Lou Brown:
Hello everyone, and welcome back to another installment of our Street Smart Q and A. Where you have sent me a ton of questions. I’m excited to answer all of them for you. Before we get started, let me just recap what’s happened over the last couple of weeks in our economy. Tell you that, I think that, a lot of things are on hold right now waiting for the elections. I don’t think it’s really going to make a difference who gets elected in terms of things turning around. I just think that a lot of things are on hold.
I’ve been keeping my ear to the ground with mortgage brokers and determining what the market is right now. What I’m finding is that a lot of loans are not being approved. Some loans are coming back even after having had the appraisal. The lenders are coming back and saying, “We’ll only fund maybe 75% of the loan.” So, the folks are having to come up with an extra five to seven percent cash down…in addition to their 20% down.
So, that’s a disappointing piece of news. It does indicate that that’s where things are right now. That means that lenders are just not letting loose of the cash just yet. I think we will see it here pretty soon.
I think it will happen after the elections. Not to say that one over the other getting elected is going to change much. It’s just that I think the psychology of it will be that it’s over at that point and people will know. I think the market has already adjusted for the elections. Who the market anticipates is going to win, which will have impact in the taxation of the economy.
Which, of course, higher taxes mean, typically, lower investments. Lower investment, means lower jobs. Lower jobs, means lower number of people buying houses. Lower number of people buying houses means less influx into the economy. Less carpet made, less draperies made, less furniture made, and so on. So, there’s a lot of impact with a change in administration. A change in taxing philosophy.
It will be interesting to see what happens with this. For us, the thing to keep in mind is there is a macro-economy. There’s a micro-economy. For you and I, the only thing we really have to worry about is our own personal micro-economy. For us, that means buy right, and buy cheap. That’s means that we have to buy our equities when we go in.
When we go in and purchase the properties, let’s negotiate like we’ve never negotiated before. Let’s make sure that there’s no possibility that the seller can be the bank, before we move on. That is a good segue into my first question here.
A deal structuring question from Suze from Fort Mohave, Arizona, one of our platinum members. Suze says, “I got a call from a couple asking about a short sale. MLS comps are $127,000. This is in very good condition, one whopping negative amortizing loan at 10%, now at $220,000 balance.”
“Notice of default must be in the mail by now. It was $1,300 per month. Washington Mutual is the servicer, which, of course, is now JP Morgan Chase. Freddie Mac backs the loan. They are 80 days late.”
“Both adults have lost their jobs. She is a painting contractor. He’s a home inspector. Not much of any of that work going on right now. Growth in Mohave County is a rocking 6%. They have three little girls; a registered sex offender lives five doors down. So, that and the only one ugly mortgage is the ugliness. Eleven MLS houses have sold in the sub-division in six months. Many other empties…plus house has sewer and water.”
Okay, so we’ve got some sales in the last six months. That’s very good news.
“Can any money be made on this deal? The short sale service, which charged me $1,500 and $165 title search. Then, I need a cash buyer and what? The discount would only be 20% below MLS of 127,000, which is 104,000. What should I charge the seller? I don’t want to pay almost $2,000 when other deals would bring back more money. I’m not doing that well on my short sales. The last one went chapter seven and it was, “Poof gone.”
“Also, their taxes are taken out with the payment and it’s tax time. So, for closing, that would have to be paid up. What would you do? Run away, put on some waders, or first buy some time with a work-out of some kind with the lender. Help, thank you.”
All right. So, Suze let’s take a look at the facts. There’s a $220,000 first mortgage. There is only comps of $127,000. So, obviously, the value of the property is, significantly, lower than this mortgage. What I’d like to see if there’s a possibility of, before we move on, before you hire anyone else, I’d like you to contact the lender.
Propose that, you, as their financial advisor find that they can make the payments. Between you and I, you’re gong to be the one that’s going to take this over, and you’re going to be the one that makes the payments. So, that gives you the opportunity to provide some financial records that will support that fact.
Now, recognizing that the mortgage is, significantly, lower, let’s ask if there’s a possibility that they will do a write-down on the mortgage. That means, leave the existing mortgage in place…have it written down to a number that is legitimate. Maybe, let’s try for at least $15,000 less than $127,000. So, let’s go ahead and start with your 104,000 that you mentioned before. In other words that would be the new balance of the loan.
Now, let’s take that and with the interest, let’s create an interest expense. Let’s say, let’s bring it down to 4%. So, your first offer should be, number one, bring the mortgage down to 104,000. Number two, the interest rate would be 4% resulting in X payments. Just go to your Street Smart calculators, and borrowing, and it will calculate your payments for you.
All right, then the third thing is, of course, if there’s any adjustable rate, we need to make it fixed. If it’s an interest only loan, we need to make it a fixed amortizing loan. Wipe away any pre-payment penalty. Look for all those things.
Now, here’s a key. The lender, while you’re talking about modifying the loan, what they’re going to hear, is that you’re looking to actually re-finance the loan. Let’s be really clear, we do not want to re-finance the loan. We want to modify the existing loan. If we can do that, then you’ve got a deal. You really don’t need the short sale service for that.
Now, if that is a possibility, they’re going to send in some paperwork, and we’ll have to manage that situation. You being a platinum member, we can manage that individually with you. The other aspect of this is that it’s going to take a while. Probably, anywhere from four to six months.
So, be prepared for that, and prepare them for that as well. It’s likely that the lender will set aside the foreclosure until they are able to do this work-out. Then, don’t worry about the property taxes; don’t worry about any of that stuff right now. Let’s just see if there’s a possibility that they will, actually, modify this existing loan. Very good work, very good opportunity here…if you can get it to the right numbers.
Now, of course, what would be your exit strategy? Well, obviously, if we get the payment down to a number you can stand that makes sense…then you can put it out on our work for equity and owner finance program.
Now Neil Mohan has a question that I may not have answered. I don’t have a check mark beside this from the last session. So let me make sure this gets taken care of. “What is the value of an insurance trust? If you recommend them, how is one established?”
Great question Neil. Okay, an insurance trust is, actually, a unique little vehicle created by Congress. That basically says, “If you buy a certain type of insurance, typically, whole life insurance, that can be paid for and counted outside of your estate.” That means that whomever you have as the beneficiary, of that insurance trust will, actually, receive the money at your death. The estate taxes that are taxable to your estate would not apply to the insurance proceeds. The insurance proceeds of the insurance trust go directly to the beneficiary without any tax.
So, that can be a benefit of insurance trusts. It really depends on how large the estate is. In today’s market, if the estate is over four million dollars, then that would mean that…yes you should have an insurance trust. When I say four million dollars, I’m saying that the exemption for an individual is two million dollars.
At MAS, I teach you how to set up an AB trust. That means that there’s a spousal trust, if you’re married, and that each spouse is either A or B in that trust. What that does is create an opportunity to double the exemption on the estate. So, instead of having two million dollars, it goes to four million dollars at your death, if there is a living trust.
So, this is a real opportunity to have a big hunk of money be protected…with the combination of the living trust and the insurance trust. Great question, Neil.
All right, Eveyn Peckart asks me, “Hi Lou, my daughter will be the beneficiary of our living trust. I would like her to be the trustee of our land trust, which is our home. We could have a different trustee for the personal property trust. Is it okay for her to be the beneficiary of the land trust and the trustee of the living trust? Or not good, because of anonymity, thanks.” Evelyn.
Well Evelyn, if your daughter is married, then anonymity is not going to be an issue. We’ll just use her married last name. If not, you’re right; privacy will not be there for you on your land trust with her being the trustee. Let’s also take a look at the fact that once that land trust is created, you can dismiss the trustee at any time you want to. So, perhaps she could be the successor trustee.
Right there on public record you have a primary trustee. Then she’s the successor trustee, but nobody really sees the successor trustee, because it’s buried at the bottom of page three of the recording. The only name that’s really indexed at the courthouse is the land trust, primary trustees name as the current owner. So, that’s one way to her name doesn’t necessarily have to be out there in the open.
Now also, keep in mind, that privacy is just one of the over 30 benefits of land trusts that you can’t get with any other entity. So, keep in mind that you might choose to give up the anonymity side, or the privacy side, in exchange for still getting the other 30 benefits of trust too.
We go in-depth on those benefits which are astounding when we get together at the MAS. We’re going to do that again in January. So, if you haven’t yet registered for MAS, you can call in at 1(800)578-8580 and ask for the payment plan. You’ve got time before January and we can help you out with that. Great question.
Okay, got another purchasing property question from Eduardo Ginsberg. Says, “Please explain how do you negotiate with a seller, in order to convert a lease option deal into a subject-to deal…where you are the buyer and you’ve been paying on time for say six months. What are the magic words you use to accomplish this?”
All right, let me see if I have this straight? We are negotiating with a seller in order to convert a lease option into a subject-to deal. So, what I would do, is say, “Mr. and Mrs. Jones, just wanted to check in with you. See how things are going. Let me ask you a question. Have I done, exactly, what I said I would do when I moved in?”
Then wait for an answer. Hopefully, they are going to say, “Yes absolutely. You’ve paid on time. You’ve done what you said you were going to do.”
Then say, “Great. What I’d like to do now, is I’d like to go ahead and take over the payments to show you…I’ve already shown you that I can do this. I’ve already shown you that I will do this. Now, what I want is to go ahead and have the deed transferred to my trust, and be able to take over the payments. Would that work for you?”
If they say, “No Eduardo.” Then, I would go to the next thing and say, “Well, I’ve really got to make sure that I’m taken care of here. So, what I’d like to ask you to do, Mr. and Mrs. Jones, is transfer your property into a trust. You will be the beneficiary of that trust. We’re going to put the assignment and quick claim of beneficial interest in that trust into escrow.”
“That means, that if anything ever happens to you, there will be escrow instructions saying…that I have the right to get my deed, and what that helps me do is avoid your probate. God forbid anything happens to you. Now, I’m tied up. I won’t be able to re-finance, sell, mortgage, pledge, or do anything with property that otherwise would have been mine.”
“So, I’m going to ask you to go ahead and at least set that up. By the way, I’m also asking that once we get this set up, that you, say give me another three months. Let me show you that I can and will make the payments on time, and then transfer it to me then. Will that work for you?”
Just adding three month increments until they say, “It works for them.” Now, you have got the benefit of the best of all worlds. You control the deed, you are able to satisfy the sellers, and have a great house. All right, keep me posted on that, Eduardo. I’m interested in hearing what happens with that.
Now Dee Crouching Cougar, that’s cute. Dee says, “How can you tell if you are structuring a good…preferably great deal? What are the steps that should be followed?”
Well, it’s kind of a broad-based question, Dee. The real key element that I’ve found, and the best way to structure deals, is to first take the information on the seller questionnaire. Gather as much as you possibly can. Now, that you have that information, compare it to the possible offers to make.
First, before you do that, we need to do some filtering. Number one, you must obtain the sellers problem and their pain. What is their real problem? It’s, usually, not the house. It’s, usually, getting rid of house, getting rid of the payments, getting rid of some problem, Okay? So, let’s find out what the problem is. Then we’ll create a solution.
Number two, once you’ve identified that and all the details about the existing financing on the property, then you’ve got…what you need to be able to take a look at what your exit strategy is. “How much are you going to sell it for? When are you going to sell it? How are you going to sell it?”
Now, when I say, “How.” I mean, are you going to sell it with a realtor? Are you going to sell it yourself? Are you going to sell it after it’s fixed up, or before it’s fixed up using my work for equity program? If you use the work for equity program, obviously, that means that you can keep the cash for the fix up in your pocket. Give credits to the new buyer to be able to buy it.
It is a wonderful program. If you haven’t tried it before, all of you on the call, will, absolutely, need to do this. It is so powerful. It really has changed so many of our platinum’s businesses, because they’ve been able to set themselves up to be able to have the new person moving in, take care of all the repairs. It’s a great strategy.
So, determine those factors. Then do your PAW, which is your property acquisition worksheet. That way, you’ll find out your final numbers. Now, these forms, that I’m mentioning, are in your buying, volume one. Also, on your web sites, when you own the buyer or the seller web sites, from Street Smart. We post all of these forms there on your administrative private side. So, that you can easily, quickly, click on any form. Open it up and use it. Any form that you have purchased…we turn those on for you on the backside of your web site. Isn’t that a great thing?
The next step, though, is once you determine what your real numbers are; now we’re going to create the cost to sell worksheet. Now, this is, essentially, the most it could cost you to sell their home. Let’s come up with these numbers before you go visit with them.
Then when you visit with them, take out a blank cost to sell worksheet, and have the seller assist you in filling that out. When you get down to the final number, you ask, “Can you handle that?” The seller says, “Yes.” or, “No.” If they say, “No”…then you say, “How much of that can you handle?” They say an amount, and if you like that number, then that’s good. Then we’re going to have to deal with the balance. So, that’s all the process of doing the cost to sell worksheet.
Now, if the balance is too much. If the seller cannot pay you say, monthly payments, to make up that difference. Then we need to go to the bank and work through a short sale…as we were talking with Suze on. So, that’s a step-by-step process, Dee of how the process works. Like I say, “Its pretty broad-based question. So, ask me more specifics if you need to.
All right, now we’ve got a selling property question. “At the last Millionaire Deal Maker, in Columbus, you promised to teach us how to do a come-fix-me-up deal. IE how to sell a house that needs repairs to someone who could fix it up using lease option. Unfortunately, there was not enough time for you to cover this topic. People like me had a lot of other questions. Please explain in detail how you do this. Please take at least ten minutes to cover this subject thoroughly.”
Well Eduardo, basically, the concept is this. You can offer property, as we were just mentioning a couple of minutes ago, on our work for equity strategy. It is very powerful, because you don’t have to do the repairs. What happens is you take the work for equity kit, and in there, there’s several different ads you can try.
One of them, essentially, says, “Come fix me up.” You put that in the newspaper and give some description about the property. They call in and then you interview them. You find out who they are. Where they work. How long they’ve been there. How much do they earn and their spouse, the same questions. We kind of figure out who we’re talking to.
Then we ask them, basically, to rate their abilities. Tell us what kind of skills or background they have in renovating or remodeling property. If those skills are very light, and your rehab is very heavy…then that’s not a good candidate. Unless they have someone in the family that can help. Or they have enough cash to hire the people to do it professionally.
So, you’ve got to make sure of those things upfront. Now, once you determine that you’ve got a customer that makes sense, for you to take a risk with. There’s a number of documents that have to be executed. First of all, there’s the rental agreement. There’s your option agreement, giving them an option to purchase that property.
There’s the promissory note. Where they’re going to promise to pay you the amount of money that is, actually, the amount that you credit them, towards the purchase of the home, when they complete the work. That’s the key element. You can’t cut a deal like this, unless they are willing and able to complete the work.
Now the fourth document that needs to be created is our independent contractor services agreement. That, actually, is the glue that binds the tenant buyer/contractor to our deal. It, specifically, outlines that that new, let’s call them tenant buyer, is actually, contracting with you to do these repairs. Contracting with you to do these improvements. In fact, right there in the contract, you’re going to agree to pay a certain amount of money as a credit towards their option. By having these four different elements of paperwork…now you’ve got the opportunity to glue the deal together.
We don’t stop there. The other thing we do is from, renovations volume eleven; we go ahead and do a scope of work. Depending on what needs to be done at the property, we might even have a scope of work for each one of the trades, plumbing, heating and air conditioning, electrical, roofing, painting, and carpentry general.
The scope of work that I’ve already got done for you, in the renovations system, allows you to be able to complete those on a per room basis. I’ve, actually, listed all the things in there that I want you to pay attention to per room. Then give instructions beside those items that I’ve spelled out.
Once you do that, you’re going to attach that as an exhibit to your independent contractor services agreement. Then it’s clear, exactly, what work they are going to do. That they have agreed to contract, to do that. That they are going to be compensated in the form of money that is credited towards the promissory note that they owe you.
You see, they are still going to owe you that money until they, actually, complete the work. When they complete the work, then you will satisfy the promissory note. We, usually, create a step-by-step process of how we’re going to credit the repairs that they do. So, its going to be right there, spelled out in the independent contractor services agreement.
I, usually, credit say, in three tranches, or three credit patches…depending on the work that’s performed. When that’s complete, then we can credit. Like step one, lets call it, or payment one, and then payment two, and payment three. Payment three comes in when 100% of the work pursuant to the scope of works is complete.
Now, with all of that said, there’s still some clauses that we put in each one of the agreements as disclosures. So, in the rental agreement, the option agreement, and the independent contractor services agreement, we spell out the relationship that’s being created here. The understandings that are present. Number one that the property is in need of repair. The optionee buyer recognizes that it needs repair and, in fact, is contracting to do it and so on.
We’ve got all of this spelled out in the work for equity kit that’s available through Street Smart at 299.95. It’s all the documents that you need. It is our step-by-step process. It’s the ads, it’s a filled in version, it’s a blank version, it’s a forms disk that comes with it. Everything is done for you. So, when you use this method…I highly encourage you to follow all of these steps. Really, creating the right paperwork is going to be critical when you take the risk of a work for equity situation.
Now, when I say risk, I want you to understand that there’s an enormous benefit to doing it as well. We, absolutely love it, as a technique, to number one, get the properties filled quickly. When you run the ad that I described, the phone will ring off the hook. You’ll have lots of people very attracted to do the things to the property.
Secondly, not only will you have that opportunity, but recognize that, typically, when you’re fixing up property, you’re doing it on your dime. When they are fixing it up, they’re paying rent. They’re fixing it up on their dime and paying rent at the same time. Good news Eduardo, I hope you understand that and can take advantage of that great technique.
John asks, “Thanks Lou for the Q and A. I was considering selling a condo in Florida with seller financing. The person’s credit is less than perfect. Therefore, I was considering a land contract. With a land contract, is the buyer recorded as the owner of record? I ask, related to homestead benefits, to bring the buyers cost down. Yet, maintain more control of the deed with a land contract. Please briefly explain land contracts are still confusing to me.”
Okay John, essentially, a land contract, another name for land contract, is contract for deed. I call it agreement for deed. In some states it’s also called bond for deed. The main distinction for you to understand is that, basically, you keep the deed. The person has a contract to get the deed. They get the deed when they do what they agree to do in the agreement. Once that agreement is complete and they pay you off…they get the deed.
It’s a distinction between the other side of the coin, which is you give the buyer the deed and carry back a mortgage against the property. Which, of course, requires that you would have to foreclose to get the property back. In Florida, in fact, you have to foreclose to get a property back on land contract as well…except for the times that you don’t have to.
That’s one of the reasons that I love agreement for deed. Often, you don’t have to. You work something out with the new tenant that’s moved in. Actually, they are the buyer now. They create an agreement with you to get out of the property if they can’t make the payments. You’re not going to be harmed by that situation. That’s the best way to set this scenario up.
If you’ve given them the deed, obviously, you have, absolutely, no choice, but to foreclose to get the property back if they don’t pay. With an agreement for deed, that may not be the case. I say, “Hey, if I’ve got any chance where I don’t have to go through a foreclosure.” Especially, in Florida, that’s a lengthy process there. “Then it makes sense to give it a try.” Good question John.
The next question as part of that. Is, “I ask related to homestead benefits to bring the buyers cost down, yet maintain more control of the deed with a land contract?” So, that question might be, “Can they apply for homestead exemption?”
The answer is yes they can. So, I encourage you to go ahead and do that.
Now we have a tenant problem question. “Lou, how do you handle people who complete the rental application receipt agreement, provide certified funds, with and without a signed lease, and then decide to rescind? They also stopped payment by telling the bank they lost the certified check. This has occurred to me twice recently.”
Wow, okay John well, one lesson would be go to the bank with the certified check and cash it as soon as you get it. So, they aren’t going to be able to go to the bank and try to undo that certified check.
Second, the answer is the rental application receipt agreement is a contract. They have contracted to take that property. They have contracted to take it off the market. They have given you a reservation fee, and they have agreed that it becomes liquidated damages…since other people may have been turned away. It may be necessary for you to re-advertise the property and re-market the property.
It’s all stated clearly in the application. If they say, “Can I have my money back?” You say, “I wish I could give it back. You agreed in writing that indeed that would be our money, because now we’ve got to re-market the property. We took it off the market when you committed to us.” That should help you through that process.
All right, Brian Musa has a lease option question. He says, “Lou, unfortunately, my grandmother has dementia and can no longer live in her house. Currently she is living with my aunt. Is there anything we can do to protect her home from being controlled…taken by a nursing home? If we lease option the house, could the nursing home still take the house?”
Well Brian yes, the answer is yes they can. First of all, I’m sorry to hear about your grandma. This is a trying time for many families…when you have to be faced with situations like this.
Unfortunately, I wish we had done the work earlier. If there had been a transfer out of her name, over a long enough period of time, and in many states its five years, called the loanership. If they find that it has been transferred for a very long time, then they don’t try to come back and take it as part of her assets.
Anytime shorter than that… they can take the property back. If you lease option it, that still means that when you finally exercise, then Medicaid is going to have a lien against it for the money that the Medicaid has about that. Although, she could lease option the property. It would delay the state from being able to come in and take the asset until you, actually, buy the property. Then they would be able to get the cash at that time.
Next, you say, “I’m a little confused on how your rent works using your lease option paperwork. Does the tenant pay a month in advance? How is the reservation fee applied?”
First of all, all rents are paid in advance. When a tenant pays on the 25th of the month, according to my policy, then that carries them through the next 25th of the next month. This differs from mortgages. Mortgages are paid in arrears. In other words, you borrow the money, wait 30 days, then make your first payment. What you’re really making is a payment on last month’s interest, on the past 30 day’s interest. That should clear up how the application of rent goes.
Then you say, “How is the reservation fee applied?”
It’s applied to the money that is needed at the table. So, for example, they’re going to need their option fee. They’re going to need their rent. I definitely want to get the option fee out of the way. That’s money that is difficult to collect later. Let’s go ahead and get that, settle that piece.
Then if you have to work with them on the first months rent, maybe you can work out a payment plan or something like that. We definitely want to collect the option fee if we possibly can.
“Last call you mentioned free web sites to list a lease option for sale. Can you name a few?”
I think I did in that call. I’ll name some again. Craigslist is one. Kagigi, I believe it’s K-A-G-I-G-I, kagigi.com. There is some other rent to own sites; I believe its renttoown.com that you can list for free. There’s another one, it’s a paid site called rent, R-E-N-T.com. Then there’s another one called fsbo, F-S-B-O, fsbo.com. I believe that is a fee paid site. There’s another one called P-O-S-T, postlets, L-E-T, postlets.com. Postlets, what they do is post for you to multiple sites. Okay great, glad that helped.
All right we’ve got some tax questions here. “Being the rare conservative in the state of Massachusetts, I’m concerned about taxes. Can you explain what is going to happen to the short term capital gains if Obama is elected?”
Well Brian, I’m afraid that’s going to become a thing of the past, my friend. The philosophy of the democrats is that, basically, government can do a better job than individuals can. So, therefore, they have a philosophy that in order to do the better job than the individuals can, they must collect money.
In doing so, they, typically, go after the things that hurt the fewest voters. They don’t realize that their actions, actually, hurt voters. Psychologically, they’re thinking that they won’t get votes, if they hurt people directly. So, they’re hurting them indirectly with some actions that I happen to believe are detrimental to our overall capitalist economy, because taxation always rescinds an economy. It does not improve an economy.
This has been proven over 100 years of tracking. I, actually, have a chart that shows taxation over the last century. Then, exactly, what happened to the economy right after the taxes were changed…when taxes went high. We’ve had taxes as high as 90% in this country in the past. Of course, during that period of time, the economy came to a screeching halt
So, one of the things that Obama will have to do, is raise taxes in order to pay for all his aggressive programs that he plans to do. So, expect that capital gains will go absolutely through the roof. That we won’t be able to sell anything and get money.
That the only real strategy for us will be the 1031 tax deferred exchange. Where you take your profits and roll it into more property. That is the only game that I see in the foreseeable future. If that election were to take place that way.
I look at both candidates with some disdain, and I think, honestly, it’s a choice between socialism and communism. We have to make some decisions about our future as a result of that. I’ve always seen, though, that our economy is resilient, regardless of who’s in the White House.
It does help to have a mismatch between the White House and Congress. When you’ve got Congress without any restraints on it, then you’ve got some real challenges there. So, it will be an interesting ride to see what things look like after next week.
We’ve got, lets see, some create cash flow questions. “I heard that some people use a life insurance policy to create cash flow. Please explain how this works, and what type of policy should you use if you are in your early fifties.”
Well, I don’t personally think that insurance is a great investment. Insurance should be used for insurance purposes, something like, replacing income, for example, if you were to get unhealthy. If you had a situation happen or death. Then you’ve got the influx of cash. Of course, health.
Life insurance, the idea is that it’s, basically, a forced savings plan. What you are doing is getting the benefit of your premium over time buying insurance. That is figured out by their actuarial tables that determine how long you’re going to live.
So, basically, they’re saying, “We’re gambling that you are going to live this long. So, as a result, we’re going to collect this much money off of your premiums.” If we do, then we’ve made and taken in a lot of cash. If they take in the cash, the theory is they are going to invest it well. Some companies like AIG, did not do so. They invested it poorly in things called sub-prime mortgages. As a result, the government had to come in and bail them out…which is a sad story.
So, life insurance to create cash flow, that really to me doesn’t add up to be a good strategy. Cash flow comes from when that policy itself, actually, throws off a cash benefit. Yes, there’s many different products out there.
If you’re interested in it, sit down with an independent life insurance agent. Let them tell you all the different programs that are available. Obviously, if you sit down with someone from Allstate, they are going to want to sell you Allstate insurance. So, I think it’s better to talk to a certified financial planner, and see what they might be able to do to help you.
Now we have our, an affiliation with the ARK, A-R-K, call the office at 1(800)578-8580 to obtain a telephone number. They can, probably, guide you on a lot of different policies that are available. They are one of our providers. Many of our platinum’s and gold’s use their services to do their taxes, to do insurance planning, to do life planning…financial planning that is. So, they may be able to help in that arena.
Okay we’ve got Becky Sharon says, “What are my best options for a loan modification in Naples, Florida? How would the options be different in Cincinnati, Ohio? Property, two bedrooms, two bath. Condos, bought as rental investments. The rents in Naples have dropped from 1,150 a month to 800 a month this year.”
“Details, two conventional, no doc, 20% down, jumbo adjustable 30 year loans, on two, two bedroom condos. Borrowed 5/12/06. Appraisal amount $230,000, loan amount 183,920, interest is 6.5% for five years fixed. Then it adjusts, beginning in 2011, with a 2.25% margin. I owe today 179,132.”
“Loan is current and has been paid on time each month. So, there are no additional fees or interest that has been added. There are no other loans on the property. We are paying the expenses of our two investments out of savings. Have started two companies…so only small passive income the past few years.”
Okay Becky. Well, I would go for the loan modification, absolutely. I would say talk to the bank and try to get somewhere with them. The challenge is that you’re not behind. That does not mean that they won’t work with you…they will. It really depends on who the lender is. That’s the only thing you didn’t tell me. That’s the only thing I’m not aware of that I might be able to help better, if I knew who the lender was.
In any case, you’re, absolutely, right about Naples. It has taken a nosedive. It’s amazing just how big of a struggle it’s become for all the nice folks that live in Naples. That also means that the banks know this. So, I would, definitely, go to them and say, “My cash flow is just not there. I’m asking you to make this adjustable rate loan into a fixed rate loan. I’m asking you to lower the interest rate from six and a half percent down to two percent for the life of the loan.” That way, you’ll have enough cash flow to be able to make this work.
We just covered a lot of information about loan modifications at our Millionaire Deal Maker event. Which is definitely a training that all of you need. I always teach to the very market that we’re in. This is, exactly, what I’m seeing folks. Is that loan modification is a real opportunity over the next six months. Taking an ugly loan and making it pretty. What I call, “Putting lipstick on a pig.”
This gets you to the opportunity to really make this business sing and dance, when you’ve got a cost of funds that’s really, really low. The banks should cooperate, because of the new Homeowner Act that went into affect in July. That act is really designed to encourage the banks to do loan modifications.
As you heard me mention earlier, to Suze, I was talking about forgiveness of debt. Which is another big deal. What I believe is going to happen with this new program. The only problem is that the guidelines haven’t come out yet. So, those lenders that were already doing modifications aren’t going to be delayed. Others who weren’t doing loan modifications are going to have to wait for the HUD guidelines to tell them what to do.
Vic Ridezi has a question. “Lou, we had a great time at MDM. It’s always a pleasure to visit with the quality of students that your organization attracts. Thank you for the opportunities that you extend to Mark and I. When looking to do loan modifications, is there any other violations of RESPA to be aware of, other than the mortgagee not receiving a HUD statement prior to closing. That would be evidence to help you convince the bank to do a work-out or modification.”
Well Vic, is referring to, exactly, what I mentioned a few minutes ago. That I focused on loan modifications at MDM. Thank you for mentioning that, Vic. Shirley, I’m happy to have you and Mark both as part of our platinum program, and also our biz whiz program up there in the Charlotte, North Carolina area. I’m excited to tell you that there are, actually, many, many different errors, that banks and lenders make in the RESPA area.
Now, lets back up for everyone on the call right now who’s saying, “What in the world is he talking about?” All right, some years ago, Congress passed a law called RESPA, which was Real Estate Settlement Procedures Act. What the act did was create guidelines for lenders, title companies, attorneys, everyone who’s closing a loan or closing the sale of a property to follow. One of those guidelines says that the HUD-1 closing statement has to be provided to the borrower at least forty-eight hours prior to closing. We all know…that ain’t what happens.
Now, to go beyond that, there’s a lot of other things that are often miscalculated. Such as the big square, the rectangular box rather, on a loan disclosure document on annual percentage rate. That is often miscalculated. Sometimes they include the points, sometimes they don’t. Sometimes they leave it blank. Sometimes they round it off. There’s often a lot of mistakes in the actual documents. That gives you another bit of leverage if you’re working with a lender.
Now, there are also companies that do a forensic analysis of the mortgage to find these mistakes. They charge a fee for that. Once it’s done, now you have leverage with the bank to say, “Look, you guys did not follow the law. Now, I want my loan modification.” Or, “Now, I want a reduction in the mortgage.” Folks, it’s legitimate if they made a mistake. If they didn’t do it right, then you can use that to your benefit. Hope, that helped Vic.
All right Terry Moore-Miller says, “Hi Lou, wow, what a lot of great information we learned at MDM. One such information was about section 14-0-3. Could you elaborate on that a little by telling me the exact act ruling that I should quote when asking the lender to modify the loan?”
Yes Terry Moore, that is the letter that we created to be able to send the lender to explain to them. First of all, we’re aware that the new law has passed. We’re aware that the government has come up with a plan for this. We’re aware that the banks have the requirement to talk to us before a loan goes into default…or while it’s in default. Especially, if it looks like the lender will lose money in the transaction. They have the right to modify that loan, even forgiveness of debt.
So, that is very powerful information. We are posting that to our web sites too. By the way, if any of you do not have the Street Smart web sites, my friends you’re making a mistake. You must pay attention. The opportunity to have technology working for you, instead of you working for all the other mistakes that are made, is absolutely, available to you at pennies on the dollar.
We’ve got the buying, selling, and borrowing web sites that gives you credibility on the front end of your business. On the back end is where the real power is. That’s where we’re able to post not only all of our forms, but also when you graduate our event, it’s all of the auto-fill forms are turned on.
In addition to that, as things such as section 14-0-3 come out, we post those there as well. We create a letter; we’ve posted that there as well. Anytime that we make any tweaks to the Street Smart system, your forms are updated there as well…for free. So, access to having that information is absolutely powerful.
We just posted something to our platinum site, that’s also going to be posted to the web sites. That is an access to all the municipal codes in the country. In addition to, the state law codes that we have posted there. We have a copy of a mortgage for all 50 states. A copy of the landlord-tenant laws for all 50 states. The foreclosure requirements for all 50 states. The notarization requirements for all 50 states. All of that is posted right there on your web sites…your administrative site. So, I encourage you to go there and find that information Terry Moore, and you’re going to have what you need. Be glad to answer any more questions that might come up.
Okay Jamie Cantoo has a question. “I had a second position, and had to foreclose on a house, because the person never made a payment on the money he borrowed. I went through the whole eviction process, and took over the house only to find out that I was upside down. We now owe $124,000. The house is appraised at 105,000.”
“I caught up the loan twice and offered the bank 95,000. They never accepted, because they needed the old owner’s signature. Now, we withdrew the first offer and countered with a $45,000 cash offer. They still want the old owner’s signature. Can we do a short sale with the evicted owners absence and how?”
“I loaned this person $17,000 and paid $8,500 to catch up the loan. At $2,500 to fix the house, after the eviction. I am getting a little money back, because the house is rented. I’m getting $750 a month at, to a potential buyer. We have not made payments since I caught up the loan in December of ’08.”
You must mean ’07, Jamie. First of all, what I’m hearing you say is that the loan is, actually, not your loan. It is the original borrower’s loan. They borrowed from the bank on their first mortgage, and they borrowed from you on your second mortgage. You have now foreclosed, taken the property back, and it’s yours…subject-to that first mortgage.
The good news is you are legally a holder in due course. That means, of course, that you have the right to continue to make the payments on the first, as the loan exists now. Unfortunately, in order to change that loan, the lender is well within their rights to say, “We have to have the signature of the first mortgage borrower to agree to adjust their loan.” It’s not your loan Jamie…it’s the original borrowers loan, that would be changed with the consent and cooperation of their lender.
So, you don’t really, honestly, have any control in this situation. Jamie, about the only thing that you can do, really, is to allow this property to go to the foreclosure steps, and be the successful bidder at the foreclosure steps. Hopefully, it would be at a greatly reduced price. Many lenders now are coming up with a much lower price. They’re offering it on the foreclosure steps at lower than they are owed for their mortgage.
If that does not take place, then they take it back at the higher price. You’ll go through the lender at that time to offer your lower price. This is too bad and, unfortunately, it is a precarious situation for a lender. Most lenders, when they take back a property, pay off the underlying loan. Or they let it go.
That’s why you’re seeing so many second mortgage lenders only accepting 500 or $1,000 on their second mortgage, because they know that they still got a problem. They got to pay off that first mortgage, or take the property subject-to that first mortgage. Then, perhaps, be upside down on it. So, it’s not a good plan for anybody to be in second position, unless you’ve got plenty of equity, and can afford to play the game that way.
The other alternative, of course, Jamie, is to go find these people and say, “Look, I’m trying to help restore your credit. I’m trying to help salvage your credit.” Now, of course you and I both know that they already got a foreclosure on there. They’ve got all these arrears that are showing up on their credit now.
The truth of the matter is, if this were able to be worked out. Then they wouldn’t have any more bad marks after this. If you were able to, actually, modify that existing loan and get it reduced. Then that would, actually, ___56:20 to their benefit and as you make payments on time, on that first mortgage that could really help.
Dorothy Belcher says, “What can I do to protect my business, our LLC, tenants, and reputation from my partner… who is contemplating filing bankruptcy. She has been told that she would have to include our LLC as she holds 50% of one of our properties, and as she has the mortgage in her own name.
The deed to the property has her name, and mine, each equal 50-50. I am trying to get a mortgage in my name to protect the property. I’m not sure my credit rating is good enough to do so. How, short of her signing off immediately, can I protect my part of these things and go forward?”
Well let’s see here Dorothy. First of all, in bankruptcy, what happens is the debt gets divorced from the borrower. So, the borrower is not any longer personally responsible for that debt. However, that does not mean the debt cannot be collected. It can, because of the collateral.
So, in this case, if she’s trying to divorce herself from that debt, she could win that. The lender still has their lien against the collateral. They can even go back to the bankruptcy court, and get the court to allow them to get a lift of stay. Go forward with the foreclosure action.
So, the important thing is that you have tenants in the property. You have money in the property. Hopefully, you have enough income to be able to make payments. So, just, because she gets divorced from the debt…does not mean that she will have to remain part of the deal.
In fact, if there’s a way that you could, “buy her out”. You might say, “Well, there’s not enough equity in the property to buy her out.” Then fine, let’s get her to go ahead and assign her shares in the LLC to you. Probably, with the bankruptcy trustees blessing…that she would do that, if there’s no equity for the bankruptcy trustee to come after, on behalf of all the other creditors.
Okay, well hopefully that helped. My goodness we had a great variety of questions today. All over the place. Deal structuring, tenants, lease options, owner financing, loan modifications, creating cash, all kinds of great stuff. Trusts, everything…so keep in mind that that’s what these calls are for. Think of the questions you want, we’ll be back together in a couple of weeks.
