast.

Most investors know that when a wholesale deal is a flop, one alternative is to retail the property instead. To do that we would need a buyer who preferred the neighborhood. Since it was heavily Hispanic, we called in our Hispanic bird dogs.

We found one who had a buyer—and that buyer liked the property.

This bird dog set his price at $3k, which is pretty high. But he did have a buyer so we felt it was worth it.

The next obstacle that we hit was that this family didn’t have enough cash to pay the full amount.

Again, it was time to kick into creative mode.

We set the retail price at $51,500, which was agreeable with the buyer, but all they had was $30,500 as a down payment.

Our idea then, was to create a note and to hit up our network to search for someone to purchase the note. The plan was to create and market the note at the exact same time.

How to Create a Note

It’s actually really very simple.

simple The borrower fills out a note application. We make a copy of their driver’s license and social security card. (It’s important to make sure they’re a legal resident.)

We created a straight promissory note.

The terms in the note were “2-year note, 24 months.” The buyer would pay $30,500 down, then they would borrow $21,000. We added an extra $400 (as a “paperwork fee”), which was more profit in our pockets.

So, they borrowed $21,400 at 18% interest-only. That’s why we ended up with a straight promissory note at 18% interest-only, 24 months.

The way we secured the note was with a “deed of trust.” The note secures the fund, the deed of trust secures the property to the note and to us. We also got proof of insurance because you never want your money at risk.

One of our team members—our escrow officer—was called in to create this note and the deed of trust.

It’s so important to leverage your Power Team members. You never want to have to do all the work yourself.

Back to the Deal

We then had a new product to market—a note.

Remember I said when we were trying to wholesale the property we had no interested buyers?

Now everything had changed.

Once we created this note at 18% interest, we had a waiting list of investors ready to buy this deal. By repackaging the deal and using our creativity, we had plenty of interested buyers.

We created a letter to the borrower, letting them know that the note was being sold and that they needed to make their monthly payments, which amounted to $450 a month.

repackage We also created an estoppel letter, which protects the end note buyer. It simply means that any terms or conditions or anything that we said about the note, is true.

We are stating that the borrower never gave any indication that they weren’t going to make payments. There’s no unrecorded liens or encumbrances that should have been disclosed. This is anything that the end note buyer wants to add in there to protect themselves.

Next, we have a “Seller’s Agreement to Correct Errors and Omissions.” This document says that my partner and I will come back to the table if there’s something wrong with any of the original paperwork regarding the note. And since we knew everything we created was good to go, we were agreeable with that.

We then created the “Terms and Conditions of Sale Agreement.” This is similar to a purchase contract, but it’s for the note rather than for property.

Finally, we created a “Promissory Note” and “Deed of Trust Assignment.” When we found our note buyer, we assigned it. It really was that simple.

These documents created the note AND helped us sell the note.

Bottom Line

With the initial expenses, we paid $43,792.50 as our purchase price. Add to that the $3k bird dog fee, for a total of $46,792.50.

The buyer paid $51,500, which gave us a $4,707.50 profit.

And there you go!

We turned a dud into a deal and did it in less than 30 days. (Which meant we never had to make a payment on the hard money loan.)

From this story, you can see that most any deal can be turned around if you just set your mind to it and use your creativity. No need to back down or give up.

You can do this!