Posted by Tony (CA) on July 23, 2001 at 17:30:24:
Thanks for your advice.
Tony
Low or no equity and upside down properties. - Posted by Chris G (OH)
Posted by Chris G (OH) on July 23, 2001 at 13:55:53:
I’ve just been taking note that there are a lot of newer homes in my area that are low or no equity and some even owe more than the purchase price. What types of techniques do you guys use when you find a motivated seller in this situation?
Thanks!
Re: Low , No or Negative equity properties - Posted by Bill Gatten
Posted by Bill Gatten on July 24, 2001 at 16:11:07:
Here are a couple ways I handle these properties (with the PACTrust of course):
I get the seller to pay a portion of the monthly payment and plan to hold the property for at least 7 years. By the end of this time, even if there has been no or negative appreciation, the principal will have amortized enough to make a little profit. Further, the money I make with my incoming resident beneficiary will put $20,000 to $30,000 in my pocket…those two profit centers when coupled with the positive cash flow will make it a good deal for me whether there is any equity in the property or not.
When the resident beneficiary comes in, I explain that the property is over-encumbered at the moment but that amount will remain my responsibility if they continue in the property until the end of the term. If they want a short term its not the deal for them.
Why would the seller pay part of the payment? Think of his alternatives: thousands of dollars out of pocket to pay the over-encumbrance on top of closing costs and real estate commissions. Or…if he would consider a short-sale or foreclosure, he’ll get hit with an IRS tax bill that will blow his socks off when the Gubmunt gets wind of the windfall from Debt Relief (not to mention the banks selling costs and administrative expenses which are added to the 1099 that goes to the IRS). Iuts a lot cheaper to just let me take the property and the pain and pay a little per month, rather than all at once.
In a few of my properties I’ve gotten the seller to pay me to take them AND contribute to the monthly payment?even in cases where there IS good equity. My Hurt ?Em and Help ?Em sales philosophies do work reeel good sometimes.
How do I secure performance? A 2nd mortgage or a Performance Deed on another property, or a Collateral Assignment and UCC filing on something else of value (boat, car, motorcycle, airplane, Armadillo Chili recipe…whatever).
Candidly, if the house is free and I don’t have to qualify for a loan, make a down payment, make monthly payments, take a credit risk or fix stuff when it break…I don’t care how negative the equity might be. I just need two or three of the following:
- Cash-flow
- Up Front Money
- Appreciation
- Principal Reduction
- Freedom from risk and management
Hope this helps.
Bill Gatten
Re: Low or no equity and upside down properties. - Posted by JohnBoy
Posted by JohnBoy on July 23, 2001 at 14:00:58:
Hey, this is a bit scary! - Posted by Tony (CA)
Posted by Tony (CA) on July 23, 2001 at 14:42:37:
JohnBoy,
I have sellers that is in a situation very close to the one you describe in your article. They have a $400k loan on a new house they’ve been in for 10 months. Now they want to go back to India. I suggested lease optioning the house. They’re asking $455k for the house. Pretty much the median home price in the area. A few remaining unsold homes in the same development are listed for $450k. They wanted $10k conseration money, but I talked them out of it.
I told them I’d have to determine a price that I’d offer and be back to them in two days. One part of me is kicking myself for not signing the L/O on the spot. They agreed to continue paying the mortgage for 3 months after signing a one year lease option with the right to renew for a second year if I desired. Another part of me is scared out of my wits that in 3 months after signing the agreement I will have to pay $3,000 per month, plus taxes and insurance, if I can’t find a tenant-buyer. This is a problem that I didn’t think I’d be facing, and I’m certain others find themselves in similar situations. This is a risk. It’s real money–mine! How can I get over this fear?
Also, do you normally have a notary-on-wheels notarize the L/O agreement? If I do enter into the agreement I want to begin marketing the house and not have them be able to back out of the contract.
Tony
Re: Hey, this is a bit scary! - Posted by JohnBoy
Posted by JohnBoy on July 23, 2001 at 14:58:55:
The first problem I see is being able to lease the property for enough to make a profit. Even under a L/O deal. What do homes like this rent for in the area? Usually homes in this price bracket rent for a lot less than what a mortgage payment will be. If that is the case then even offering it with a L/O may be hard to get enough rent off this deal.
The way to make these work in this price range and get them to cash flow is to SELL them with seller financing. That means you need to get the deed and take their loan over subject to so you can sell it on terms.
The other option would be to set up a PACTrust and go that route. If that is a subject you know little about then maybe you can call Bill Gatten and talk to him about this. Maybe he’d consider partnering on this deal with you in exchange for him helping you structure everything using his PACTrust. You would have to talk to him to find out about that.
As far as just doing a L/O with the seller, that would concern me also with the payments that high. The other concern is getting the sellers to sign off on everything with them being out of the country. I would want to get the DEED on this one.
What ever route you take you could make the deal subject to you finding a suitable tenant/buyer before finalizing the deal. If you find someone to put into the property then the deal is a done deal. Otherwise you could back out if you don’t find anyone within the 3 months they’re willing to make the payments for.
If you have to, offer them the deal to where they agree to pay the payments for up to 3 months OR until you find a suitable tenant/buyer, which ever comes first. In exchange you reserve the right to back out if you don’t find someone or extend the time to keep looking.
Re: Hey, this is a bit scary! - Posted by Lor
Posted by Lor on July 23, 2001 at 14:56:31:
Tony, In California this is a legitmate fear. Not just that you won’t be able to find a tenant but rather that your tenant might move in and just not pay. This has happened twice to me in the past 11 years and each time the tenant had a legitimate reason to stay in the house and fight the eviction for 6 months. I did nothing wrong - even had property managers - but I lost. The only suggestion I have is to have some back up credit cards that have check writing privileges to back you up if this happens.
Re: Hey, this is a bit scary! - Posted by Tony (CA)
Posted by Tony (CA) on July 23, 2001 at 17:29:34:
Thanks for your wisdom!
Tony