Hi guys and gals; it has been a few months since my last writing. I’ve been working on diversifying my real estate investment strategy. What I want to share with you today is how my first seller finance deal was accidental.
The Back Story
If you’ve been around BiggerPockets for a while, you may know that I typically stick to wholesaling, and I have a smaller portfolio of rentals. This is where I am comfortable, but I know if I want to reach my goal of 50 doors by the age of 50, I need to move things a long. So I’m working on increasing my portfolio by leveraging some of the assets I have in order to acquire more. Well in doing so, we made a bad purchase. I say “we” because I let the emotions of a partner skew my decision.
We purchased a small frame house in a rural area. The house being small wasn’t a issue. The rural area was not the complete issue either. But the house being small and in this certain rural area was an issue.
Our problem was that we purchased this property for one specific reason: to help homeless teens. We did not look into this project as a money maker, it was more philanthropic. We looked at this project without our investor hats on, and we did not have multiple exit strategies.
Let me outline the problem. We did our research and found out through our network there were government subsidies allotted for the project. So not only can we give to the community, but the project could be profitable as well. So we were all in. We acquired the property, subsidies were awarded to us to complete the majority of the rehab, and of course we had county approval. Here’s the problem: During this time, there were county elections, and politics got in the way. Ultimately, the newly elected county commissioner disallowed the project. Here we were with a (small) loan on a property, in a rural d-class area, and vacant. What the heck am I going to do with this property? I wanted to know.
We, or rather, I should say “I,” had to look at the bright side, although it was not glaring. We had a property with a $20,000 note. We had completely rehabbed with money we did not have to repay due to politics. I began to market the property for rent. I knew the tenant pool would be small, and most likely they’d have some credit issues, but we had to take a shot.
We found a traditional paying tenant (not section 8). Although the prospective tenants credit wasn’t good, he had a got a good job he’d been at for over a year. This definitely went against all of our procedures (bad credit), but we were somewhat desperate. Not because the $20,000, but because the house was vacant in this area. We finally decided to rent the unit to the prospective tenant because the references checked out. He rented the property for two years, and he was compliant with paying rent (although he would be a few days late at times). We had a positive cash flow of just over $230.
One day, after a short conversation, he stated that he would be interested in buying the house. I knew traditional financing for him was not an option at the moment, so I begin slowly introducing the tenant-to-lease option. I had some background on lease purchase, but was not completely familiar. It took some time for me to completely educate myself as well as educate the tenant.
The contract was prepared by the attorney and signed by both parties. We agreed get to a purchase price of $54,000, with $15,000 down and 7 percent interest for 12 years. Nothing really exciting, but remember, we only had a $20,000 note left on the property, so our horrible acquisition was beginning to turn around for us.
Before finalizing the agreement, he called early one morning to say the detached garage was on fire and completely burned down. Everyone was OK, but the garage was destroyed, and the vinyl siding on the rear of the house was melted. The insurance paid the damages, which happened to be more than the amount owed on the property.
The entire dynamics of the deal had now changed, because now, instead of lease option, I could sell the property through seller financing. We agreed to decrease the purchase price of the house rather than replacing the garage (part of the money from the fire to pay off the note and repair the vinyl siding).
Finally, a note was created for the same terms as above, minus $10,000 for the garage. I also used the buyer’s down payment for a down payment on a new acquisition. So in essence, we created a note on one SFR and purchase another for rental (with much better numbers).
This terrible acquisition is now cash flowing without the headache of repairs, and it even created another stream of passive income. Although the seller financing was completely accidental, I was not closed minded when it came to finding solutions to turn the acquisition around. I used the resources I had, including BiggerPockets, to help me navigate my way through this mess. As an investor, you will make mistakes, but try to find the best solution to rectify those mistakes.
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