Archive for August, 2009
Take Over My Payments – Published in the Pasadena Independent, and the Monrovia, Sierra Madre and Arcadia Weeklies
August 27th, 2009 categories: Land Trusts, Seller Financing
“We just don’t want our property any more . . . it’s too much stress. We’re tired of being soaked by the bank, and we’re not going to send them another dime.”
This frustrated woman and her husband bought a penthouse condo in Pasadena just above Cal Tech for $510,000 2-3 years ago. It’s in a great location and has beautiful views of the San Gabriel mountains, but the mortgage payments are draining the life out of them.
In fact, they’re in the process of getting a divorce.
They bought because their broker promised them that it would be a good investment and definitely be worth over $600K in no time at all.
Whoops . . . that crystal ball thing can be kinda tricky.
In today’s market, it’s probably worth somewhere between $425K – $450K, and they owe about $470,000.
The $408,000 first is a 5.7% fixed, and the $60,000 second is variable but capped at 9%. The payments on both mortgages plus the HOA comes to about $ 3,700 a month (this does not include taxes and insurance).
They didn’t want the hassle of listing the property, but wanted to ask me what they should do. They’d like to preserve their credit if they can (they both have 775+ FICOs), but mostly they just want out.
I advised them that they might have a couple of exit strategies. There may be a buyer out there who can afford the payments, but can’t qualify for a loan for some reason.
This type of buyer may be willing to take over the payments on this slightly over-encumbered property in exchange for ownership (a beneficial interest in a land trust) without having to obtain their own bank financing.
I continued,
“I have already sent out feelers to buyers I know that are looking for some sort of ‘lease-to-own’ scenario, so perhaps I will have a lead for you in the near future.”
“However, as you are likely upside down, you may want to simultaneously get a short sale process started. I have an all cash buyer that is expert at negotiating with the banks.”
“All she would need is your short sale package filled out, and she will take it from there.”
“I don’t think you can lose attacking the disposition of your property from both angles. In either case, you will have the weight of it off of your shoulders in a relatively short period of time.”
“Please feel free to call if you have any questions or concerns. For more information on how the land trust works, visit: http://notequeen.com/trust-transfer-system/“
“Also, even if your credit ends up taking a hit, it won’t necessarily affect your ability to acquire property down the road should your objectives change.”
“The last 2 properties I purchased were closed with seller financing. I make a point of closing most of my transactions without the need for new bank financing.”
If any of you readers out there know of someone who would be interested in taking over the payments on this fully furnished Pasadena penthouse, be sure to contact me as soon as possible.
Be sure to sign up for: “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits” (it’s up there at the top of the site!). Defer capital gains & sell fast for top dollar, regardless of market conditions (and have a note that’s worth something!)
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I Need to Fire My Realtor, She Doesn’t Know Anything About Seller Financing – Published in the Pasadena Independent, and the Monrovia, Sierra Madre and Arcadia Weeklies
August 24th, 2009 categories: Land Trusts, Seller Financing
Knowing about, and being comfortable with, seller financing is increasingly becoming an important skill set for real estate professionals.
Here’s an email I received and responded to recently:
Dawn,
I would like to carry up to 90% of the loan on my property and be the banker. My property is currently listed at $1,547,000, and I have a couple of people flying in to take a look at it this weekend.
I can carry the paper because I own the home outright, and I would prefer to carry paper for the right borrower because I feel it’s a good investment with loan interest at 5% and CD’s at 2.5%.
How can I utilize you to help me close potential buyers? My current agent is not qualified to help and I will have to make a change. Please advise directly,
Ronda
Dear Ronda,
Your plan makes a lot of sense to me, and I know I can add value to what you are trying to accomplish. You need to have the best chances of attracting the right buyer, so how you advertise and communicate with potential buyers and their agents is important.
Depending on the situation, I act as a real estate broker, and/or a note broker, and most often, a consultant.
I help sellers understand not only how to meet their needs now, but how to prepare for contingencies in the future.
Many times, sellers don’t understand how important it can be to create not one, but two notes. This provides long term flexibility and wealth preservation if there’s ever a need for a little cash down the road.
Although it sounds straight forward, there are many ways to set up a seller carry back transaction, and I help sellers understand which strategy would work best for them, and help them intelligently underwrite potential buyers.
Banks have whole underwriting departments helping them make good lending decisions . . . sellers need to hire their own underwriter to make sure they don’t overlook an important aspect that will have unpleasant ramifications.
A nice, safe 5% return is only good when you’re getting the payments. If someone defaults, your return is meaningless.
Whenever you make a loan, you need to think about what you will do to minimize the chance of default, and if it happens anyways, you need to have a plan for dealing with it.
For this reason, I advocate the use of a Title Holding (Land) Trust when there is less than a 20% down payment, and it can be useful for other reasons as well. With the trust there is no exposure to foreclosure, and if you have to ‘take the property back,’ you will retain your property tax basis.
There are many elements to consider when negotiating a seller carry back, because every aspect of price and terms is flexible and dynamic. You would want to have someone negotiating on your behalf on a transaction this size.
At the very least you need to be sure that you clearly understand the short and long term implications of how you set the transaction up.
I also help in the marketing and advertising department, and many times help sellers coordinate services with their real estate agent if they have one.
I believe it is worth our time to get on the phone. If you concur, I have between 1-3, or after 5 today.
Best wishes,
Dawn
Be sure to sign up for: “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits” (it’s up there at the top of the site!). Defer capital gains & sell fast for top dollar, regardless of market conditions (and have a note that’s worth something!)
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Strategic Default – Does it Make Sense to Stop Paying? Published in the Pasadena Independent, and the Monrovia, Sierra Madre and Arcadia Weeklies
August 22nd, 2009 categories: Real Estate News
“We’re going to quit making our mortgage payments . . .”
I’ve heard that from more than one acquaintance in the last few weeks. It’s not because they’ve lost a job, or had a medical emergency, it’s just that it doesn’t make sound financial sense to keep making the payments anymore.
Defaulting on a mortgage or credit card has become a cool and calculated financial decision, not a great moral dilemma, or cause for endless shame, guilt and insomnia.
A young man and his wife both have good and ‘safe’ jobs. They have no kids and no debt. They live in a modest home and rent a spare room to a friend. They can afford their $300,000 mortgage, but they’re going to quit paying anyway.
His house is only worth $200,000 in today’s market, so he has $100,000 of “negative equity.”
He won’t be able to sell his house and he won’t be able to refinance his loan at better interest rates. He’s trapped making payments on a large loan.
Defaulting is his other option. He stops making his mortgage payments and waits for the bank to foreclose, and when they do, he’ll be rid of his debt, and he’ll have enjoyed 6+ months of ‘free’ rent.
The foreclosure will ruin his credit, but it doesn’t matter. The blemish disappears from his record in less than 10 years. And in the meantime, his wife can buy a better house for $150,000 at a lower interest rate (the mortgage is only in his name).
To top it all off, the government is offering an $8,000 tax credit to first-time homebuyers who buy a home before December 1, 2009.
By defaulting on his loan, he’ll save himself over $100,000, and still own a home. And even if he or his wife couldn’t get conventional financing, there are many seller financing deals to be made. Credit is really less of an issue than most people think.
The last two properties I’ve purchased have closed with owner financing. I don’t tend to have much use for banks . . . (I barely trust them to keep ahold of that flimsy fiat money the Feds keep printing).
New research this month from the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management found strategic defaulting now accounts for 26% of all mortgage defaults.
And according to Zillow, a real estate database, 22% of homes in America have negative equity. In parts of California and Nevada, over 50% of homes have negative equity.
With all the negative equity in America, there’s plenty of cannon fodder for more strategic defaults.
Is it ‘right?’ Is it ‘wrong?’
Personally, I don’t tend to have a huge judgment either way. Being overly attached to possessions and credit scores can kill you. I’ve watched clients literally die from heart attacks trying to maintain ownership and FICOs, believing that their very worth as a human being depended on it.
Do I think we should do all we can to honor our obligations? Of course.
Do I think we should enslave ourselves for decades to keep any system going (personal or global) that is ultimately unsustainable? Absolutely not.
I contend that our collective creative energy could be put to much better use.
Be sure to sign up for: “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits” (it’s up there at the top of the site!). Defer capital gains & sell fast for top dollar, regardless of market conditions (and have a note that’s worth something!)
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