“Foreclosure Profit Machine” Chapter 4

 "Foreclosure Profit Machine"

 Ethical Foreclosure Investing Strategies for Massive Wealth Creation

 © Copyright 2008 Asset Solutions 2100, LLC   All Rights Reserved

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 Chapter 4

Creative Financing Strategies with Foreclosures


There are a multitude of ways to purchase real estate, whether it is a pre-foreclosure or not, without applying for a bank loan. Keep in mind, it does not matter that it is foreclosure property. What matters is the situation and what the sellers need. This is the basis of creative offers.

Sure, you can run down to the bank, pull out a down payment, get a conventional loan, pay thousands of closing costs and hidden fees, and pay full price for real estate. Plus take on all that risk.  If that is what you have in mind, you are a speculator. Overpaying for something rarely results in success. Many investors are, in fact, taught to go out and borrow money to buy real estate. I am not a speculator. Borrowing is only a last resort. This forces me to become more creative. 

If I buy property at a total cost (including repairs, holding and reselling costs, plus loan cost) that I can’t sell today for a decent profit, then I paid too much.

That is my simple formula for success. There are no deals so good that you have to overpay for them. Be patient. Opportunities for good deals exist in every market, if you are constantly in the game looking for them.


Getting the Deed, Subject to Existing Financing

This is the most common way I use to take ownership of foreclosure property. It gives me full ownership, and I actually have a loan on the property, which I might be able to utilize long term. Why would I get a loan in my name, if I don’t have to?

The only variable is, where to get the money to bring the back payments current, and cure any other liens against the property. This is where it gets interesting and fun.

Before I ever pay off those back payments, I’m going to approach any secondary lien holders – such as private judgments, second mortgage holders, or others – and ask for a discounted payoff. This is referred to as a “short sale.” We have entire advanced courses on just this process alone.

It is not uncommon to get as much as a 90% reduction on some secondary liens. We have seen second mortgages of $50,000 or more reduced to less than $5,000 as a payoff. Why would the lenders accept this? They may get nothing, if the first mortgage holder forecloses. Something is better than nothing.

But what about the dreaded “due on sale clause”

Whenever a student asks me this question, I patiently avoid climbing the wall with the aggravation of having to answer this again. So many people are worried about the dreaded due on sale clause. The due on sale clause, in simple terms, is a paragraph that is found in most mortgages or trust deeds which refers to the transfer of ownership, without paying off the existing loan. It gives the lender “the right” to call the note payable and due, if the title is transferred without the bank’s permission. It is a right or a rule, not a law.

I’m not suggesting that you do not notify the lender in some fashion about the transfer of the property to you in one of these situations. In fact, we do let them know: it is just carefully stated. Frankly, the lender is happy to have someone bringing the loan current and make payments. Remember, banks are not in the real estate business, and they do not want to own these properties. In fact, it hurts their credit rating to have foreclosures on their record. Their cost of funds and credit also goes up. Therefore, their profit margin and volume goes down.

Many students ask, “What if interest rates go way up? Won’t the banks then start calling these loans due?”

Only if they know about it, and if they want to spend the money to go back through every loan in their portfolio, pay $200 each for titles reports (this would cost them millions of dollars), all regarding perfectly performing loans.
It makes no sense. Furthermore, if your bank called your loan due, putting you in a crisis, would you go back to that same bank to get the replacement loan? Of course not. Many investors assume the bank would be stupid enough to expect you to refinance with them, if they called the loan due.

All the bank would be accomplishing is a loss on performing business. Just because interest rates rise does not mean they’re losing money, nor will they earn more if they call loans due. If the note is performing, they’re making their same spread and fees.

A friend of mine who is an attorney once said, “There is no such thing as due on sale jail.” It is not a violation of law to transfer title without paying off a loan. It’s that simple. It is nothing more than a contractual right, not an obligation.

When we take titles to properties subject to existing financing, we either take them into the name of our company, or sometimes into the trust (but only to keep the property owner name private). In previous years, we used a land trust for the seller to put title into. This mechanism reduced exposure to the due on sale clause. After a period of years, we have found this is simply too cumbersome and not necessary. Banks simply don’t call these notes due, if the payments are current. Of course, they could if they wanted to, because the due on sale clause gives them right to do so. But they don’t seem to want to.

Additionally, we have found that title companies prefer a simpler process for tracking title history. Trusts tend to cloud that history in an unfavorable fashion for the title companies. If you can’t get title insurance, you can’t resell. Our new advanced title holding system takes care of this, without the risks of the trust.  I do still use trusts if I already own property and want to have the title held more privately. Using trusts this way creates less exposure to my overall business. Privacy is a form of asset protection.

More Creative Ways to Structure the Foreclosure Purchase

Here is a quick summary of the ways that we have purchased foreclosure properties.

1.    Get a new loan and pay cash to pay off the seller (my last

        choice every time).

2.    Take the deed subject to existing financing. Then bring the

        back payments current, leaving the existing loan in place for

        a specified period of time. The question then remains,

        where to come up with the money?

3.    You might use your own cash.

4.    Use a partner to put up the cash and split the deal.

5.    Use a partner to put up the cash and give them a

        private party second mortgage, where the issuer is

        to pay off any existing back payments and  mortgages

        or liens with this new second mortgage. The issuer is

        to get enough money for repairs as well.

6.    Use credit cards or credit lines to bring the back

        payments current.

Understanding more about the seller’s mindset when facing foreclosure

I cannot move forward without discussing this subject for a moment. The sellers are having financial and emotional difficulties as a result of their situation. Please treat these people with respect and understanding, while maintaining your businesslike demeanor and intent.

Too many investors get caught up in these situations and forget that they are there for a reason. Yes, you are driven by profit. The day “profit motive” becomes a bad word is the day our democracy and the free enterprise system are finished. You really can make a situation better, even if it means the homeowner has to move on. Avoiding foreclosure on their credit, as well as the subsequent humiliation it can create, is a gift you can provide them for years to follow.

 

Patience is a Virtue

Be patient with these people: they will rarely move as quickly as you like. Just make sure they understand that if they don’t act quickly, your options to help them become fewer and fewer. Think about it. If the best scenario you can offer is that you go and get a new loan and close, it will take longer than simply writing a check, bringing the payments current (after getting the deed, of course), and perhaps giving the sellers some “walking cash” or a promissory note for part of their equity.
When negotiating, keep asking questions like the ones below. You may have to convince these people that if they procrastinate, it may become too late to help. Those of us who have bought many foreclosure properties know that denial is a common state of mind we deal with, when dealing with foreclosure sellers.


Questions you may ask to convince sellers to move forward:

  •    What will it feel like to have this taken care of?
  •     How will you feel if you are treated like a “credit criminal” the next handcuffed when I say this.
  •     Bankruptcy is actually less impacting on your credit than a foreclosure: did you know that?
  •    How much cash will you get if the house goes to auction? Then you must act now.


Let’s examine the reasons the foreclosure business is so good.


It offers large potential profit margins.
   
EXAMPLE: Anytime you can purchase a commodity below current market value, it is a smart move to take. Even if you have to borrow money to get it, the cost of those funds will usually be far less than the profit you will earn. This is one time that credit is a great thing to have (or the money and credit of others).

Assume you find a $200,000 valued house (fair market value based on other properties in good condition, sold recently in the area, etc.), and there are $170,000 in mortgages against the property, including back payments and penalties.

On the surface, it appears you have $30,000 in equity. In our advanced training, we will show you how to create even more equity with the same deal. You can learn how to double the equity and profit with the right cash flows strategies.

The sellers could end up with ZERO equity in the event of a foreclosure.  If they sell through the traditional means of hiring a Realtor, paying traditional closing costs, plus holding costs and a discount for selling quickly, they would likely receive little or no money, anyway.

At least our option is quick and simple. Mostly, it reduces the chances of a foreclosure on their record.

Both parties win:

  •     The sellers get to save their credit and move on with your help.
  •     You get a property at a discount that you can now resell for a handsome profit. Let’s assume you obtained a new loan with a small down payment to purchase the property at $170,000.  You could sell the property for cash at market value and earn $30,000 cash now, minus fees and expenses. Or you could sell on a lease option or an installment land contract for even more profit. If the market is a strong market, you might even sell the property for as much as $220,000 on a contract, plus you might earn a nice monthly cash flow spread.
  •     Earn more with creative selling strategies. Say you have a $50,000 spread + a monthly cash flow of $300 a month (the difference between your mortgage payment and the income from your installment land contract payments from a new buyer). If you hold this for 10 years (120 payments), this equals $36,000 of additional profit. That’s a total profit of $86,000 on a property that originally appeared to have less than $30,000 of equity.
  •     When selling on an installment land contract, your cash flow is usually in net figures, as the owner-occupant pays the taxes, insurance, and maintenance. No tenants or toilets required on this method.
  •     Both parties also get a faster closing. Depending on how you purchased the property, your funding source, and methods used, you should be able to close very quickly. At the very least, you should align your strategies so that you can close quickly.
  •     Easy financing.  There are many ways you could use to purchase such a property. My favorite would simply be to bring the back payments current, thus stopping the foreclosure, and then start making the existing loan payment. Of course, you get the deed. That is, have the seller transfer title to you, leaving the existing loans against the property. The bank, the seller, and you benefit with this simple arrangement. With this method, you may never need to get a new loan. If you do get a loan, please realize you’re taking on more risk. Be careful when you choose to get a loan, especially if you do not have to.


It is a great way to help sellers solve their financial problems and move on with life.

The sellers are facing significant emotional and financial stress. You really can help and need to keep a confident “consulting” mindset. Keep your focus on what these sellers truly need. Selling the house just solves part of the problem: it’s not the entire solution.

 

More Creative Ways to Purchase a Property

 

Purchase using a “Lease Option.”

This is nothing more than an agreement to lease the property, and have  established a purchase price built into what we call an “option agreement.” When purchasing, I would typically use a single form, combined lease option document. I must strongly caution you here, though, that you are relying on a person in financial distress to follow through later with a promise of delivering title. You must take certain provisions to have the title previously signed and held in escrow, pending your completion of the contract, at which time you would then received the deed. This is only a rare backup strategy that you should use only if the seller won’t deed you the property at the beginning.

Purchase by getting a deed “subject to” existing loans.

This is simply a process where the seller signs a warranty deed or similar instruments to transfer title to you, while leaving the existing loans against the property. But in the end, I would much rather have the deed early and quickly with these sellers who tend to be a little unreliable. If I have the deed, I own the property, regardless if the previous liens are against it. Of course, a foreclosure could still happen, which would simply mean I don’t get to keep the property, but it is not on my credit record when this happens.
 
Purchase outright with cash or new financing.

As long as there is significant equity, this is a great strategy to use. Just be sure to work with a lender who can reliably close before the auction date, or your efforts will be for naught.

You may also end up using a combination of these strategies, depending on the seller’s mood, or various other circumstances. Be ready, and be flexible.

We strongly suggest you have a basic understanding of these creative financing methods before venturing into foreclosures. The purpose of our Advanced Training program is to help you apply that knowledge to the field of pre-foreclosure investing.