Investors Lounge Online

My father was a savvy investor whom has taught me how to buy and sell single family houses the same way he has bought and sold land. He bought more land than he needed, sold off the excess, and used the sale proceeds to pay off all his loans. He kept the unsold lots as an investment for the future. When he retired, he expected to sell them off on contracts to, and use the income to support his life style.

He bought a 35 acre tract of land, using seller carry back financing. He divided this purchase into ¼ acre lots, which he then sold off the lots until he's sold enough to pay off the mortgage. . At that point, he stopped selling the lots and just kept the rest. He repeated this process as rapidly as he could find tracts, cut them up into lots, and sells them off.

The basic concept is:

• Buyer purchases a substantial tract of land, using seller carry back financing; has it surveyed into smaller lots, then sells off the lots until enough have been sold to pay off the original seller financing.
• Buyer stops selling the lots and keeps the remaining lots. This process is repeated as quickly as the buyer can find the acreage.

He sold the lots on contracts which wrapped around the existing financing. When he couldn't get the seller to accept these contracts in payment for the land, he pledged them as security for a bank loan and used the proceeds to pay off the seller.

I was baffled as to why a bank would accept these contracts as security for a loan?

He explained to me that the bank benefited in 3 ways:

• It is better business for the bank to underwrite several small loans instead of making one large loan to a single individual.
• The bank would be in a good position to make the construction and permanent home loans, when the buyers were ready to sell or build.
• The lender has now established a business relationship with the buyers.
• My friend became good business for the bank, and could be counted on to bring in more land loans in the future.

He further explained that this same technique can be applied to purchasing houses.

• Buy more than you need, sell off the excess, and then use the proceeds to pay off any loans associated with the homes you intend to keep
• Buy houses at a price where there is instant equity and a ready market. Most houses provide instant cash flow when there are no loans to pay off.

My father bought 10 houses each year, sold off 5 to provide cash flow and to pay down debt, then kept the other 5 as long term rentals. Once he had 10 houses, with outstanding loan payments, he stopped investing and lived off the rents for 25 years. He recently sold the rentals and is now living off the income from the sales.