Foreclosures-Good, Bad, Ugly? By Bill J. Gatten Obviously for some, working foreclosures is a safe, lucrative and wholly moral enterprise. One doesn't even have to have good credit or a lot of experience if done properly. However, my favorite way to work foreclosures is to do it without a penny out of pocket without need for a bank loan, credit or credit application, and ending up with pure profit and no payments, management or maintenance. (Got your attention? Good. Read on). The problem today with working the foreclosure market is that the practice has garnered some bad press and an unsavory reputation (quite justified in many instances). It's a fact that many investors have shown themselves to be blatantly unscrupulous when dealing with people in foreclosure. As a result, the practice of buying foreclosures has come under some very close governmental scrutiny as of late within the enactment of some quite stringent prohibitive laws in many jurisdictions (e.g., California's civil codes 1695 and 2045). The reason for the government's stepping in is obviously to curb the unconscionable treatment of the tens of thousands of homeowners in distress. These people who, while in their doldrums, are far too often unwittingly coerced into just giving up, and giving away thousands upon thousands of dollars of valuable real estate equity to those who take far more than they need, while offering nothing what-so-ever in return. One popular ruse by those seeking big and quick profits has been to loan money to homeowners with which to cure their default, requiring that the borrower pay the loan off in full, with all principal and exorbitant interest in one year. When the homeowner is unable to come up with the money, the "benefactor" forecloses on the property costing the homeowner his home, his equity and his self-esteem, while he and his family end up on the sidewalk. Another popular scheme has been to make the foreclosed-upon homeowner a long-term, fully amortized loan with exorbitant interest, with which to bring his mortgage current, thus increasing the monthly payment obligation well beyond what the homeowner has already demonstrated he couldn't afford in the first place. At the first sign of slowness, foreclosure ensues, and the moneylender resells the property for tens of thousands in clear profit, leaving the homeowner scratching his, wondering what just happened. Given all of this, the foreclosure market is still an excellent pathway to real estate wealth. There is now a far better means for making money in foreclosures, while honestly helping people in the process. With the following system, you can take over the distressed party's burden and leaving all or some of their hard-earned equity in tact for them. As an example, we came into a foreclosure opportunity yesterday (one of a few this month). We got the property for an agreed upon $500,000 though it is appraised at $568,000...with a $426,000 first mortgage on it at $3,600 per-month. Due to the way its being handled, the property will cost me nothing...I will have no payments to make, no risk to take, and I won't need to qualify for a loan, fill out forms or provide anyone with a credit report. Moreover, I'll make between $70,000 and $200,000 dollars on it (unless the planet explodes in the next seven years). The deal is this: I merely mentioned to the party in foreclosure that if he wished to, he could just walk and I'd take over the payments, bring the loan current and repay him his equity in a few years. I explained that at the end of our agreement, his loan will be retired and from the proceeds, I'll take a refund of my $26,000; and he will be paid $49,000 (his equity: $75,000 less my $26,000 contribution). Whatever remains will be my profit. Picture the following if you will... - Fair Market Value - $568,000
- Existing Mortgage - $426,000
- Arrearages - $26,000.00
- My Cost - $500,000 (less the $26,000)
- Equity Owed to Seller - $75,000 less the $26,000)
- My Own Beginning Equity -$68,000
Before consummating the transaction and being required to spend any money, I'll take a Non-Exclusive Option to acquire the property in, say, 30-45 days...after completing all of my "due diligence" (e.g., obtaining the lender's Reinstatement Quote, verifying balances, having the property appraised and inspected, checking on mechanics liens, utility liens, zoning ordinances, insurance, property taxes etc.) ...and finding a resident co-owner. During this option period, I will use the time to locate a suitable co-owner to live in the property, make the payments and handle all maintenance, insurance and property taxes-in exchange for homeownership benefits, including full income write-off for the mortgage interest and property taxes. Once identified, the resident will come in at a mutually agreed value of $560,000 ($60,000 more than my acquisition price, and $8,000 less than FMV) and will pay between 5 and 7 percent of the agreed value up-front (e.g., $28,000 to $40,000, far less than a down-payment would be). Once the funds are ready and cleared, I'll exercise the option and have all of the documentation prepared and executed. In the process, I should clear a few thousand up front, $60,000 in "bumped-equity," $14,000 in equity build-up from the loan's principal reduction, and given any appreciation over the term maybe another hundred thousand or so. The Road Map... - Find the foreclosed upon party (County Records or a Foreclosure Notification Service)
- Get a general acceptance of terms (on the phone)
- Get a reinstatement Quote from the lender (owner calls and requests it)
- Ascertain the Fair Market Value (comps or appraisal)
- Issue a proposal inclusive of a Non-Exclusive Option
- Advertise for, and identify a Resident Co-Owner (newspaper, sign on property, etc.)
- Exercise the Option
- Have the property vested in a Title-Holding (Illinois-type) land trust
- Take a 90% beneficiary interest in the trust, leaving the seller with 10% interest to be forfeited to you at the trust's termination following a refund of his equity and in consideration of your prompt payment record
- Have the trustee for the trust lease the property to the resident party while simultaneously making him/her a beneficiary in the trust (with from 10% to 80%, interest depending upon your objectives (e.g., for the end-result to be analogous to, say, an equity share, a wrap-around, a contract for deed, an option, a conditional sale, etc...but without any of their downsides and risk)
Is there any reason why anyone reading this article (newbie, or knobby) couldn't do this three or four times a month in the prevailing market? I think not. |
