Re: overfinanced properties - Posted by Bill Gatten
Posted by Bill Gatten on November 14, 2000 at 19:33:56:
These are my meat.
First of all, when the property is over encumbered, go to the note holder and find out if there is a discount available. They’d be stupid not to discount their note down at least to something under the property real value. If they don’t, they’re going to have all the costs of refurbishment, resale and administration themselves: and they?ll sell at auction, which makes their loss even higher.
Next, go to the seller and explain that he’s going to need to make some of the monthly payment (in lieu of being foreclosed upon and destroying the rest of his credit or being forced into bankruptcy) until you can get some appreciation and be able to re-market the property. His portion of the payment should be based upon what he would pay if he got a 15-year loan of, say 15% or 20% of the property’s real value at today?s prevailing rates.
Remember…that over-encumbrance exists because of money the owner received, which was spent on himself. He got the benefit of whatever it was (a new pickup, a boat, wild weekend at the Mustang Ranch or a wide screen TV). His luxuries should not be your bill to pay.
Now, you have payments that can allow you to sandwich for a decent positive cash-flow. The Seller will, of course, need to secure his performance with a note backed by other property (real or personal…if personal, a simple U.C.C. filing will protect your interest). Marty Weisberg in Florida is doing one exactly like this right now, wherein the seller has a house in Georgia which Marty will take as security for the seller?s payment performance. Another is a call I just got off of…Andrew Hainsworth in New Jersey has a seller paying $1,000 to close the deal and $200 per moth toward the payment; a 2nd mortgage holder discounting a $26K note down to $3 or $4 thousand.
If the seller has no other property or anything else worth securing his note, then you have to rely on the lender’s discount, appreciation and equity build-up by principal reduction to make your money. You still charge the seller monthly, but know that if he defaults it will eat up your positive cash flow (or most of it). However, with the right tenant buyer, he may agree to take the risk of the seller’s default along with you (if the seller defaults, you and your tenant buyer split the shortage).
As you hold this property (I?d suggest a minimum of five years), its a good idea to sell your tenant buyer certain benefits, such as tax write-off, a share in future appreciation, etc. in exchange for their handling all management and maintenance and their making higher than normal lease payments.
The key to getting the buyer to agree to pay monthly, or to come up with cash up front, is to show him all the options available to him before you suggest your plan. Once he realizes that your offer will be his best, least expensive and most protective alternative, he’d be foolish not to go with it…if it truly is in his best interest.
If you’d like me to send you a copy of the benefits to risk chart that we use to do this exact thing, just let me know and I’ll e-mail it to you.