The Least Utilized Wealth Building Strategy in Real Estate - Part 2

[Don Konipol]

Okay, (imo) utilizing financing to profit is the least utilized strategy; but a close second is the straight option

I'm not referring to the lease option that some use successfully when leasing a SFR to a tenant - I'm referring to a straight option to purchase.

Let me provide an actual example. 
In 2015 I was dealing with a mortgage broker who was representing an attorney who owned a motel property he was trying to get refinanced. Unfortunately, the attorney had too much debt and there wasn't anything we could do. However, the attorney told me that he had sold a small retail center anchored by a convenience store 2 years earlier and owner financed 80% LTV. He had a $500k original balance note ($478k remaining principal) at 6% interest and 13 years remaining. I asked him how much he wanted for the note and he told me no less than $400k. I told him that wasn't in the realm of possibility so I would have to decline. He then asked how much I would pay. Since my partner and I had just invested most of our available cash in our business (about $3 million), I wasn't interested in using the relative small amount of liquidity I had left unless I could purchase the note to yield 17%. So, as a lark I offered to pay him $2,000 for a 60 day option to purchase the note for $250k. Amazingly he accepted.

During the 60 days I found a buyer for the note looking for 10% interest return, and sold the note to him contingent on my ,purchase for $385,000.  We closed and I earned $135,000 (the $2,000 option fee was credited to the purchase price).

The broker that originally introduced me to the seller was not being compensated on this transaction - so I agreed to pay him $5000 out of the $135,000.   But here’s the bottom line.  The mortgage broker, thinking like a SERVICE PROVIDER, was happy to earn a $5,000 “broker fee” on the transaction.  I, thinking like an ACTIVE REAL ESTATE INVESTOR/DEAL MAKER, earned $130,000 for a little more effort.  What I was willing to do was put a relatively small amount of capital ($2,000) at risk, and spend some time identifying end buyers, as well as think like a PRINCIPAL, not an intermediary.  The difference between a broker and a deal maker - $130k!

Let me know what you think