Are you seeing an increase in property investors using creative methods like seller financing? You are not alone. It works well with rising interest rates to build long term cash flow and the note can be sold to a note investor to recapitalize.
Recently, a fix and flip investor, hard money lender, and note buyer worked together on a venture in Alabama. Each offer different strategies and roles that demonstrate how much opportunity and flexibility can be had within a single real estate transaction.
The Rehabber Real Deal – Creating Opportunity
Located in the heart of Huntsville, this 3-bedroom, 2-bathroom brick home on a sizable lot became the canvas for a creative financing work of art. The investor adopted a multi-faceted approach, leveraging various methods to turn a distressed property into a profitable investment.
Fix and Flip Investment Strategy: The journey began with a property investor’s purchase of a distressed property, offering a lower entry fee for a fix-and-flip project than traditional acquisition methods.
Hard Money Lender for Acquisition: To expedite the buying process and alleviate the need to use their own funds, the investor turned to a hard money lender for quick and flexible financing.
Owner Financing to Home Buyer: Rather than having the buyer seek conventional bank financing, the investor offered seller financing to attract a qualified buyer, setting the stage for long-term cash flow.
MLO Underwriting to Qualified Buyer: Underwriting by a Mortgage Loan Originator (MLO) ensured that the buyer/borrower had the ability to repay providing a layer of security for all parties involved.
1st and 2nd Wrap Mortgage Structure: The repayment structure involved a first and second wrap mortgage (around the underlying hard money loan) allowing for creative financing to accommodate the needs of both the seller and buyer. This also opened the door for the investor to receive money now as well as monthly income.
Sale of 1st Lien to Note Investor: The investor further capitalized on the deal by selling the first lien to a note investor, effectively recapitalizing and mitigating risk.
Payoff to Hard Money Lender The hard money lender, initially used for acquisition, was repaid from the proceeds of the note sale, demonstrating the fluidity of funds within the deal.
Holding 2nd Lien for Long-Term Cash Flow: The investor/rehabber retained the second lien position for ongoing cash flow, creating a sustainable income stream over the life of the note. Not only did he walk away with some money in his pocket from the sale of the 1st position mortgage, he still gets a piece of the long-term interest income.
Rehabber Real Deal by the Numbers
The property was acquired in Spring 2023 at a distressed sale for $135,000. It was then sold for $215,000 in June with a down payment of $25,000 and a second note of $40,000. The first note of $150,000 had terms of 9.9% at $1305.29/month for 360 months.
The transaction had a 70% loan-to-value (LTV) on the first, an 88% combined loan-to-value (CLTV) on 1st and 2nd, and 12% true borrower equity.
After 4 months went by the note was sold.
Here’s the Real Deal Numbers at a Glance:
| Sales Date | June 2023 |
| Sales Price | $215,000 |
| Down Payment | $ 25,000 |
| 2nd Note | $ 40,000 |
| Original 1st Note | $150,000 |
| 1st Note Terms | 9.9% at $1305.29/month for 360 months |
| Seasoning | 4 payments (July through Oct) |
| Unpaid Principal Balance | $149,725.47 with 356 pymts left |
| Note Purchase Price to Seller | $138,814.13 (less payoff) |
At closing, the proceeds from the note sale were used to payoff the underlying hard money lender used for the property acquisition.
On this particular deal, we chose to refer the transaction to a note buyer, earning a referral fee at closing.
The end note buyer was able to earn a yield over time (IRR) of 10.62% by purchasing the note at a discount. They were also protected with an 66% ITV (Investment To Value) on the first lien.
The rehabber (aka note seller) profited from the property sale, retained the down payment funds, and kept a monthly cash flow on the second lien.
The Wrap-Up – Using Seller Financing with Fix-and-Flip Investments
This Huntsville deal serves as a prime example of how adaptability and creativity in real estate transactions can yield substantial returns. By blending traditional fix and flip strategies with innovative financing and note selling, investors can navigate market fluctuations and build sustainable, long-term cash flow. As the real estate landscape continues to evolve, embracing such versatile approaches may well be the key to thriving in the dynamic world of property investment.
Additional Resources for Seller Financing and Note Buyers
- Creating Notes with Seller Financing
- 21 Tips to Read Before Investing in Real Estate Notes
- Directory of Note Buyers and Service Providers
- Interest Rates and Yields in Note Investing
- Calculating Cash Flow Notes Training
- Learn from Real Deals
- 300+ Free Articles on All Things Seller Financing and Real Estate Notes
This is a great example and shows how everyone can benefit. I have been on all sides on the transaction as the hard money lender, as the note buyer, and as the fix/flipper. Thanks for sharing the transaction details.