There is a Good Way to Make Money On Marginal Equity or Over-Encumbered Properties.

Our Example Property:

-Worth: $110,000
-Loan is: $120,000
-Payments on Loan: PITI $1,100
-Status: One payment past due
-Motivation: Seller Wants out...Bad!
-Your Objective: You're searching for a Profit Making Income Property opportunity. For Free!

First, identify a motivated seller (someone who feels they're in over their head and just wants to be free of the property). Marginal or No equity property owners fit this description quite well. Then arrange to sit down with the sellers and show them how you can bail them out of their "Pain" (the over encumbered property and his financial dilemma) for less than anyone else could. In otherwords you want HIM to pay YOU to end his agony, not the other way around.

He needs you because:

1) Working with a Realtor would requires commissions, and closing costs say, around $14,000 or so.
2) Paying off the lender will require a full loan satisfaction and closing costs, PLUS Realtors commissions -- say, $20,000 or so in all plus $1,500 in closing costs...out of pocket
3) Opting to leasing or rent the property out, while waiting for equity build-up or appreciation will involve major expense over time: e.g.: negative CF, maintenance, repairs, management, advertising and vacancies (Let's say $9,000 to $12,000 at least).
4) Short-Sale (almost as much credit damage as a Foreclosure, and most Likely, big income tax due on Debt-Relief: i.e., thousands of dollars Payable to the IRS relative to the Windfall Profit resulting from "Debt-Relief"). There is no Deficiency Balance due to the lender; but the IRS wants their piece of their taxpayer none-the-less.
5) Foreclosure. Letting the property go to Foreclosure creates even greater credit damage, and like the short-sale, results in a 1099 IRS filing by the lender. And chances are...the foreclosed-upon property will sell for considerably less: thus creating an even larger Debt-Relief obligation for the borrower.

So.... what do you do?

Make the appointment with the owner; sit down with him and his wife at their kitchen table; and slowly and concernedly explain how you can get him out of the property for a lot less than anyone else could. Before you can do that, they have to perceive the value of your offer, so it'll be necessary to graphically demonstrate ALL of the other options available to them, and precisely how much each will cost in hard dollars in the long-run: This is the "Hurt 'em and help 'em" approach. In other words, if they're don't know they're hurt, then they don't know they need your help. So it's your job to whack 'em with something like the expenses they're about to encounter if they take any course of action but yours. Now you can help them.

Next, show the sellers that not only will you charge them far less than anyone else would or could (maybe a quarter, half or three quarters as much); but that perhaps (if they don't have it) they needn't come up with any money in advance...i.e., that they can pay you monthly by merely picking up a portion of the mortgage payment during the course of your transaction. This will be far less than they would have to pay for any option. And even if they could get the IRS to take monthly payments on the Debt-Relief tax, those payments would be 2 or 3 times more than you are asking them to pay.

Now, at this point, you can determine and adjust THEIR portion of the payment, so that YOUR portion gives you a decent positive cash flow from the tenant whom you put in the property as your Resident Co-beneficiary. In this regard, depending upon the area you're in, a renter will expect to pay about 0.6% to 1.0% of the property's true Fair Market Value per month (at most) in rent; while a Resident Co-beneficiary in a PACTrust(tm) will gladly pay an aggregate (PITI and Trustee Fee) of from 0.9% to 1.2%).

Why will a Co-Bene. pay so much more than a Leasee would? Because they receive tax write-off, equity build-up from principal reduction, Appreciation and "Pride of Ownership" This in-fact constitutes virtually ALL (100%) of the Bundle of Rights in Fee Simple Real Estate Ownership.

Above all, again note that if this sellers think they can bail themselves by just biting the bullet and opting instead for a Foreclosure or Short-Sale, they will not only destroy their credit (in either case): but they will also receive a giant tax bill from the IRS as well, when the bank sends in their 1099 reflecting their expenses and the amount of debt forgiven (all of which is taxable to the borrower and due and payable NOW...this year!)."

The amount upon which the compromised mortgagors will owe in income tax will be the difference between the mortgage balance (including all Lates)...and the amount the lender can get for the property at auction: PLUS the lender's administrative costs and all other costs of disposition (e.g., Real Estate commission; refurbishment costs, transfer costs, administrative expenses, etc.). The Debt-Relief (windfall gain to the seller) on our hypothetical subject property above could conceivably run as much as $20,000 to $25,000K by the time the bank sells the property at a discount at auction, pays out commissions, as well as Refurbishment and Administrative costs. Bearing this in mind, and given a 1/3rd tax bracket for the borrower: that could constitute as much as $10,000 out of pocket expense for getting rid of the unwanted property. So, in this scenario, were the seller to agree instead to pay YOU, say, $100 to $200 per month for 36 months: wouldn't that by far be a whole lot better deal for him? Of course it would! Doing so would only cost him $3,600 to $7,200 instead of $10,000 or $12,000...AND he wouldn't need to come up with it all at once.

To make it even easier for this seller (if you can afford to do so), you might set up his payment schedule so that he pays you nothing for, say, 3 months; then $133.33 per month for the next nine months; $200 per month for the second year and $300 in the third year (totals $7,200).

The overall idea here, is that you, as the Investor Buyer (Investor Co-Beneficiary in a PACTrust) end up getting the property for NOTHING (just closing costs and the one past-due payment...but your new Resident Beneficiary will be coming in with all of that...PLUS maybe a thousand or two (or 3 or 4 or 10?) for you. Further, it is the Resident Beneficiary who makes all payments and handles ALL recurring costs and repairs throughout the course of the transaction.

An Ad to Run:

"Why Rent? No Bank Qual, No Down, 3 pmts & Clos. Costs moves you in. Beaut. $110K 3+2 w/ pool. Only $898p/mo+tx & ins.. Call Now."

When the ad respondents begin to call, you tell them essentially that you'll "give them the property" for just closing costs and a few payments in a Contingency Fund.assuming they can handle all others costs. You explain too that you'd also like to split any Future Appreciation with them ("IF there is any") at termination.

Remember that just because you keep 50% "future appreciation" and 100% of the "existing equity," positive cash-flow, and free yourself of maintenance, repairs and vacancies, doesn't mean that the Resident Beneficiary isn't receiving 100% of the property from the Get-Go, as well as 100% of the tax write-off; 100% the use, occupancy and possession and all other benefits and incidents of ownership..

Therefore, when they call, you say exactly this (Read it to them):

"Yes, I picked up this little house over there on XXX Street, and if you can handle the payments and the closing costs, I'll just "GIVE it to you." (Pause) .All I want out of it, is to have you sell it or refinance it in your own name in a couple years: and at that time, my profit incentive would be that if there's been any Appreciation, I'd just split it with you."

After you get acceptance of the basic concept...then you can explain (when you meet with them personally) that for the time being, the mortgage payoff is greater than the property's actual value. This news shouldn't really bother them any, because at this level, they're looking for a "home," not an "investment (and they'll tend to see the over encumbrance either as a sort of "pre-payment penalty," or as your risk and responsibility since you're seen as carrying the financing for them). In addition, as the principal reduces and the property appreciates, the over-encumbrance dissipates in no time. Even without Appreciation, principal reduction will eventually bring the loan down to, and below, Fair Market Value.

You can also explain here that if, at the end of the contract, they'd like to terminate the agreement and NOT refinance or sell, that you'd gladly take the property back and let them go on their way. Note here that their loss in that event would be thousands less than it would be had they paid a large down payment and were still indebted to the bank for 97% of the loan amount over another 27 years).

What if the Resident Beneficiary defaults? The protective features of the PACTrust allow for expedient removal or an errant tenant (far more easily than a co-mortgagor or Optionee). After the eviction, you then charge someone else another $9-10K, and start all over again with a better positive cash flow and more equity.

What if the seller defaults on his contribution to the aggregate monthly payment obligation? Your security interest can be strengthened by taking a Performance Deed on another piece of property, a UCC filing on a personal property asset (motorcycle, car, boat, goat, etc.). In the event of and absence of attachable assets, you might just take an unsecured promissory note, which can be foreclosed upon if the agreed-upon payments are not forthcoming. If documented properly, the Resident Beneficiary will have already acknowledged the possibility of default, and contractually accepted the responsibility for full payment should it occur.

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Never forget:

All good ideas go through three phases of development. They are at first, universally ridiculed; then they become controversial; and finally they're accepted as self-evident.

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