Will That Be Cash, Or A Note?

by Lonnie Scruggs

The sellers had spent two agonizing months of their spare time trying to make repairs to their rental house. Their tenants had skipped out, owing several months rent, and left a trashed house that not only looked bad, but smelled bad. It didn’t take me long to realize that I was talking with a very disgusted landlord. After a short period of negotiating, I agreed to buy their house and solve their problem.

When I finished signing the purchase contract, I asked the sellers if they had anything else they wanted to sell. My question resulted in another deal which was much better than the one I had just negotiated. They told me about another rental house that was left to them by their grandmother. Now if there’s anything a disgusted and burned out landlord needs, or wants, is another rental house. I could smell opportunity. The other house was not in great condition and was not a house I would ever have bought to keep as a rental. But I recognized an opportunity to create a nice little note with this house and have the mail carrier bring me another monthly check.

By asking questions, I learned the tenants had been renting this house for two years, paying $250 monthly rent, were excellent payors and would like to buy the house themselves. But they had the same problem as a lot of other people have...they had no money and couldn’t get bank financing. But, they could make monthly payments, and had been for the past two years.

I met the sellers at the house, was introduced to the tenants, and made a walk through inspection. The sellers dream price was $29,000...all cash. I explained that everything had two prices...a cash price and a financed price. And $29,000 was not a cash price for this house. But I made the seller two offers. (I always try to give people at least two choices to pick from, and either one they choose is good for me)

My first offer was $25,000, nothing down, semi-annual payments of $1,250, zero interest. And the first payment would be due six months from settlement. Or, I would pay a total of $12,500 cash and close as quick as the attorney could get the paper work ready. Later, after considering both of my offers, the seller called and agreed to the cash offer of $12,500. Obviously, he preferred $12,500 cash now, rather than monthly payments spread out over many years.

Now that I had a verbal agreement, I immediately contacted the tenants and arranged to sell them the house for $25,900 They would pay $700 down and sign a note for $25,200, payable $302.44 monthly, 180 months, 12 percent interest. The reason the tenants only paid $700 down is because that’s all they had. The reason they’re paying $302.44 per month is because that’s all they could afford. (You must make the deal affordable to avoid, or minimize, future problems.)

On the day of settlement we all met at the attorneys office and did a simultaneous closing. I bought the house from the sellers for $12,500 cash, and 15 minutes later it was sold to my buyers for $25,900 under the terms just explained. Now, what exactly have I done?

If we invest $12,500 and receive 180 payments of $302.44, my calculator says that’s a 28.6 percent return. I’m not including the $700 down payment we received, I’ll consider that the closing cost. Checking my records, I see that we have already collected 119 payments which amount to $35,990 and still have 61 payments ($18,448) remaining for a total of $54,338. Subtracting our $12,500 investment leaves me with a profit of $41,938 which took about 4 hours of my time. Does that figure out to more than $10,000 per hour? Yeah, I know, we have to consider the time value of money, and the fact it will be 15 years before we have all the payments in, and the buyers might stop paying, and we might have to take the home back and sell it again, and all the other horror stories that folks love to tell, but I’ll take all the deals like this I can get.

Here’s some interesting points to consider. After 42 payments I had my entire investment ($12,500) back. After 83 payments my investment had doubled ($25,102). And all I’ve had to do is wait for the mail carrier to deliver the checks. During this time I’ve had no tenant, no management and no maintenance problems. And unlike tenants, the mail carrier never argues, or complains when he leaves the checks.

I’ve created some good notes with houses, but houses are not my first choice. As many of you know, I like used mobile homes. And for the past 13 years I’ve been using this same concept of buying, selling and financing used mobile homes, and it’s been a real cash cow. To illustrate, let me share several of my deals with you.

One mobile home was bought for $3,500 and sold for $6,500, $500 down and a note payable $200 per month for 36 months. Another home was repossessed on Friday and sold again on Tuesday. I had already made a profit on this home before it was taken back, so I had nothing left in the home. It was sold this time for $6,000, $3,500 down and a note payable $150 per month for 18 months.

The next deal was a home that I had $1,600 invested in, and sold for $8,500, $500 down and a note payable $275 per month for 36 months. (This home is on my lot, so I also receive $250 monthly lot rent, together with the $275 mobile home payment). And just this week, I bought a mobile home note that nobody else would buy. This note has 80 payments of $145.45 remaining. My purchase price was $3,000. I’m not sure, but I think my yield is “good enough”.

I hope these actual case histories will illustrate how making your money work for you, instead of you working for your money, will make a huge difference in your life. Tomorrow morning I can stay in bed, or go fishing, but the folks that owe me payments have to get out of bed and go to work so they can send me a check. Maybe some day these folks will learn to do better, but I wouldn’t count on it. They all seem to be too busy trying to make a living, that they don’t have time to make any money. And none of the folks that buy these mobile homes ever take the time, or make the effort to go to seminars, or conventions to learn how to do any better. So many of them just keep working a job they don’t like, that pays just enough to live on, and wonder why they never have any money.

There was a time when I thought working two jobs, 12-15 hours a day, was the answer to financial security. I didn’t realize then what a price I was paying for my ignorance. Then I decided to get an education and learn what the pro’s did...make money do the work. There might be something better than the note business, but so far I haven’t found it. It sure beats any job I know of.