My near miss of getting a VA repo was a disappointment but it did not discourage me from real estate investing. I kept looking for houses hoping I could find one I could afford. Whatever I got was to be for real estate investment purposes and not to live in. I didn't have to wait long. Only a couple of months after the VA repo incident I saw an ad for a townhouse that looked interesting.

I didn't want a townhouse

Now a townhouse was not what I was looking for. In fact I knew that townhouses were not good investments in most cases. There are exceptions, of course, but there are more restrictions with them, they are harder to sell, and the association fees can be quite high and you have no control of them. At least in any area that I knew of they also did not appreciate as fast as single family homes.

I did not count a townhouse as a good real estate investment. However, here I was looking at an ad and thinking maybe I should consider one. My friend had just bought one in Ontario California, as a real estate investment. He paid a low amount, and here was one in Montclair for a reasonable price, more in my price range than a house. Could it be a good real estate investment? Something had to be wrong.

The location was wrong

Nonetheless I pulled out the stops and decided to take a look. I had seen nice homes in Montclair so maybe the townhouse was nice too. Not so. Well that's only partly true. The townhouse was nice, but the area left a lot to be desired. It was located in a rowdy area but the complex of about 100 townhouses was quite nice and the whole complex was fenced in with its own streets inside. However, there was no gated entrance so anyone could drive or walk in. This had to be a marginal real estate investment at best.

The price was right

Not having much money and still having a big liability on my rental house I didn't want to get into too much debt if I could avoid it. I thought more about it and made an appointment with the owner to see inside. I was surprised to find the owner was a young man, a real estate investor that was probably half my age. We talked and he showed me the place. Everything was fine. I liked it. The only thing I could find wrong was that the air conditioning was not working. That could be a problem.

I made an offer

Since the townhouses were not very old I figured the air conditioning problem might be a simple fix or at worse I had seen ads in the paper for new air conditioners for less than $1500 which I could afford if absolutely necessary. I decided to take a chance and offered $5100, the lowest I could get him to go.

I was to take over a brand new VA loan with reasonable payments. Previous to my offer I had gotten a property preview from a real estate agent and checked on prices some other townhouses in the complex had recently sold for. There had been a bunch of foreclosures in the complex and that had depressed the value and would make it more difficult to sell. But I had decided to take the risk. It was a rather risky real estate investment, but I thought I could handle it.

Townhouse for sale

The air conditioning problem turned out as I suspected, to be an easy fix. All I did was take out the circuit breaker and go buy a new one. It cost me about $14 and I had a perfectly working air conditioner.

I had some apprehension about selling the property. The outlying area was not very good. There was a strip club about a block away, and more foreclosures within the complex. I had only paid $5100 to take over the loan, which I got from a cash advance on my credit card. I priced my townhouse for sale at $70,000 with $1000 down payment, no qualifying, with an assumable loan. That was the approximate price of the few townhouses selling there. It was a two bedroom, one bath medium size townhouse with a small patio.

The young man I bought the property from had just bought it from the VA as a foreclosure property so the loan on it was perfect for me as I could control the mortgage and be flexible with my terms. I needed that to help sell it. However even with great terms and a reasonable price it still took me a long time to sell. Several prospective buyers were interviewed, but none bought it. One came close, but wanted too many compromises and I refused. This was looking like a bad real estate investment.

After many months a good offer

I kept running ads in the local paper with not much luck or response. I reduced the down payment to "no money down", but even then it didn't make much difference. I guess the outlying area turned most people off. It was not a desirable area, although it was not in the slums. After many months I finally got a firm offer.

As it turned out it was from a real estate investor. I don't remember now exactly why, but there was some question about the investor or his offer that bothered me. I did some research and discovered about 100 homes in his name in the county records. I was leery and decided to meat him in person near LA County Data Processing center where I was working at the time. I still had questions after talking with him, but felt I still knew what I was doing, even though he was a much more experienced real estate investor than me.

I really didn't see how he could rip me off, if he wanted to, because the sale was going through escrow and everything would be done legally. I came to the conclusion all he did was find "no money down" deals like mine, buy them up, then immediately get rid of them for a quick profit. That’s one way to make a profit, but it's more difficult to do today with government insured loans due to changes and restrictions.

No money down, but $1800 in my pocket

I accepted his offer which was the same as my terms. No money down, but he had to pay all the closing costs and close right away. That was slightly more than $1800 which went directly into my pocket. I had created an AITD second mortgage (Trust Deed to be exact) for about $5000 more than I paid for the property. Partly because he was a real estate investor and partly because I wanted to have a mortgage as an alternative to a real estate investment, I made my second mortgage assumable under certain conditions.

The AITD (All Inclusive Trust Deed)

The AITD I created, often called a wraparound mortgage, is an instrument often used in commercial real estate transactions. Mine was a little more complicated than some because I wanted to purposely keep the payments low initially so the mortgage could continue if the property was sold again with the my loan still in place.

What it accomplished was this. I had a new VA loan with a balance of about $65,000 on the townhouse. I had bought the property subject to that existing loan. The AITD I created had a face amount of $70,000, which is the price I sold the townhouse for. I structured the loan payments on the AITD in three different tiers, each with three different interest rates. It was a 2nd AITD (like a 2nd mortgage) since it included the original trust deed within it.

When the buyer paid his monthly loan payments it came directly to me. I took that payment and paid the original loan payment which was still on the property. The extra money that was left went directly into my pocket. As a point of fact, it later became the major part of a payment on a piece of land I had purchased in the Caribbean. I was really parlaying my money. This was fun, just like real estate investing.

Quick summary

I violated the major rule of real estate investing of location, location, location, and purchased a townhouse in a nice complex in a somewhat bad area. It had a new VA loan and I bought the property by essentially taking over the loan. That required paying about five thousand dollars as a down payment (which I borrowed off my credit card). I was also aware that at that time and place a townhouse was a risky buy compared to a single family house.

I bought the property from a real estate investor so he made some amount less than $5000 off the property since he had to initially pay something for the townhouse. I then sold the property some months later for "no money down", but structured it to put $1800 into my pocket from closing costs. I raised the price by $5000 and sold the property with a wrap around second trust deed that I created.

See part II for the conclusion of this long term transaction.