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How A $17,500 House Made Us $80,000 Profit

Real Estate Agent with Stark Family Companies

I wanted to share this powerful strategy with you so you could learn the horsepower to building wealth while you are ripping through your yearly wholesale deals. This strategy can really be applied to any situation where the sellers are open to seller financing. You must learn to move a little bit slower on these deals so you are not missing any important factors and so you can line up closings within a few days of each other to fund and transfer collaterals. Also, get in the habit of asking the seller if they are willing to contribute in the financing.

Above is a visual of the actual properties referring to this case study. This deal was completed over the course of one year and went down exactly this way.

The property at the top, which we will reference as the “booger property” was the deal first allowed this snowball effect to occur. Everyone has access to booger properties. These are what most wholesalers wholesale all month long. Cheaper, low end, typical rental property.

We bought this booger deal on seller finance with the following terms
$17500 Purchase Price
$2000 Down
$15500 On a Promissory Note (with a Mortgage for Security)
4% Interest
3 Year Term
Fixed Payments of $125 Per Month (Including Principle and Interest)

We began advertising it for rent. It proved harder to rent than normal since it was the nicest house on the block. I began to contact some of our landlord buyers and offer it for sale.

Meanwhile, the brick property in the center was a deal we had been negotiating with the seller for nearly 18 months. Its 4 units, coin op laundry, A+ location and everything a landlord wants in a rental property. The seller was open to seller financing. We took a purchase agreement on the booger property to sell it for $25,000 cash, net to seller, meaning we walked away with $25,000 exactly. This left us with a net profit of $7,500.

Now, when we sold this booger property, the sellers did not want their $15,500 back. They wanted to continue to receive payments on their note. In our instance, we simply moved the note over to a free and clear rental property that had enough equity to support the note and enough cashflow to support the payments. If you do not have another rental to move the note on, this is where you must line up the closings to be within a few hours or days of each other so you can find a replacement property to place the note on and continue making secured, collateralized payments to the seller. I recommend “upgrading” your sellers to a better area. No one ever turns down an upgraded collateral position.

Since we had another free and clear rental, we just discharged this note and mortgage on the booger property and placed it on another “upgraded” booger property.

Now when we sold the original booger property, we had $25,000 from the sale. Remember, the sellers did not want the money back so now we have the full amount ($17,500 from the original purchase and $7,500 in proceeds for a total of $25,000). We used those proceeds ($7,500) as the down payment money on the 4 unit and if needed, we could have opted to put down more, yet with great seller finance terms on a great rental, I recommend putting as little down as possible and financing all you can as long as you still have great equity. Under no circumstances do I recommend over financing ANY property.

Here are the terms of the 4 Unit purchase

$159,000 Purchase Price
$7,500 Down
$151,500 on a Note (with a mortgage for security)
7% Interest
15 Year Term
Interest only (or more) payments of $883.75

So we lined up the closing of the booger property within a few days of this purchase and used the $7,500 proceeds from the sale as the down payment on this property.

Immediately we raised the rents on two of the 4 units, rented the garage, and had tenants pay toward the water bill which was paid by the landlord. Within weeks we had increased our cash flow significantly.

We bought this property on March 29, 2013 and held on to it until May 29 2014 when we sold it for $252,000 cash. Now the seller, once again, did not want his money back. He liked his interest only payments coming in each month. When we sold this property, we moved his $151,500 note over to the property on the bottom of the photo which was a duplex bringing in the same amount of cashflow as the 4 unit. The duplex is located in a downtown, A+, romantic location and is excellent collateral for anyone wanting to park money for interest income.

Upon sale, we discharged the mortgage on the 4 unit and transferred it (along with the promissory note) over to the duplex. So at the closing sale here is what happened

Sold for $252,000 Cash
Moved the $151,500 Note To The Duplex
Since the Seller Did Note Receive Funds Back, We Had All Proceeds From the Sale
We Used The $151,500 to Pay Off an Underlying Loan of $107,000 We Had On The Duplex
So At One Closing, We Sold The 4 Unit for $252,000, Discharged The Mortgage for $151,500 on The 4 Unit, Paid Off a Mortgage of $107,000 On The Duplex, Put the New Mortgage On The Duplex For The $151,500
Took the Difference of The $151,500 and the $107,000 And Placed it In Our Account (Since All Of The $151,000 is Accounted For Under The Equity and Cashflow From The Duplex
Still Had The Proceeds Left From The $252,000 - $151,500, Which Came Out To Around $80,000 In Profit.

Now, Alot of Things Just Happened, but the summary is this.

We controlled an EXCELLENT LOCATED, 4 unit apartment building for over one year for only $7,500. We cashed in on the equity and moved the collateral (with better interest and longer loan term than we had on the duplex) to the duplex, which was in a better part of downtown.

That $7,500 came from a booger wholesale deal that typically anyone would just take their $7500 up front and be done. You can surely do that as the downpayment money is the same either way, yet when you are new to this owner finance business model, you may want to test a few low end situations to make sure it flows the way you need it to. Anytime we can ever get movable cheap financing, we will take it.

We now have excellent financing for 14 more years on a downtown location that is never going out of demand. We could even sell that property, offer to finance it (wrap note) for $275,000 at 8% and not only make a 1% margin on the first $151,500, and then we make a full 8% on the remaining difference of $123,500

So now, we still have a 4% note on $15,500 that we could basically move to any property we wanted as long as we have equity and cash flow enough to support the note and payment we agreed to make to the seller.

We also have a $151,500 note at 7% we can basically move to any property that has equity and cash flow to secure the note agreements.

If you find you have to sell a property without having a replacement ready to go the same week, you can collateralize the cash, with the cash, in an escrow account. Keep in mind, you are still responsible for this interest payment while the money is in escrow and cannot sit longer than 30 days.

There are a lot of moving parts in this transaction, but by learning to ask the seemingly impossible questions of if the owner will finance the deal, you not only can buy more property, you can control more property, stretch your dollars further and while your out ripping through leads and wholesale deals, you can create long term financing to use as YOU need to and also create exceptionally large profits with very little up front cost.

You can listen to the case study on on RealEstateMogul.com at this link


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