Buying Real Estate Creatively: A Personal Real Estate Journey thru the IE
By Charles L Harmon
Way back in 1987 I decided I needed to move to a better location. Buying Real Estate Creatively never initially entered my mind. Although I was living just about a half mile or so from West Covina, near a nice residential community on the outskirts of that city, I didn’t like the exact area I was in, which was an unincorporated area of Los Angeles County.
I had bought my little home some 10 years earlier for the lowly sum of $39,995 which was a big strain on me at the time. That being my first home, was by default a “no money down” purchase, because when I bought it I got a VA (Veteran’s Administration) loan and the seller paid the points.
My Little Red Corvette Signaled my First Real Estate Mistake
I was single back then, but now my circumstances were different and I had a family. The area where I lived was getting worse and I didn’t want any part of it. Buying Real Estate Creatively crept into my mind since I wanted to move out the area into a nicer one and a new house, if possible.
I remember the day I moved into the area I was unfortunately initiated on my own front yard. At the time I had a little red Corvette, a Stingray that was a quick little sports car. I parked it on the front lawn of my just purchased home while I was moving in.
But back then it was fast for a sports car that was not modified in some way. It was even faster, but I was afraid to push it harder for fear of ruining the transmission.
While I went to my previous apartment to get some things to take to my new home someone stole the brand new car cover I had put on my Corvette. That’s when I knew the area the house was in was not the place to be.
I had never had anything stolen from me before in my life. But here with my first big transaction I was initiated to the facts of life – things can get stolen.
During the following 10 years I lived there my house was broken into one time when a business partner of mine from Hong Kong came to visit and I took him out to the movies. I had left in the afternoon so my lights in the house were not on.
That was the only time in those ten years the house was entirely dark in the early evening hours.
My first Creative Real Estate Investment Purchases
I was a budding real estate investor back then and had bought my second house and also a townhome, in Ontario California and Montclair respectively, some 25 miles east of me in the Inland Empire. The houses in that huge area were quite a bit cheaper than those of Los Angeles County which was where my current home was located.
There had been a housing boom some ten to fifteen years earlier in that area and houses that most people could afford were considerably cheaper than all the other surrounding counties near Los Angeles.
Both those houses were essentially a “no money down” deal, the house in Ontario I had made a deal with the owner to let him stay there for two months in lieu of me making about a $5000 down payment and assuming the existing FHA loan on the house. As for the Town home, I had sort of reluctantly bought it from a young college student who had just gotten it through a foreclosure sale.
Reluctantly meaning the area where the townhome was located was on an undesirable street, and there was a strip club just a few hundred feet outside the big complex where the townhomes were located. Also there were several other townhomes that had been foreclosed and several more for sale in the big complex.
In real estate the main factor one needs to be concerned about is location, location, location and here I was about to violate that valid concern. Being a new investor, and if I did get that townhome it would be my second investment property.
I thought that even if the property were in an undesirable area I could sell it to someone and put a new wraparound mortgage on it. That way my risk would be less, I would not own the property, and I could still make some money from it – if I were lucky.
I Created a Wraparound or AITD Loan
For those of you that are not familiar with wraparound or AITD loans here is a brief rundown on them from Investopedia.
Wrap-around loans are a form of owner financing. Some wrap-around loans require consent from the existing lender, and wrap-around loans cannot be done on properties that include a “due on sale” clause in the loan documentation.
Wrap-around loans can also be structured such that the buyer’s payments are directed to the lender, rather than the seller, and the lender then forwards the buyer’s payment to the seller.
The owner (lender) should be able to charge a higher interest rate to the buyer that what is currently being paid on the loan. Buyers often seek wrap-around loans when they cannot obtain standard financing or mortgages.
How I became familiar with wraparound mortgages
How I got very familiar with wraparound loans was through a real estate club in Orange County I used to belong to. The club was for investors or people like me interested in all sorts of ways of investing in real estate. I never participated in any of the actual investments the club made, but wanted to know as much as I could regarding creative financing. The club purchased SFH (single family homes) in the Phoenix Arizona area, and in Tacoma in Washington State.
Those Tacoma real estate deals were large fixer-upper apartment complexes which they purchased for little or no money down, fixed up, and then resold using wraparound mortgages or other creative financing methods. It was amazing to me to see relatively large deals (to me) like a half-million to two million dollar purchases made with either no money or no payments while the property was fixed up. All those apartment deals required fixing up before they could be resold – in usually about 3-4 months after purchase.
Credit cards were my friend
I didn’t have extra funds at the time I bought it so I had borrowed the needed down payment from my credit card. So in a couple of weeks I had a townhome in a rather undesirable area of Montclair. I had lots of credit cards which I got strictly for the use in real estate investments.
California uses Trust Deeds
Immediately I put the house in Ontario up for sale with a lease option to buy. I sold it (by myself – not using a real estate agent) in a short period of time to a service manager of a large car dealer. The Montclair townhouse turned out to be a nightmare.
It was up for sale for about nine months for “no money down”. But all potential buyers, there were only a few, seemed too unreliable. So I refused to sell to any of them.
Finally I ended up selling the townhome to an investor although I initially had quite a few doubts about selling it to him. After a short background check (using public county records) I discovered he had over 100 houses under his name.
My job then was a Programmer consultant at Los Angeles County Data Processing department in Downey California. I met the potential buyer in the front office there. My original thoughts he might be some sort of shady character gave me some caution. However, after meeting and talking to him, he assured me everything was on the up and up.
AITDs became my Friend
I weighed my options and decided that since the property had been for sale so long I’d better get rid of it then if I could. I thought that even if he did do some shady deals at least buying my property was going through escrow and I had legitimate title through the Veterans Administration so my sale was not a problem.
Now, even though that was sold as zero down deal I did make about $1800 due to closing costs. That was good for me because I had arranged for the person who had bought my townhome originally (that investor) to be able to sell it easily.That’s because I had put a new assumable AITD mortgage on it. The money from the mortgage would be coming directly to me. Well almost directly to me because I arranged for the new buyer to make his payments to Bank of America.
What is an AITD? According to Greg Luczak’s Real Estate Blog, the definition – all-inclusive deed of trust (AITD) is:
Wraparound AITD. A wraparound AITD (all inclusive trust deed) is where the seller deeds the property subject to the existing loan and signs a note to the seller secured by a deed of trust on the property. The deed of trust is second (junior) to the existing deed of trust lien.
It is called “all inclusive” because the payment is for the ENTIRE amount. For example, if the sales price is $100,000 and the seller owes $80,000, the buyer may put $10,000 down and sign a note for $90,000. The seller collects on the $90,000 note (with principal and interest) and continues to pay his underlying loan, pocketing the monthly spread.
Wraparound Loans are Fairly Common on Commercial Properties
One other thing about wraparound loans – they are fairly common on commercial properties. It is rather unusual for them to be used on home purchases. When most people buy a house, townhouse, or condominium, they go to a real estate agent and buy it through it them.
They usually get a new loan in the process. With a new loan there are exorbitant fees involved which the buyer pays, however, and most of the loans are not assumable (FHA and VA loans excepted).
So in some respects a person buying a property with an assumable loan on it may be getting a better deal unless the seller is purposely trying to rip them off (which is possible). In my case, except for the Montclair townhouse, closing costs for the loans were usually just the cost of escrow, which in all cases was less than $1000.
As it turned out that investor turned right around and resold the townhome to someone else in a couple of weeks. Amazingly, the person he sold it to was also an investor! I made another $700 at that time because in my assumable mortgage I charged $700 for someone to assume the loan, along with a credit check of any new buyer.
Even more amazingly that new buyer of my previous townhome resold the townhome to his sister a couple of months later. I collected another $700 and gave her a break by selling it to her because her credit record was spotty. Even though her credit wasn’t A1, I had a good feeling she was reliable after I met her in person, so I approved the purchase.
At the time I had a decent job as a programmer/analyst but having a family usually kept me short of funds. But real estate investing was in my blood. I had taken two years of real estate back in college when I attended Pasadena City College in Pasadena California.
I Decided I would Find a Deal on a Home No Matter What
So I put on my thinking cap and decided I would find a deal on a home no matter what. And that I did – sort of. I don’t remember the exact price I paid for a nearly new house I purchased in Bloomington California, but it was in the 70 thousand dollar range.
The house was a small 3-bedroon 1 bath home, but had a nice size yard and was on a nice block in a so-so area. I bought that house instead of moving to an apartment while a new house I was purchasing was being built.
I didn’t want to waste money renting an apartment for six months or so. The Bloomington California house was only to be a temporary home for the family for a few months. I didn’t particularly like the Bloomington area either. But at least the street and surrounding streets where we lived were nice.
None of that bothered me too much because we had already found a new home that was going to be built in a few months in a new area of Lake Elsinore. All I had to do was be able to sell the Bloomington house by the time our new home was finished.
Although I got an OK deal on the Bloomington house the payments were way too high and causing a strain on my finances. I had sold my previous home and we had moved to Bloomington, a small San city not too far from San Bernardino.
I had also purchased a somewhat bigger, 4-bedroom house in Rialto, about the same time as the Bloomington house. But problems started occurring with that house. The lady we had sold it to with a “Lease with Option to Buy” started being late with the payments (which came directly to me).
That Rialto California House was Essentially a “No Money Down” Deal
That Rialto house was essentially a “no money down” deal I had arranged through a real estate saleslady I had met a few years before. I had purchased it by borrowing 2/3 of the down payment from one of my credit cards. I promised to pay the seller the other third in three months.
That last third never was paid because the previous owner had lied about a leak from the solar water heating on the roof leaking that I had asked her about. It’s a long story, but suffice it to say, I never paid her the rest of the money because it cost me a lot to fix the problem.
The water had leaked from the roof two stories all the way down to the living room – something I had asked her about before I bought the house. I had been assured the little stain I had seen in on the living room ceiling was not from a leak on the roof.
Selling off Two Houses
After six months or so we moved into our new house in Lake Elsinore, about 45 minutes south of our Bloomington house. I decided to sell the Bloomington house and the house I had bought in Rialto.
The Rialto house was giving me problems with the rent being collected and the Bloomington house had very high mortgage payments. I could not create a wraparound loan on the Bloomington house because the payments and interest rates were too high.
I decided I wanted to get rid the Rialto house because of the rent problems with it. Even though I had rented it with the option to buy, the lady I rented it to wasn’t making rent payments like they were supposed to, so I had decided not sell it to her. Unknown to me until I tried evict her, she had rented the bedrooms to four different people and set up an unauthorized daycare center downstairs.
In court I found out about the unauthorized people she had rented the bedrooms to and the judge gave them 90 days to move. That meant I would lose 90 days rent too, since the lady I rented the house to stopped paying me. Reluctantly I decided to use a real estate company to sell both houses since they weren’t far apart. They both sat for sale for a few months.
Finally they sold. Even though I had problems with one of them and they both sat for a few months before they sold I still made over $70,000 profit in about a year off those two properties alone. That was only the second time in about eight house deals I had ever used a real estate company to sell my houses.
How I Found my Potential House Purchases
If you are wondering how I found such low down payment deals it is because I worked hard at it. Once I got rid of my real estate salesman’s license I started scouring all the local throw-away-papers. Those are the free ones often thrown into your yard or driveway. I also used the local newspapers from surrounding small cities and areas.
Every day I would search for homes for sale that indicated they had assumable loans on them. If the price was in my range I would drive there and check out the house. If the house was in OK condition I’d consider making an offer.
That’s what I did and it netted me money over the long run with little real work involved. Originally I wanted to find fixer-uppers and fix them up then resell them for a higher price, but I could never find any reasonable priced houses like that. So I gave up that idea and concentrated on houses that needed no work on them.
I wouldn’t make as much profit, but my goal was to create long term mortgages and receive money on a monthly basis instead of bigger profits requiring much more work.
Small Profit – Almost No Work Involved
The AITD mortgage I owned on my first investment house in Ontario was paid off when the person I sold it to get a new loan. I didn’t make much off that house, but since it took no money from me to buy it and I didn’t have to borrow anything either any profit was a bonus.
As it were I made about $100/mo. for the three years they had it before they refinanced it and another $18,000 once the refinance went through. Not a lot, but since the only real work involved with that sale was a small amount of paperwork it was almost like getting something for nothing.
During the next couple of years I bought another small house in San Bernardino. I didn’t know much about the San Bernardino area, but as it turned out it was a good area like I thought and had been told. The house was small and old, but nice. I had borrowed $8000 from my credit cards to buy it by assuming the FHA loan.
Immediately I turned around and sold it for $8800 down with me assuming the existing mortgage me creating a new AITD mortgage. I also raised the interest rate a percent or so allowing me to make at least $8000 a year on interest.
Big Problem – I Took Easy Way Out
I won’t go into all that happened to that San Bernardino house, but the person I sold it to eventually abandoned the house shortly after he told me had lost his construction job. He had seemed a shady character when I sold the house to him, but I like to give people the benefit of the doubt. Well in this case, although I am not sure about who was responsible, the house was later set on fire and a couple of rooms were totally destroyed. Some two weeks after that fire the kitchen was set on fire.
I don’t know for sure, but my gut feeling was that the previous owner I had sold the property to either set the fire or had someone else do it. He seemed like the kind of person who would do something like that or some other bad thing.
Unfortunately my insurance company told me it might take up to six months to repair it. They would not tear it down and build a new house because it had burned slightly less than halfway down, and their insurance required that half or more of the house had to burn down for them to rebuild the house from scratch.
That meant it would basically sit during that time with me having to pay the underlying mortgage and that was a major problem.
Real estate values had gone down since I had bought it. I had already started foreclosure on the property, but that cost me over $2000 and I had only paid part of it. I figured it would be a significant problem making those monthly house payments while the house was producing no money and still having to come up with even more money to continue the foreclosing procedures.
So I decided to forget the whole thing and let the bank take back the property. I hadn’t lost any money on the property, in fact, I had made money during the two or three years I had the mortgage.
Sometimes you Win – Sometimes you Lose
Sometimes you win – sometimes you lose. But in investments you have to take that in stride. So with those thoughts in mind I found another small house to buy in Banning California. It used to be a servants house for a fairly large Spanish ranch style house right next to it on the other street behind it. It was a nice two bedroom home with two decent size yards totaling slightly more than a quarter acre.
The house cost $65,000 with me borrowing $5100 from one of my many credit cards, assuming the approximate $60,000 FHA loan already on the property. I ended up renting that house a short time later to a Minister. I had rented it with a 1 year Lease with Option to Buy.
Part of his rent money went toward the down payment if he bought it. Once purchased, I’d put an AITD or wraparound mortgage on it so I would make about $10,000 a year on the interest from a $70,000 sale price and a few hundred dollars off each month’s mortgage payment. Doing real estate deals that way is almost like creating money.
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