EP 598 – How I Made $40K From A $100 Option Fee

NCS 598 | Wholesale Deals

NCS 598 | Wholesale Deals

 

Not all wholesale deals are home runs, especially when you’re dealing with distressed properties. Sometimes, however, an investor can get excellent returns by getting creative. Scott Carson shares the story about one of his first wholesale deals that started as a distressed note where he got creative and made $40,000 from a $100 option fee. Scott’s experience is an eye-opener for all beginner investors to start educating themselves about the different options they can take to win in a deal. Listen to the story and take away some lessons that you can apply as we enter a whole new market in the second half of the year.

Listen to the podcast here:

How I Made $40K From A $100 Option Fee

I thought I would do a recap of the last couple of episodes that we’ve been talking about on some of the first deals that we did. Not only to share those with you so that you can see that I’ve been down that road before. We flipped and wholesaled properties, we’ve done a lot of short sales. We’ve dealt with a lot of interesting real estate and property deals along the way as I’ve been a real estate investor with many years of experience, not only here in the Austin market, but in other parts of the country. Like most of us, I’ve been sitting at home, and the market’s changing.

I wanted to go back and take a look at what was going on in real estate. What was going on with the properties that we’ve bought and sold over the last years and taking a handful of those things? Some are good, bad, and ugly. The deals that stood out in my mind as being some of the most influential deals in my career that have helped shape and created who I am as a real estate investor when it comes to traditional real estate. If you look at it, there are always properties that you buy, sell, or wholesale and you look back and sometimes you go, “Why did I do that? Why didn’t I do that? Why didn’t I do this and that stuff?”

Every investor is like that. Not every deal is a home run. Others knock it out of the park and go from there, but one of the deals that I wanted to talk about in this episode is a deal that we get creative with. Austin, Texas is a hot market and it has been for years. It’s a little overpriced on things, but you come across some people in your network that try to be good friends and people you don’t want to work with again, but other people that do bring something to the table. Most people especially real estate investors will shy away from dealing with realtors. I’m a big fan of working with realtors especially on the note space. We need realtors to pull comps and listing agents. Maybe they know contractors or they become the GC on rehabs and they’ve got a team or crews.

Realtors, that’s one of the most important aspects of our business. One of the first deals that I did as Scott 2.0, most of you know that I bought a couple of properties when I was straight out of college and bombed on the marketing stuff. This is one of the most profitable deals that I did in that second version, where I learned how to do real estate the right way as an investor, not going out and buying traditionally off the MLS, 20% or 10% down, and getting to 30% or more. There’s nothing wrong with that and I highly encourage that. There are facets for that that makes sense. I am going to buy a duplex at around half the price along with the other one and then years later, I’ll do the same thing.

NCS 598 | Wholesale Deals

Wholesale Deals: Not every deal is a home run.

 

The Zilker Park Property Deal

That’s a great way of doing things, whether it is Fannie Mae or VA loans, whatever, it is fine. I’m not against that. A lot of people don’t have those credit challenges and they may not have a lot of money, to begin with. I wanted to share this deal that we did. We took $100,000 and turned it into $40,000 in profit in roughly 30 days. It was a unique situation. As I was out networking, looking online, talking with people, I came across a listing from a realtor who identified the top ten fix and flip properties in Austin. I was like, “That’s an interesting topic.” I was on Craigslist. He talked with me like, “I’ll be glad to share with you the top ten properties that are undervalued in fix and flip.” I was like, “That’s cool.”

I reached out online to a guy named McKay with McKay Real Estate here in Austin. He and his wife been in real estate for a while. This goes back to many years ago. I was like, “I’m interested. I am an investor here. I sold some property.” He was like, “Great.” I got pre-approved. I’ve got private investors behind me. We went out and started looking at properties. We came across one property. A lot of them were rough and needed a lot of work or a lot of heavy rehabs and things like that. They had some upside if you put a lot of work into them and go from there. We came across as one property in the downtown part of Austin, Texas. Austin has town links and runs around town Lake Barton Springs. You have a place called Zilker Park. This is where the AC, Austin City Limits Music Festivals is at. It’s down by the Long Center. It is ideal, especially smack them down a little. Their homes are worth $1 million, $2 million somewhere in between. They are easy. Going back years ago, we come upon this one property. It was an older home. A lot of homes were being rehabbed around it. We walked in and it was a 1.5, 2-story house.

Most of the houses were single story. There are parts of where there’s a two-story with the garage in the back. The guy that owned the property was trying to sell the property. We went to see the property and this guy came out and met us. His name is Dreads. He was a drummer here locally. He had dreadlocks all the way down to the floor. He is a nice guy. He also went by Sash as well. It needs some work, but he was looking to sell a property. As we were visiting with them there and talking, we found out that he’s in foreclosure. We were able to find out that he was in a few months. He was about 30 days from losing the house because he had done any good. Unfortunately, he was trying to sell the property. He was not in a happy situation too.

He has been forced to sell because he had some equity in the property, but not a lot based on the condition it was in that needed to be upgraded. It was interesting. We were like, “Why don’t we see it?” We came back so I’m buying it outright. I didn’t want to do that. We did some research on it and Select Portfolio Services or SPS. It was the servicing, the lender, the foreclosing company on the property. It was about $19,000 in back payments on this. We were like, “What can we do? Let’s go in and buy it.” Maybe we can go into a traditional loan and we can come in, take over payments on it, make up the payments, keep the existing financing in place and we can go out and wholesale.

When I started running comps and saw that if he drops $150,000 to $175,000 in the property, it would be worth upwards of $500,000 or $450,000. He owned about $280,000, $250,000 at the time, somewhere between. We talked to the listing agent and we were looking at this and there was our agent, Matt, the representative agent. The lady that represented Sash didn’t get along with it because she couldn’t go into the property. He didn’t like her. He was being forced to do the deal. He was a little bit moody. You can understand that being ratchet lived in the house for years, seeing it spring up around him. We said, “Let me go and talk with the guy. I’m not trying to cut realtors out of the deal at all. Let’s try to resolve it.” I met Sash himself.

I said, “What if we did this Sash?” I know you don’t want to lose this house in foreclosure and not get anything for the most part. I said, “There’s some value there, but it needs some work. Do you have the money to put it?” “No, I don’t have the money.” “You then don’t have the equity. What if we do this? Let me take over your payments. I’ll give you $10,000 to sign the property over to me and we’ll deal with the bank. We are getting that loan paid off in six months as we sell the property last.” He was like, “I could get out of here and have $10,000 in my pocket? That’s what I need to get moving on.” I was like, “Let’s do that,” so we agreed to that. I said, “Give me a short-term option to buy it. This basically sold to subject to financing a $10,000 in your pocket plus realtor commission.” The realtors are happy as well too and that’s what we did. I gave him a $100 check. He signed a property over to us on an option. I went out and ran some numbers. We started saying, “Based on the numbers that we see, we figured that based on everything that was owed and we paid the back payments to the bank, it was about $19,000.

We knew that we’d get a wholesale fee for about $75,000, it would be feasible like that, somewhere around that six-figure mark and a wholesaling fee because the value was there in the back end. We had several people and investors come through like, “We want to take it over subject to and we can pay in the end.” We were like, “No, we want the fee on the front end. We don’t want to be paid in the back end.” A guy by the name of Nick, another real estate investor was doing some higher-end, flips done. Devlin, a small commercial came to us and said, “I liked this deal. I got your email. I’m interested. I can make it happen on that roughly. I don’t mind you taking $75,000. I understand that $20,000, some of that went to your realtor commission. Some are going to pay SPS off so they don’t go away or that they don’t foreclose on the property.”

Sure enough, we signed the papers. We showed up to closing and that’s a beautiful day when a realtor is getting paid their commission. We walked out with a $40,000 check. We paid the investors off quick on letting us borrow their money for a week to pay the $20,000 off SPS to take the property over. If we need to, we can go the route with doing the big rehab, but when you look at, “I can make $40,000, $50,000 in a couple of days versus me going through the rehab and trying to build the property out and deal with the city and all the other things. Nick, the buyer, had some plans to add a whole second floor to the property and go from there. We were excited and literally, $100,000 turned into $40,000 in less than a month roughly about two weeks from the time.

The realtor was all excited. It’s like, “That was interesting. I never figured out a structure. You hadn’t heard of subject to deals.” That’s the big thing with realtors. They are worried about their commission and that’s the thing we structured and said, “We’re going to still pay you out of your full commission for bringing us the deal. We’re still going to make money on this.” I worked with Matt on a few other deals in the future. The listing agent was excited to be done with the seller. The thing is he wanted to sign but the seller wanted to cancel the contract with his agent. The agent was like, “I’ve got a contract and you’re still going to pay me. You signed this contract.” It can be difficult. It is what it is.

You would think everybody’s all excited and rock and rolling. Most of the people are, except for the buyer. He was excited about it. He had these big plans. He’d send his workout crew in this property. It had original hardwood floors in the property and had some great features to it. His rehab crew went crazy on it. They ripped the roof off. They pulled everything out. It was a shell of a property which resulted in the numbers and his rehab going through the roof. Nick was like, “My rehab crew completely demo the property. They almost tore all the way down to the studs.” It did for the most part. Here’s another funny picture. They didn’t have to talk as much because, in the timeframe from when we agreed, I’ll take a look at properties of the issue to the point we sold it.

The seller was selling off the stove, his fridge, the cabinets, anything he could sell. When we found this out, we went through and said, “You can’t sell anything more of this stuff. They’re features of the property. You don’t technically have the right to sell these anymore.” We had to deduct some of these and what you paid for it. That’s where the stuff from the $10,000 we’re paying at closing. He was all upset about that. It’s like, “No offense. You can’t do that.” That’s a big thing. If you were to take over something subject to, or put an option on something, make sure it’s as a property as it is like cabinets. Make sure to bring that up. That was one learning thing. Fortunately, it didn’t affect our backend with Nick when he was buying it from us. He’s splattered this stuff out, but it still would have been nice to have those cabinets, stone garage or something else like that, or the big island that they had in the house that he was planning on keeping that in.

How did we structure this? They talk with a borrower and came up with, “What were the borrower’s needs?” It wasn’t the fact that he was interested in selling the property. He wanted at least $10,000 and move on. That was the big thing, we found the pain point. The second thing, we were able to dictate to that and figure out something that works. We had to go out and get $230,000 or $250,000 and get finance. We were able to go out and find $20,000 plus $10,000 to secure the property, even though the equity was there to bring the mortgage back up to date. If we needed to, we did along with having money there to put the rehab places. We had investors that were willing to do that. I didn’t need to break 250 tables if I could take that subject to financing down and keep that in play, which would give us a lot of flexibility.

The monthly was $2,300 a month. I think about it so he was about six months behind going into it. When the deed was properly sent over to us, we didn’t record it immediately. You should probably say, “You probably should,” but the last thing you would have wanted anything is a trigger if you want to sale clause. That’s not going to happen most of the time when you take over properties, especially if you can put the property land trust and do that. As long as the bank is getting the payments, most of the time. As long as they’re accepting payments, they’re not going to care. All the banks are going to care when they don’t get payments. They start digging into things is when you do on sale clause get filed more so than anything else.

Going back to the story. Unfortunately, the property stayed vacant for over a year, because the rehab cost budget was going to be twice what he originally expected. Fortunately, during that timeframe, the market had dropped and rebounded and Nick was able to sell it off to somebody else. That what he’s into it for, and that person puts some rehab into it. The house is worth about $1.2 million or $1.3 million. It’s a beautiful property in Zilker Park. Now, it is not even close to what it looked like beforehand. It is about a 6,000 square foot lot. It was a 3-bedroom, 2-bath. You can see the second floor behind it there.

It is a gorgeous area down in Zilker Park and it seems from the interior photos. They did a great job of going in and designed the property. The property for years has doubled in value from $400,000 to $500,000 to be over $1.2 million to $1.3 million mark evaluation on it. There are not big homes. We have the big thing here in Austin with McMansions when people have gone in and tried to build up because the lots are small and you run into issues with water and utilities and things like that. This house is not worth $1.2 million to $1.5 million, depending on where it’s at and things like that. I was happy because we made $40,000 from $100,000. We got creative and applied what I learned by reading a book by Ron LeGrand on how to make money in options and wholesaling.

What To Expect In The Current Market

It’s one of the best books that you read still out there. Ron has over 40 years of experience, but I learned from sitting in a lot of his classes and talking about wholesaling and options and then reading the book on the flight home and then going out and apply, looking for opportunities, networking with realtors that had the investor mindset. If I had never answered, responded to that Craigslist posting, met, and talk with Matt, we wouldn’t have found this deal. That’s one thing to keep in mind is as we look at what’s going on in the economy. In the news that came out, it was mentioned that 9.5% to 9.6% of all mortgages in the country are in forbearance agreements. We expect that number to increase.

I’ve been saying for years, there are still a lot of people in default out there. One out of every ten Americans was already a month behind before this happened. You can imagine if we’re seeing an increase in forbearance agreements and things kicking in by the banks at 10%, I expect to see probably closer to 15% to 20% in the next month or two, as this continues to drag out as the economy struggles and things like that. What does that mean? You’re going to have people who have been in default that can’t make their payments. We were on VA and Fannie Mae and doing some great things by saying, “If you’ve been laid off or you’re late because of Corona, we’ll take your six months of payment and add the face amount of the money. Start paying when you can start paying again.” That’s phenomenal.

NCS 598 | Wholesale Deals

Wholesale Deals: Educate yourself on some different options to get creative in deals.

 

Not everybody has an option though. Investors who have finance properties and owner-financing don’t have that government bill out. Non -VA, non-Fannie Mae programs may not have that option for them. You’re going to see a lot of people in default, people that need to downsize. People are like, “I overbought. I’m in a short sale process.” That’s the thing to look at it. You’re going to see some options that are available to you. You’ve got to be creative and think outside the box. It doesn’t always need to go the traditional route of, “I’ve got to hire an agent. I’ve got to close it out and moving on.” Sometimes you’ve got to educate the realtors. I was exchanging messages back and forth with an agent in Dallas.

She has a show and I was like, “I would love to come on and be a guest in your podcast talking about this.” She was like, “What do you mean the note market? I do traditional real estate.” I said, “No offense. That’s great, but we’re turning into a nontraditional market. We’re turning into a nontraditional economy. Especially on the niche that you’re in, you’re going to be seeing these options. It’s best to educate yourself so that when these things pop up, you know how to react.” Note Nation, keep that in mind. You may have to educate people on some different options to get creative. I think taking it over a note to subject to is a great opportunity. You’ve got financing in place if the interest rate is low. We all know interest rates have been low for a while. It’s cheaper going out and borrowing money at 6% to 12% and trying to make our hard money, make things happen. Maybe you got to come out of pocket $20,000, but it’s easier to find an investor for $20,000 to $30,000 that can be in a mezzanine second lien position behind that first while you rehab. As long as the numbers make sense on either selling or rehabbing the property, or having to foreclose and take the property back if you could.

There are a lot of people that want to get out of their dreams turning into nightmares. That’s not a good place to be for a lot of people out there. I encourage you, get creative. Options are a great thing to do. Options are available in the known industry. We had to do the option with the buyer and this one, you’re not going to go out most of the time and make an option with Bank of America, Chase, or any of those guys. As you start seeing smaller companies, smaller funds that aren’t so huge, we will probably do an episode here talking about how you might be able to use a non-exclusive option agreement to help you secure note portfolio or note while you market it and move it across the board and you’re wholesaling or so onto somebody else and sandwiching yourself in between for a nice fee.

This was our Zilker Park, come here on this one guy. We took the $100,000 option and turned it into $40,000 in roughly about three weeks on the profit side. The fee was higher, but when you start looking at how we paid people and paid off the realtors and investors, stuff like that, $40,000 is not a bad way. Guys and girls, go out, take some action, keep an eye out on your market. Start looking at your defaults or looking at your foreclosures and stuff because you can start seeing the market starting to increase. That’s an important thing that you guys can step in, make something happen. It could be a bad situation into a good situation and helping people with their problems because that’s where you make the most money in real estate. Anything that’s being a problem solver. Go out and take some action and we’ll see you at the top.

Select Portfolio Services

http://www.NoteBlueprint.com

Important Links:


Love the show? Subscribe, rate, review, and share!

Join the Note Closers Show community today:

Leave a Reply

Your email address will not be published. Required fields are marked *