The Million Dollar Foreclosure System - Part 12 13-9
Chapter Fourteen
STRUCTURING THE DEAL
The homeowner has contacted you. You have met with him and inspected
the home. You have convinced him that selling to you is his best course of
action. Now it is time to frame the offer and create the contract.
Once you have determined the value of the adjusted equity you must
agree on how it is to be divided. On a basic deal with a reasonably sized equity
a 50/50 split is a good offer. If there is more than average risk you should expect
a greater reward. If there is little equity you should receive at least your minimum
profit figure and whatever is left over (if anything) can go to the seller.
Those are just general guidelines. Every deal will be different. Sometimes
all the seller requires is some "get away" money to pay for the moving van and a
few expenses.
If you have done a good job of explaining the alternatives (forced sale)
and costs (liens, fix-up, etc.) to the seller some will be willing to accept your
purchase offer. Remind her that time is running out and her options are few.
Will all prospects go for your offer? Of course not. But enough will so that
you can earn tens of thousands of dollar a year – if you will just put this system
into practice and stick with it. Once you have a prospect who agrees to sell you
must formulate an acceptable deal.
Actually the presentation of the deal may be part of your effort to persuade
the prospect that selling to you is her best course of action. Your offer will
probably be put together piece by piece while talking to the prospect and making
her aware of her real, immediate needs.
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Things like, where is she going to live, where will she get the money
needed to move. Perhaps her car has been repossessed and she needs another
to get to work.
It will be necessary for you to organize the sellers needs, so she can
understand how you can help meet some of them. Sit down with her and ask, "If
you lose your home where will you and your family live?" "How will you get the
money to move?" Often the prospect is so depressed and confused she just has
not thought out what she will do and how she will do it.
This is your chance to explain how selling the home will remove the stress,
keep a foreclosure from her credit history and allow her to take the first step
towards getting her life back together.
Let’s look at what sort of deal you can offer the seller. For example,
suppose the home has an adjusted equity of $24,000. The most basic deal
would be a 50/50 split. At closing the seller would get about $12,000. She could
do whatever she wanted with the money.
Would that be best for the seller and you? Maybe not! Remember that the
prospect is not good at managing money. If she were she wouldn’t be in this
mess. You can make a strong case for giving her a portion of her half now and
the remainder later.
You could give her $6,000 at the close and the other $6,000 in twelve
months. This would be spelled out in the purchase agreement. There could be
no promissory note or mortgage for her creditors to find and collect on.
Suppose you gave her $6,000 at the close and the $6,000 would be paid
at the rate of $250 per month for 24 months. This plan would remove her
temptation to spend the $6,000 on non-essentials and guarantee her a monthly
income during a time when she could most use a flow of cash. Your offer of
monthly payments would be included in the purchase agreement. There would
not have to be a promissory note created and no mortgage placed against the
property to secure your $6,000 debt to her.
If the seller raises an objection to that arrangement offer to give her your
unsecured, personal note for the 24 payments. This would be your personal debt
with no securing document and no mortgage against the property.
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Don’t make a big deal out of this; just say, “This is how we will do it.” Or, if you
must, have the note secured by the property.
Interest on the note? Keep in mind that your are dealing with a distressed
seller. Don’t offer to pay interest and they probably won’t ask for it. If they do ask
just tell them you will pay the same rate that they would get on a bank savings
account.
Having the note unsecured by the property means that you can sell the
property and use part of the profit to make payments on the note. If you plan on
holding onto the property and renting it, at least part of the payments can come
from the monthly rent you will be receiving. This is an example of always trying
to have the asset pay for its self.
Of course, you could structure the deal with the second $6,000 paid in a
lump sum at the end of 12 months. Or $3,000 at the end of six months and
another $3,000 at the end of 12 months. Any deferred payment makes the deal
more attractive to you based on the time value of money. Whenever you are
receiving money you want it now. When you are paying money you want to
delay payment as long as possible. The sooner you get money the sooner you
can get it invested and earning. When you pay a debt over time you have the
use of the money during that time period and you can keep it invested and
earning.
Deferred payment is probably good for the seller. It is money she can
count on receiving during a period when it is important for her not to squander it.
Your imagination and experience are the only limit on the deals you
create. Suppose your offer included some cash and a year’s free rent in the
home she is selling to you? This would allow her to save face by remaining in
the home, kids staying in their school, etc. If the home had a monthly rental
value of $650.00 that would add up to $7,800.00 for the year. If your payments
on the home loan were less than $650.00 it would be like getting a discount on
what you owed the seller.
You wouldn’t have to offer a full year of free rent. You could offer six
months or whatever number would match the equity owed to the seller.
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This can be a very attractive offer for the seller and good for you if your
mortgage payments are less than the rental value of the home, as they should
be if this is a good property to hold for your portfolio of rental homes.
Don’t offer to rent the home with an option to purchase. If you became
entangled in a legal dispute with your new tenant a court could rule you rent-
with-option was actually a financing device for the purchase of the home. Not
good for you!
What if you offered the seller some cash, two days use of a U-Haul truck
and some months of free rent on another house you own. If you did not have a
vacant property you could contact another landlord and offer to pay a year’s rent
in advance for the family, if the landlord would give you a twenty-percent
discount. We have had this kind of "discount for prepaid rent" offer accepted by
a landlord.
If the seller has had his car repossessed you could offer to give him a
used car as part of the deal. Since you are a good negotiator you should be able
to buy a car from a private seller at a good price.
These are just examples meant to get you thinking about identifying and
solving some of the prospects immediate problems as part of your offer. This
approach can often be more effective than just a cash deal.
Homeowners who have moved out of the house that is being foreclosed
upon are a special case. Usually they have moved because they have given up
any hope of saving their home. They think that by getting out of the house they
can leave their troubles behind.
They just don’t realize that the foreclosure will be part of their credit history and
that some of their creditors may go to court and get a judgment against them.
That judgment will follow them around for a number of years unless it is paid.
It can sometimes be a problem finding these distressed homeowners. You
will get some of your direct mail returned marked "Vacant" or "Not At This
Address", etc. You will have to do a little detective work to find them. Talk to
neighbors, etc. Search on the Internet.
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You will often find distressed owners who have chewed up all the home's
equity. Can you do deals when you find a property that has no equity? Maybe.
Here is an aggressive technique. When they find a home that is
mortgaged up to near 100% or more of its value, you can offer to buy the
property "subject to" the existing loans. "Subject to" means you will buy the
property, pay any arrears and costs, and take over the loan payments. The
owner deeds the property to the investor, but the owner's name stays on the
loans.
This tactic allows you to buy the home with no new financing. The loans
probably have due on sale clauses in them, but lenders very seldom call them
due if the payments are brought current and remain current. For an investor this
is a quick and inexpensive way to buy. If the lenders do call the loans due the
investor could refinance or arrange to assume the loan for a fee paid to the
lender.
If the monthly rental income is comfortably greater than the loan
payments, you might rent the property for cash flow.
Usually the home is mortgaged to 100% or more of its market value. That
means that you would have to sell quickly for above market value to make a
profit. That's too risky. It could take months to find a buyer all the while your
must be making those monthly loan payments.
There are two ways to have a better shot at a quick sale. Price it above
market, but not too much above. Run a "rent to own" classified ad. In the ad
state that bad credit and recent bankruptcy is OK. This attracts a buyer who has
been turned down by most home sellers and loan companies.
These buyers understand they must pay more to overcome their bad
financial history. You can sell for above market value and you can require
monthly payments above the going rental rate. Be right up front about all of this.
Explain you're willing to take a chance on them, but you have to be
compensated for the increased risk.
Collect as much cash as you can as option consideration and security
deposit before the move in.
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Often this people have good jobs and cash. It's just their credit that is a
disaster.
"Rent to Own" is just a lease with option to purchase. If they have not
learned their lesson they will default on either the lease or the option and you will
reclaim the property and collect more cash from you next lessee.
Another technique is to sell the home on a "Contract for Deed". In this
case the investor holds the deed to the property and only passes it to the buyer
after the buyer has completely paid (monthly payment just like a mortgage) for
the home. Cash Flow Institute has a book on land contracts that explains how
this nifty plan works.
Either method you choose starts with an ad like the following:
"$6,000 Down, No Qualifying,
Bad Credit, Bankruptcy OK.
3 bdrm, 2 bath, Nice Home
222-2222"
There are plenty of people who make good money, but because of past
financial problems they can't qualify for conventional financing. The down
payment is often enough to cover your out of pocket expenses in buying the
house and bringing the loans current. You can then charge the buyer/lessee a
higher than normal monthly payment that will cover the loan payments, plus one
or two hundred dollars he can put into his pocket each month.
THE PURCHASE AGREEMENT
Some investors create, and have printed, their own "standard" purchase
contract with all of the fine print slanted in their favor. You may wish to follow
that course after you have gained some experience. In the beginning a standard
contract is your best course.
A standard "Residential Purchase Agreement and Deposit Receipt" that
can be used in most states is available from business supply stores like Staples
or Office Max.
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When you use any standard contract be sure and add all of the clauses
and addendum you need to create a sound deal for yourself.
What clauses you use depends upon the details of the deal. The goal of
any contract is to carefully spell out the exact terms of the deal and exactly what
is expected of all parties to the deal. When in doubt, write it into the contract.
Most of the clauses that follow can be selected for use in any purchase
agreement you create. Each of the clauses should be read and initialed by the
seller. Better yet, read them aloud to the seller and have him/her initial each.
That makes it hard for the seller to say he didn’t know what he was signing. You
can even go one step further and openly place a tape recorder on the table as
you read the agreement. Have the seller respond after you read each clause.
SAMPLE CONTRACT CLAUSES
A. Seller represents that the following are the mortgages, liens, encumbrances,
judgments, bonds assessments (hereinafter "Encumbrances")
1st $_______________ Payable $____________ Monthly _______% including
taxes/insurance
2nd $_______________ Payable $____________ Monthly _______% Due
date___________
3rd $_______________ Payable $____________ Monthly _______% Due
date___________
b. Seller represents that said Encumbrances each have the following amounts,
which are now due or past due:
1st $____________________________ 2nd
$______________________________
3rd $____________________________
All payments on existing encumbrances due through _______________,
20_________
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and any taxes, judgments, assessment bonds, prepayment penalties and other
liens may be deducted from the net amount due Seller.
* *
*
Buyer shall have the right to rescind this agreement and to receive a refund of all
consideration paid to Seller if within five (5) days after receiving a
Grant/Warranty Deed for the Property Buyer notifies Seller in writing that the
principal amounts of, and/or the amounts due or past due on, one or more of the
encumbrances are greater than as represented herein, or that there are one or
more easements, zoning or land use restrictions, or covenants, conditions and
restrictions concerning the Property which adversely affect the continued use of
the Property for its present use. Said notice shall demand rescission and shall
specify the Encumbrance(s) which are not in compliance with the
representations made by Seller or the easements, etc. which interfere with the
continued use of the Property for its present use. Upon receipt of said notice
Seller shall immediately cooperate with Buyer to execute all documents and do
all things necessary to fully rescind the sale and return the full amount of money
and/or other property transferred to Seller in connection with this sale. If Seller
shall fail or refuse to so cooperate, Seller shall be liable for all loss or harm
caused by said failure or refusal.
Seller is aware that buyer is an investor who buys and sells real estate for profit.
Seller understands that the purchase price in this agreement is less than full
market value. Seller acknowledges that this agreement was entered into under
the threat of foreclosure by a third party and in the Seller’s judgment was the
best possible agreement available at the time.
Seller agrees that this agreement may be assigned by the buyer with no notice
or additional compensation. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
