I wanted to share a story about a deal I did about several years ago which illustrates both of the two main principals that I teach my students. The first principal is “everybody wins or we don’t play”. I might not make as much as many other gurus and investors out there, but I believe that absolute unquestionable integrity will eventually win out, so that’s the way I do it. I have covered this principal in many other blogs which I would invite you guys to read, and go into in great depth when I teach people the way that I do Real Estate Investing. The second principal is “I win or I win”. This principal is not nearly was easy to show folks. I has to do with how I set up deals so that no matter what happens, even if there is an earthquake, flood and tornado all in the same day, I will still not lose money.
The story starts with a yellow letter campaign I was running in Saline County. Saline county is south of Little Rock, Arkansas where I live and is home to a few of the suburbs of the Little Rock metro area.
This particular campaign targeted “absentee owners” in that area. An absentee owner is somebody who owns a house at address “a” but lives at address “b”. These types of owners are typically landlords or people who have recently inherited a home. In both cases, they are great leads for flips or for holds, in that landlords are often burned out from trying to maintain properties and babysit renters, while those who have inherited a property nine times out of ten do not really want it, and with a little prodding will off it quick and cheap.
I get a call from a guy named Simon. Simon has a house that he and his wife owner financed to a guy ten years before for 50k. The guy gave him 10% down and started making payments; sort of. He got behind within the first three months but Simon let him slide and worked with him. Then the guy got behind again. And again. When Simon called me, the guy was roughly 5 years worth of payments behind. Yes, Five Years! Talk about DEFAULTED PAPER! Simon was a very patient man to say the least.
The face value of the loan was 42k, plus or minus. Simon understood that I would need a discount in order to buy the note, and offered to sell it to me for 35k. Not much of a profit, but when I did my due diligence I found that the home was 2500 square feet, needed a bit of updating, and happened to be lakefront property worth conservatively about 170k; (the home next door to it sold for a little over 350k, but was bigger and had a bigger lot). Needless to say I bought the note.
I figured at least I would get the guy to pay me off and make a few thousand.
The note was based on a Land Contract which in some states is called a contract for deed or in Texas, there is a similar vehicle called an AITD (All Inclusive Trust Deed). What that means in this state is that The Seller retains the deed, in other words, when I bought the paper, I bought the house; yes, I spent 35k and got a 170k house!
The first thing I did was to let the buyer know he was behind (duh… like he didn’t know) and to let him know that he owed me just over 10k in principal alone, and that I intended to evict him. Surprise, surprise! The guy sends me a check for 10k! I was really hoping that he would just get out, and I would have this 170k beauty on the lake, but no matter…he still owed interest as well.
Now I only had 25k in the home, and I went ahead and did a substitution of collateral with another home I owned outright to get the note off the lake home. If you want to know more about substitution of collateral, stay tuned as I will cover that in a later blog, or sign up for my training at www.askalhow.com .
I attempted to evict the buyer again, citing the back interest, and interest that accrued on interest as a result of being late, and of course he claimed the land contract as a mortgage and did a chapter 13 bankruptcy.
I could get into all the long drawn out crap about the court case, but it doesn’t really matter, because like so many other issues in Real Estate I solve this sort of problem by writing a check. In other words, I hired an attorney, and let HIM worry about all this stuff.
Thanks to the legal system in Arkansas, about a year later the court finally decides that the buyer cannot work out a repayment plan that works and give me “relief of stay”. This means that if I had a more conventional mortgage I could foreclose, or in this case, I could simply issue a 30 day eviction notice.
The eviction notice is issued and 30 days later I show up with my attorney to the eviction hearing, but there is a problem; the buyer wants to know what the payoff is. My CPA does a quick calculation of the interest, the payments he did not make while in bankruptcy court, attorney fees, and CPA fees and comes up with a figure just under 70k.
Now, in reality, all I had attached to this house is $5000 in attorney fees. The way I do business with this attorney is lump sum, on a case by case basis. (There is a lesson there about paying your people by the piece, not by the hour, but that is also another blog.) The CPA does all my books, so this bit of extra work cost essentially nothing, and remember, the 25k is now being paid off by a renter in another house due to the substitution of collateral.
So, believe it or not I lost the house.
The buyer showed up to the eviction hearing with a cashier’s check for the total payoff of nearly 70k, and since he had it in hand, the judge pretty much told me, to take the payoff and forget it.
I am not going to lie, I was a bit bummed out by the judges decision, after all, if I won, I got a 170k house on the lake. Instead I lost and made 70k…okay, 65k after paying the attorney. It was a little bit bittersweet.
I tell you what made it feel a bit better.
I bought a 2 bedroom bungalow for 17k included the repairs, which now rents for $475 per month. I bought another home for 23k including the repairs, which rents for $550. So, I now have an extra $1000 per month coming in for the rest of my life. Finally, I paid a few old bills and spent a week in Destin with my family.
Not bad for what was basically a loss.
See, even when I lose, I win. Like I said at the beginning of this blog; I win or I win. It is one of my main principal on how to do business. Stick around and I will show you how to do the same.