How to make money from a house with no equity - Posted by Sam

Real Estate Investing
#1

Posted by JohnBoy on March 10, 2002 at 22:22:03:

Yes. Plus I like to get a $100 security deposit on the lease as well to show something as a security deposit so the option money isn’t confused as being a security deposit later should we ever end up in court.

If they don’t have the $5k plus first months rent then I will consider taking less on the option money and financing them the difference over several months and let them make payments in addition to the rent to make it up. It just all depends on the buyers, their income, etc. as to what I’ll do to make the deal workable for them and myself at the time.

#2

How to make money from a house with no equity - Posted by Sam

Posted by Sam on March 08, 2002 at 17:54:45:

I have been sending letters out to people being foreclosed on for a couple months now. About nine out of ten of the people have no equity and some even have negative equity. (owe 135k FMV-130k) I have seen people mention that they can make money out of a situation such as this. I was wondering if anyone could explain how exactly this is done. If I could figure out how to do this I could doup to five deals a month. There are lots of foreclosures where I live.
Thank you in advance for any help.
Sam

#3

There’s a market out there waiting to be had. - Posted by Craig (IL)

Posted by Craig (IL) on March 09, 2002 at 06:19:37:

I’d like to know, too; there’s a sizeable market of sellers behind in payments with very little or negative equity if there was a way to leverage them.

Many people bit on aggressive lender advertizing for for equity loans, some of which are 125%LTV. Some of these people are now in trouble. Acquiring such properties with short sales may be a way, but it involves both cash and risk on the part of the investor. Margins may be close depending on what the investor can arrange with lenders. Part of such a deals would be learning how to compare risk with the margin.

I’m too inexperinced to deal with this complexity yet, but I’d like to start learning. I know Carmen FL has posted her experience on arranging short sales, but I haven’t seen much else at this site on this subject. I’d like to see more on this.

#4

Re: How to make money - Posted by JoeS

Posted by JoeS on March 08, 2002 at 22:50:17:

I have read a lot of posts about buying pre-foreclosures from the current owners, and doing a “subject to” deal. This is a good way to make money, as JohnBoy pointed out. I need to add however, that USUALLY when a homeowner is just about to be foreclosed on, they also have numerous judgements on them as well, and these stay with the property when they deed it over to you.

The only way to find out is to do a Title search FIRST, before you take the deed. I am just saying this out of past experience. I know that not everyone who has a foreclosure has a lot of judgements, but a new person should be cautious and aware of this. Just trying to be helpful, like so many other posters.

#5

Re: How to make money from a house with no equity - Posted by JohnBoy

Posted by JohnBoy on March 08, 2002 at 19:13:43:

You take over exisiting loans and sell on L/O or contract for deed at higher prices and interest rates to create profit.

If you had a deal where the house was financed to the max at 6-8% interest, you take over the loan and sell on terms at a price at about 10% above market value, collect a down payment from your buyer which would be up front profit, finance them at 10-12% interest creating a higher payment to them where you create a nice spread for monthly cash flow and when they cash you out you make a back end profit on the difference between your buyer’s pay off amount VS. what your pay off amount would be on the loan(s) you took over.

On average you can tyipically create a $15k - $20k profit over a two year period on every $100k worth of value where the property has no equity. Any equity in the property just increases the profit made by that much more!

Not bad considering you can do this without using your own credit, money, being personally liable or even having a JOB!

#6

Re: How to make money from a house with no equity - Posted by Heidi W

Posted by Heidi W on March 08, 2002 at 18:21:54:

Sam - Thanks for posting this question…I too am desperately seeking the answer to this question!

Sam - answer may depend on laws in your state. Which state do you live in.

I live in California which is the Buy-a-House-Wrong-In -Foreclosure - Go-To-Jail-State.

Thanks to anyone who can answer this question!

#7

Re: How to make money - Posted by JohnBoy

Posted by JohnBoy on March 08, 2002 at 23:11:10:

You are absolutely correct, but I would also advise having a title search done on ANY property before committing to the deal regardless of how you buy or what the seller’s situation may be. This includes buying on L/O’s, subject to’s, contracts, flips, etc. The last thing you need is to run into problems after the fact only to find out the property has some other liens against it that the seller conveniently forgot to tell you about! ALWAYS check title before committing to the deal.

I should probably be pointing this out in more posts I make. Thanks for bringing it up.

#8

Have a Question - Posted by Tim Jensen

Posted by Tim Jensen on March 09, 2002 at 15:01:24:

Johnboy,

I do not like buying properties with little equity. However, what do you think about uying the place from the owner on Cotract for Deed. Make it where the only recourse the owner would have against you would be to take back the property?

You think thats legal and possible?

Tim

#9

Re: How to make money from a house with no equity - Posted by Heidi W

Posted by Heidi W on March 08, 2002 at 22:17:39:

JohnBoy,

Thanks for your response…

I do have a question, however…

Since these properties are in Foreclosure - they typically have some costs associated with bringing the loan current in order to take-over-the-loan. So far, the average delinquency is between $5-10K.

I guess I’d have to get that money from somewhere. Who would lend it to me - and how would I not be personally liable? I’m confused.

Thanks,
Heidi

P.S. When you say “You take over exisiting loans,” do you mean, I just start making the payments (quiet-like) after the loan is brought current, or something else?

#10

Re: How to make money from a house with no equity - Posted by Sam

Posted by Sam on March 08, 2002 at 18:49:39:

I live in IL (Northern Chicago)

#11

Re: How to make money - Posted by JoeS

Posted by JoeS on March 08, 2002 at 23:17:33:

The matter of a “marketable title” is my weasal clause in my contract to buy. If the seller cannot supply me with good and insureable title, I do not buy, and I get back my earnest money. I also have in there that in case of that happening, the seller would be responsible for any and all title work expenses. I have not had any objections yet. I also put the closing date on or about 45 days from the completion of the title work. That could take months in some cases, and your contract to buy still ties up the property. Hope this helps.

#12

Re: Have a Question - Posted by JohnBoy

Posted by JohnBoy on March 09, 2002 at 15:44:06:

Sure, it’s possible. The only problem is that title remains in the seller’s name until the contract is paid off. Meanwhile you are stuck to deal with any potential liens being recorded against the property caused by the seller and dealing with any potential problems should the seller file BK. You can record a performance mortgage to protect your interest, but then you would still have to foreclose on that to get clear title if the seller was unable to take of any liens recorded behind your performance mortgage.

By getting the deed you eliminate all that because YOU are the owner. You can put a clause in your contract that would allow the seller to be able to get the property back from you by giving them an option to buy it back from you for $10 if you were to ever default on the payments being made on their loan.

If you were looking to assign a deal to get in and out with a quick profit then I like using a contract for deed or a L/O to buy on and then assign my contract to my buyer by getting their down payment as an assignment fee. That way I’m not putting the seller at any risk by allowing someone else to have legal title to the property while the seller’s loan remains in place. The seller would retain legal title and would have recourse to get the property back easier should my buyer default on their end.

I can offer the property by advertising something like:

NO BANK QUALIFYING!
$5k Down and Just Take Over Payments!
Nice 3 bed / 2 ba House
Call xxx-xxx-xxxx

There are lots of ways to do deals like this depending on what your goals are with the property.

If I’m buying where I plan to remain in the deal then my first choice is to get the deed. If that is a problem for the seller then I would consider buying on a contract for deed or a L/O depending on how the numbers pencil out and how I would need to sell to generate the best profit. If selling on a L/O wouldn’t work because I couldn’t get enough rent on the deal under a L/O then I would need to be able to sell on contract to make the deal cash flow by getting a good interest rate increasing the payments enough. Then I would want the deed or at the very least to buy on contract so I can resell on a contract at a higher price and carry the balance at a higher interest rate to my buyer.

If the deal won’t cash flow enough and/or the back end profit would be minimal then I would want to just flip the deal by making a decent profit off my buyer’s down payment and taking that as an assignment fee. Then my buyer would just take over my existing contract I have with the seller!

It all boils down to how the numbers pencil out as to what way would be best to do the deal and how motivated the seller is to get out from under the property.

#13

Re: How to make money from a house with no equity - Posted by JohnBoy

Posted by JohnBoy on March 08, 2002 at 22:33:43:

If you don’t have the money to bring the loan current then assuming you could get enough from your buyer as a down payment or option consideration then you would tie up the deal with the seller subject to you finding a suitable tenant to place into the property first. This could take up to 60 days to find someone so the seller would have to at least make a payment or two or else you’ll have to figure that into the money you’ll need to bring the loan current and be able to get that much from your buyer’s down payment. Then when you find a buyer you use their down payment money to bring the loan current.

When I say take over existing loans I’m talking about buying the property subject to the existing financing on the property. The seller deeds the property to you where you now own it and you just (quiet-like) take over the payments without telling the lender about it.

If you set up an LLC and enter into a contract naming the buyer as the LLC then you wouldn’t be personally liable for anything. The LLC would be liable.

Typically you would buy subject to by first having the seller deed the property into a land trust naming the seller(s) as the beneficiary(s) of the trust. Then you would have your LLC buy the property by having the seller assign their beneficial interest of the trust over to your LCC naming the LLC as the new beneficiary of the trust. You would have no personal liability on anything since you haven’t personally signed on anything. Your LLC is listed as the buyer and is the entity that is liable for anything.

#14

Re: How to make money - Posted by JohnBoy

Posted by JohnBoy on March 08, 2002 at 23:42:24:

Yes, I have a simular clause in my contract as well. Only if you’re doing subject to deals you need to be careful. Some investors will have the seller sign over a deed right away and then check title for defects. If any problems show up they will just tear up the deed and never record it. Only, if someone was to get hurt on the property during this time YOU are the one liable because you are the owner once you except the deed even though it hasn’t been recorded yet. Title is considered delivered upon acceptance of getting the deed, not upon recording it. So if you take title prior to doing your due diligence then either have the deed held in escrow until you’re ready to take delivery of it or wait until after you check title by just tying the deal up with a purchase contract. Otherwise their is a risk involved with being held liable for anything should something happen while you are doing your due diligence.

#15

Re: Have a Question - Posted by Tim Jensen

Posted by Tim Jensen on March 09, 2002 at 16:00:23:

Johnboy,

On these low to no equity deals, I think that a quick flip is best. Buy the place on contract for deed, then assign your position away in the contract and get a release of liability.

Is that about right?

Tim

#16

Liability II - Posted by Lee

Posted by Lee on March 09, 2002 at 09:05:19:

(Something weird happened to my first posting!)

JohnBoy, if you use a land trust as you say,
wouldn’t the legal title actually vest in the
name of the trustee? If the seller signs the
deed to the trustee of the land trust, delivery
has not yet occurred until the trustee accepts
the deed. This assumes that you are not the
trustee for the land trust in question.

Would this effectively put the deed in escrow?

Do I understand this correctly, or am I
missing something?

Thanks in advance!

Lee

#17

Re: Have a Question - Posted by JohnBoy

Posted by JohnBoy on March 09, 2002 at 16:26:25:

That’s about it.

#18

Re: Liability II - Posted by JohnBoy

Posted by JohnBoy on March 09, 2002 at 12:05:44:

It’s the beneficiary of the trust that would be liable for anything, not the trustee.

If you set this up properly then the seller would deed to the trust naming themselves as beneficiary of the trust. So at this point title has transferred to the trust, but the seller is still the beneficiary of the trust so no problem there. Then you would have the seller assign their beneficial interest of the trust over to you or whatever entity you use. Once you take deliver of that assignment form then you are the new beneficiary of the trust and you or your entity as the beneficiary of the trust becomes the liable party. This form doesn’t even get recorded, only notarized. So to be safe you wouldn’t take delivery of the assignment form by having it notarized until you are ready to take title. Some will do it anyway by not giving the seller a copy and then tear it up later if something didn’t check out OK. The problem is that if something did happen in the meantime and you just ripped up the assignment form you may still end up in court with the seller claiming you took title and you were the owner of the property at the time. So there is a risk involved here, although it’s probably a small risk being that you will find everything out within a day or two as far as if any other liens exist against the property.

Legal title would vest in the name of the trust itself, through the trustee. The beneficiary(s) of the trust would be liable for anything if the trust was sued, not the trustee. The land trust is not a shield against lawsuit protection. It’s a shield to hide the names of who the real owners are which would be the beneficiary(s) of the trust.

#19

Recommended cf and profit (equity) to keep deal? - Posted by JR

Posted by JR on March 09, 2002 at 21:58:19:

JohnBoy, what would you generally recommend for investor in terms of min. cashflow and profit needed to remain in the middle of sub2, l/o, or CFD deal?

#20

Re: Liability II - Posted by Randy_OH

Posted by Randy_OH on March 09, 2002 at 18:01:20:

JohnBoy,
I have not done any sub2s yet but considering it. I plan to buy Bronchick’s Alternative Financing course before I actually do it. But I am trying to learn what I can from these posts before even buying the course. I pretty much have the general idea of how these things work and I have a question about avoiding the DOSC. I am wondering, if a lot of people start doing these sub2 deals, will the lenders eventually catch on to it? And I know one answer to this is that the lenders really don’t care anyway. But would that be true if interest rates go up? So I am concerned that if interest rates go up, these sub2 deals could start blowing up on people. I would be interested in your thoughts. Thanks in advance.
Randy