The Least Utilized Wealth Building Strategy in Real Estate

[Don Konipol]

Back 100 years ago when I was first starting my real estate investing career, a friend and fellow investor and I (we both were investment/ commercial real estate brokers) attended a seminar held by the GREAT creative financing/real estate expert, Jimmy Napier.  Part of his seminar was about creating wrap around notes and earning large returns thru interest rates differential , as well as many other wealth building opportunities.

Well, my friend decided to put Jimmy's advice to the test, and began making offers on SFR properties that had been on the market 6 months or more and had not sold. Within 2 or 3 weeks he had gotten one under contract at terms which to me were shocking. The owner/seller had agreed to sell his house for $110,000 with $10,000 down, carry back the note (he owned the property free and clear) for $100,000 amortized for 15 years at 0 interest! Further, he agreed to a substitution of collateral clause in the note (I never did utilize this clause, but it would have provided other ways to profit as the buyer.

What was most surprising of all, was that my friend didn’t want to purchase the property for himself, he just wanted a commission (the seller agreed to $5,000) so he could pay off credit cards and make a contribution to his church.  Needless to say I jumped on the deal.  And the most amazing thing was the house was in perfect condition, not needing any rehab at all. 

I Purchased a SFR for $110,000 with $10,000 down and owner financing balance ($100,000) for 15 years at $556 per month, 0% interest. I resold the property after 2 years (I leased it for 2 years with about a $250/ month positive cash flow). I sold it for $115,000 net, $10,000 down and a 20 year wrap note for $105,000 at 9.5% and a no payoff allowed for the first 7 years. At the time of sale I owed $86,667 on the note with payments of $556 per month, all of which was principal reduction. I was receiving payments of $979 per month (net monthly inflow $423) and building ‘equity" in the note. The buyers held the property about 9 years before they sold and paid off the wrap note. At the time the note was paid off, the buyers still owed me $81,000 principal balance, but, my principal payoff on the underlying note was down to $28,000.

So, for what was a $10 000 down payment I received the following cash flow

1.  $250 per month for 24 months net during lease = $6,000

2. $10,000 cash down payment on sale = $10,000

3. $658 per month for 106 months net positive wrap = $44,838

4. Difference between $81,000 and $28,000 at note payoff =$53,000

Total returned during 11 years on a $10,000 investment: $119,839

Three major take aways from this deal.  First, it was a lot easier to do 45 years ago when the market was destabilized by high double digit interest rates.  Down markets, full of u certainty, always present wealth building opportunities for investors.

Second, wealth building can be accomplished via the financing side, just as by the equity side 

Third, my friend who did all the preliminary work in setting up, identifying, negotiating the purchase, chose the quick $5,000, thereby investing no money in the deal and earning $5,000 which in truth does little if anything to build wealth.  Had he done what I did and purchased the property, he would have build his wealth by $120,000, albeit over 11 years.  

[Joe Villeneuve]

Quote from @Don Konipol:

Quote from @Joe Villeneuve:

Quote from @Ken M.:

Quote from

@Don Konipol:

@Joe Villeneuve:

Quote from @Don Konipol:

Back 100 years ago when I was first starting my real estate investing career, a friend and fellow investor and I (we both were investment/ commercial real estate brokers) attended a seminar held by the GREAT creative financing/real estate expert, Jimmy Napier.  Part of his seminar was about creating wrap around notes and earning large returns thru interest rates differential , as well as many other wealth building opportunities.

Well, my friend decided to put Jimmy's advice to the test, and began making offers on SFR properties that had been on the market 6 months or more and had not sold. Within 2 or 3 weeks he had gotten one under contract at terms which to me were shocking. The owner/seller had agreed to sell his house for $110,000 with $10,000 down, carry back the note (he owned the property free and clear) for $100,000 amortized for 15 years at 0 interest! Further, he agreed to a substitution of collateral clause in the note (I never did utilize this clause, but it would have provided other ways to profit as the buyer.

What was most surprising of all, was that my friend didn’t want to purchase the property for himself, he just wanted a commission (the seller agreed to $5,000) so he could pay off credit cards and make a contribution to his church.  Needless to say I jumped on the deal.  And the most amazing thing was the house was in perfect condition, not needing any rehab at all. 

I Purchased a SFR for $110,000 with $10,000 down and owner financing balance ($100,000) for 15 years at $556 per month, 0% interest. I resold the property after 2 years (I leased it for 2 years with about a $250/ month positive cash flow). I sold it for $115,000 net, $10,000 down and a 20 year wrap note for $105,000 at 9.5% and a no payoff allowed for the first 7 years. At the time of sale I owed $86,667 on the note with payments of $556 per month, all of which was principal reduction. I was receiving payments of $979 per month (net monthly inflow $423) and building ‘equity" in the note. The buyers held the property about 9 years before they sold and paid off the wrap note. At the time the note was paid off, the buyers still owed me $81,000 principal balance, but, my principal payoff on the underlying note was down to $28,000.

So, for what was a $10 000 down payment I received the following cash flow

1.  $250 per month for 24 months net during lease = $6,000

2. $10,000 cash down payment on sale = $10,000

3. $658 per month for 106 months net positive wrap = $44,838

4. Difference between $81,000 and $28,000 at note payoff =$53,000

Total returned during 11 years on a $10,000 investment: $119,839

Three major take aways from this deal.  First, it was a lot easier to do 45 years ago when the market was destabilized by high double digit interest rates.  Down markets, full of u certainty, always present wealth building opportunities for investors.

Second, wealth building can be accomplished via the financing side, just as by the equity side 

Third, my friend who did all the preliminary work in setting up, identifying, negotiating the purchase, chose the quick $5,000, thereby investing no money in the deal and earning $5,000 which in truth does little if anything to build wealth.  Had he done what I did and purchased the property, he would have build his wealth by $120,000, albeit over 11 years.  

Brilliant!!  Seller financing is still the best way to buy RE.  The main key is you have to understand how money works, when you do, it opens up your eyes to some of the most amazing things.  These are opportunities that are hidden in plain site.

One of the key advantages, and probably the most important aspect of this, is an understanding of what cost is...to the REI.  You've laid it out perfectly in your example.

Another key piece of the puzzle is how many ways there are to make a profit.  Profits are made on spreads within the same forms of money.  Interest, cash (cost), purchase price, to name a few.  

Deals are not found, they are made...just like this deal.  ALL deals can be described the same way in two parts:  1)  Cost to the REI.  This is cash, and ONLY the cash, that comes out of the REI pocket.  2)  How someone, or something else pays for the rest.

This is an example of why when anyone asks what the most important books they can read are, my answer is always the same.  Geometry and Algebra.

Now, being the realist that I am, I ask the following questions, 

do you think
a. that many will actually read the path to great wealth that you wrote ?
b. those few that do read it, will actually understand it ?
c. those that understand it, will actually use the information ?

but it sure is a great example of properly applying a creative financing technique

The great questions of the age 
a. Is it too much for the average investor to learn 
b. Do the current crop of investors have the patience to learn techniques such as this
(and this isn't even one of the most complicated)

The answer to all your query's is "no".  That's very sad too.  The whole thing, in its many forms, really isn't all that complicated.  When you say the example is a rather simple one, that is unfortunately true.  It stems from three things:  1) As you mentioned, a lack of patience; 2) As I mentioned, a lack of understanding of basic math, much less what is more, but shouldn't be, complex examples; 3) A growing reliance on AI (the operative word being "artificial").  AI dependent on the volume, and accuracy, of the input given.  Nomater what the many growing lovers of AI may say, it will never replace creativity since it can't think outside the box.

The human brain will always have the ability to grow that box based on what it sees with its eyes, not just what it hears with its ears.

I agree, at least MOSTLY with both of you.  

Since I don’t sell mentorship’s, advice, coaching, counseling, etc (nothing wrong with selling those services, I learned a good majority of what I utilized for success by my being  mentored by Jimmy Napier), I don’t have a “horse in the race” as to whether 100, 10, or 0 people are able to use this information.
However, I do believe at least a FEW will have an “aha” moment, and perhaps rather than spend $40,000 with the kind of program that’s slick, optimized for the promoters profit, and put together by marketing companies in Vegas or Provo, will marshall their funds and obtain the education, experience, and knowledge that can lead to sustainable success.  

There are two ways one can utilize these “creative” strategies.  The way most people look at it is to utilize a strategy repeatedly as either their main activity or at least a significant active part of their investing.  This is not a bad thing at all, as long as they understand that they’re operating in a “narrow” path.  But there’s a lot of money to be made, and potentially lower risk, too.  When an investor obtains ownership of a property where the future sale can be concluded with low interest built in financing, the risk of getting stuck” with a property during high interest rates is all but eliminated.  This significantly mitigates the downside of leverage, which is that during recessionary economies the risk of losing the property to foreclosure increases significantly. 

I never sought out creative strategies per se; when I had the opportunity to use them, such as the example I provided that is the subject of this thread, I did to build wealth.  The interesting thing is 90% of investors think of creative strategies only as it relates to purchasing a property with no or little down. This is a very limited thinking; there are creative strategies that can be utilized by investors paying all cash to acquire property at 40% below market value.  And of course the creative strategies that are utilized for increasing profitability on the SELL side are much more powerful in building wealth. 

Jimmy Napier believed that unless an investor truly understood compound interest, time value of money, and ROI they would not be able to successfully maximize their return in mortgage notes, and certainly not be able to utilize creative strategies any where near the strategies potential to enhance their wealth.

You're correct.  There are many creative seller financing options that can be used.  I try to "pass on" as many of them as I can.  Her are just a few:
1 - Lease Options
2 - Sandwich LO
3 - Options alone
4 - Cash Partner flips, as in flipping cash partners
5 - Flipping LLC's
6 - Combinations of different strategies
7 - ...there's more, but that's enough for now.