Question:
The reason for this note is to inquire how to handle this wonderful situation I have pending. We have a $269,000.00 house currently in the owner financing rent to owner category. We have an interested couple with $15,000.00 to put down and able to pay $1,500.00 per month. As you can see, the down payment fits our program perfectly and the $1,500.00 payment is about $500.00 to little to actually cover the payment on the underlying loan. Please advise how you would structure this one-year deal.
The couple Charles Sr. plans to cash out within 6 to 9 months once their credit issues are resolved. I was told that their son Charles Jr. has crummy credit and it has ended up on Charles Sr.’s credit report. Can credit wiz help straighten this out?
Answer:
Well there is a couple of thoughts with your question. One is we’ve got a $500.00 a month negative cash flow. Or do we? With your $15,000.00 down essentially you’ve got $6,000.00. You’ve got the other $6,000.00 that’s missing and it’s just in that $15,000.00 down. Now I know what you’d like to do. You’d like to go spend the $15,000.00 but what you could do as a solution is put aside the $6,000.00 in a sinking fund or a savings account and just pull down the extra $500.00 each month to cover that monthly nut. If in fact there is no other way that they can pay more.
If they could, what I’d like to see you do is try to look at how their income is and based on their jobs. Maybe the three of them, the collective income of the three of them maybe enough to cover that $2,000.00 note. In which case you just go back to them and explain that that’s what the payment has to be.
However, you can increase the credit that you give them on the rent to own. That increased credit can now cover another aspect of it. So, lets say that you would normally give them $100.00 a month credit. In this case, maybe you give them if they come up with $500.00 additional. So that’s a $2,000.00 a month payment then instead of giving them a $100.00 credit, you give them a $300.00 a month credit. So they can see that money come back to them when they purchase the home. In the meantime you’ve taken care of your cash flow challenges and they’ve actually earned some additional credits that they’ll get back after closing. In fact if you have to have the $500.00 and there is no other way to get it. Go ahead and get it out of them and give them a $500.00 a month credit. Heck, its only money and it’s a credit at the closing.
So, if they don’t buy the credit goes away. Since they have told you that it’s a one year deal remember that many times that we don’t care if the property sells or not. Then we’ve written it as a three-year plan. So, they’ve told you they want it to be a one-year plan.
What’s really interesting about credit is often one year is not enough to be able to clean it up enough to be able to qualify for a loan. So a year from now that also gives you the opportunity to renegotiate and modify the prior agreement to put it into a new category and perhaps they even lose their credits or part of their credit. However, you want to structure it. There could be some additional benefits to you by keeping it as a one-year plan.
Now to answer your second part of your question, yes the credit wiz will be at MDM. At Millionaire Deal Maker and he will be able to discuss this particular situation with you.
Question:
After dealing with a rookie realtor who’s been representing the buyer on our most recent flip we are sent to close. Before taxes, we will make $46,000.00 yeah baby. Sorry I won’t make it to MDM because I’m in a masters of commercial real estate pay for by my company. But I’ll see you at the next one. Good alright. So Brian says where can I go or who can I call to see what the penalty is for hanging bandit signs in my city?
Answer:
Well Brian, my first answer is you’ll find out. You’ll find out quick enough just go hang some signs. What happens is typically they just call you up and give you a warning. Or they try to met you and give you a warning. They don’t generally cite you the first time around. They just tell you to get all your signs down and if we find anymore then we’re going to fine you. So, that gives you some level of comfort. Although, that’s not always true. You can call the department of planning code enforcement and talk with one of the code enforcement officers and see if there is a fine for posting. I wouldn’t call them bandit signs; I would call them advertising signs in the right of way. Because that’s essentially what you’re doing. You’re putting a bandit or your putting an advertising sign in the right of way. Now there’s a few things that you can do to mitigate your risk lets call it by putting your telephone number through our voice wiz and actually using an 800 number that is not linked to you. So, you can create some privacy and some extra protection there. If anyone comes after you basically you are provide these leads through a lead generation source, which is true. Gosh, you’ll tell your lead generation source right away to get those things down. That’s one way to handle that situation. Obviously, signs work very well and we like to keep them if we possibly can.
Question:
I met up with a friend the other day. He is an executor working for a Bank of America in their trust department. He told me he comes across real property all the time that he has to sell. This seems like it could be a big break for my business. How should I foster this relationship? Will they be offended and not willing to work with me if I make offers $.40 to $.50 on the dollar? How should I handle this?
Answer:
That’s a good question they are trustees. These folks who are acting as trustees are trustees for someone else’s estate. They’re going to get paid no matter what. They will act for the benefit of the estate based on the instructions of the trust and if applicable the beneficiaries. So, they shouldn’t really be offended with any offer that comes in because they are fiduciaries and their position is supposed to be to make decisions that are in the best interest of the estate. Now based on the condition of the property and the length of time it takes to get property sold on the market. They could also see that it would make a lot of sense to the estate to accept a lesser price in order to get the property moved quickly. Also, many times they’re being pressured by the beneficiaries of the trust to get the liquidation done. So sometimes, their motivation is more to get rid of the account, and get rid of the problems and appease the beneficiaries. Then it is to get the highest dollar possible. So all these things play in in a conversational format where basically you can find out what they are willing to accept. Then try and build an offer based on that. What can also work very well in a trustee type situation is to sit down with them with your cost to sell guidelines and literally work backwards from what they say the properties worth. Show all the expenses that will cost them, the estate whomever you want to name to be able to sell that property. Of course, you can take it today if you can work something out with them. So that will also give something for their file if they need to justify the discount that they took on the property.
Question:
Can I put more then one name or an L.L.C. on an authorization form? There are times when I’m at work and can’t make calls but my wife is home and could make calls for our business.
Answer:
Well what you could do is just do two authorization forms. One with your name on it and one that’s blank. Then the blank form you can use for any names that come along. An L.L.C. name, her name or any other of the third parties that are working with you. Hopefully that answered your question.
Question:
I own four properties before I purchased the whole enchiladas junior. Now that I’ve read through volumes one through five, I now know that I need to make some changes. Very, very brilliant statement Fred. As I begin to protect my privacy and my $2 million dollars worth of real estate via the property trust. Is it also possible to short sale any of my own properties? If so what it the process and what are the best targets?
Answer:
Well Fred, if the property really is worth $2 million dollars then it’s worth $2 million dollars. So the short sale comes when or the possibly of a short sale comes when the property is worth less then the mortgage is. So, if any mortgage that you’re working with is less then it might be possible to get the bank to adjust the mortgage in some way. Meaning to lower the interest rate. Or take an adjustable rate loan and make a fixed rate loan. It’s nearly impossible to keep a loan in place and get the principle reduced. So, the only other option is to do a short sale. Now if in fact you had a $200,000.00 loan and the house really is worth $150,000.00 then you could have someone like someone you know and love call the bank as your financial advisor recommending that the bank consider a short sale on this particular property. Because you can prove that the value of the property is significantly less then is owed. Would they be willing to work on a short sale? Now they would never work with the borrower. Excuse me I wouldn’t let me back up for just a second. I did tell you that at MDM that banks are doing things these days that they’ve never done before and I just now said something that’s not true in today’s market. Actually we are seeing banks go back to the borrower and say listen if you can find somebody that can pay X for this property then that’s what we’ll accept. So, some banks are actually working through the borrower and leaving the borrower to go find somebody to pay that price for it. In other situations, the banks are working with us as financial advisors and accepting less then their owed because we have found a new buyer for the property. A buyer for what our offer price is. Yes, the banks are doing that as well. So, that gives you a couple of options there, Fred, if the property is not worth what you owe on it.
Question:
I just got a letter back from Countrywide saying that North Carolina doesn’t recognize the Garn St. Germain Act. Isn’t this a federal law that North Carolina has to abide by?
Answer:
Well Jim yes and no. States can make their own laws and their own laws can actually be stronger then the federal laws that they emulate. In certain circumstances, laws can conflict. Remember that federal law only is accepted when a state allows it. So think of our United States of America as 50 different countries that are united under one umbrella. Similar to what the European Union did was copy the United States of America. Where they took all the different countries and put them under one monetary system and elements of a centralized government. But even in our country, we have individual states that have individual capitals and state legislatures and senate and house or representatives etc. at the state level. They make laws relative to the citizenry of that state. So, what we have to question is whether North Carolina has done that. I frankly doubt it because this is first time that I’ve ever heard this. Garn St. Germain is a federal law. The thought that comes to my mind is that if North Carolina does not recognize the Garn St. Germain federal depositor institution act of 1982 then what does North Carolina do? Because that also means that possibly due on sale clauses are not applicable in North Carolina. Where in North Carolina law, does it say that a due-on sale clause is applicable? Does that mean now that all loans in North Carolina are fully assumable? So that would be one question I would suggest Jim let me see that letter and see if I could come up with anything else to work with that situation.
Question:
I heard people talking about sell and lease back your property primary residence to take advantage of the appreciation and a tax issue. For example, say my house is worth $500,000.00 and I owe $100,000.00 that means there’s $400,000.00 in equity. Can I sell my property for $500,000.00 to my friends L.L.C. then I lease back the property from my friend and sublease that to a tenant? A couple of years later I buy back the property from my friend’s L.L.C. and control the property again. So now, the new purchase price would be $500,000.00. Have you heard about this for asset protection and tax reason it sounds like a good idea to me he says. How do I do that he says. Or do you recommend equity stripping instead? My goal is for asset protection for a high equity house and minimize the taxes when we sell. Thank you very much.
Answer:
Peter that’s a very creative idea however, if your friend’s L.L.C. buys the property for $500,000.00 where is your friend going to get the missing $400,000.00? You said you owe $100,000.00 on it so there is $400,000.00 worth of equity right there. Your friend basically has to come across the table with $500,000.00 to be able to buy it. Unless they buy it subject to the existing $100,000.00 loan and you as the seller carry back a $400,000.00 loan. Here is a better way to do what I think you’re asking. When not just keep the property. You said it’s your personal residence. Why not just keep it and when you do sell it, you sell it. When you sell and carry back financing you have sold it however, you do not have to pay on the gain until you actually receive it. So your gain is spread out over however many years it takes to receive it. That can now benefit you from a tax standpoint because you can use your depreciation in your rental portfolio to offset your ordinary income. That could be over in your sale portfolio. One thing you could do also is to sell this property for $100,000.00. If you owe $100,000.00 and sell it for $100,000.00 then that means someone else gets the property at whatever price its worth today. But you don’t so you’ve sold it for its value. Excuse me what you owe on it so there’s no capital gain to you. There would be to your friend when your friend sells it. So if you come along two years later and buy it back from your friend at $500,000.00 you will be buying it at $500,000.00 but your friend just had a $400,000.00 capital gains tax issue. So, you do have to look at your long term and short-term goals before you make a decision like this. If what I’m sensing is, you want to take your personal residence and convert it into rental property. As long as you’ve lived in the property two of the last five years then you can still avoid the taxation on it. So, that’s something to look at when you look at the bug picture of how this fits in to your total tax picture.
Question:
I need to find out when you will be in Florida. Also, what is your Georgia schedule?
Answer:
Well our Georgia schedule is that I’ll be at MDM Millionaire Deal Maker October 25 through the 28th. Today I’m actually at our apprentice mastermind meeting and we’ve had an incredible day. We started out early this morning and we just burned through some terrific topics today. All the masterminds are just totally turned on. So, this has been a fantastic day and I hope that you can get involved in our mastermind program very, very soon. Because what I’ve found about mastermind is while you hear a lot of information and education at the trainings. When it comes down to the mastermind-coaching program, it’s all about you. It’s all about you and your own business and what you need to do in your own business to make your business work. We just see phenomenal results come from the mastermind events. I highly, highly encourage you all to get involved in it.
Question:
When first buying a property do you fill out the offer etc. in your own name? Or in the land trust name?
Answer:
You fill it out you comma as agent. So for example my purchase and sale agreement would say L. D. Brown, as agent as buyer and so and so as seller.
Question:
I really enjoyed your MDMJS training in Orlando and look forward to MDM in Atlanta. How easy or difficult is it really to get a buyer rent to own once I am ready to purchase a house subject to?
Answer:
Well first of all, Michael, in fact, one of the things we were working on today with the masterminds is to build a marketing campaign to build a buyers list. So, if you already had buyers imagine how easy it would be to buy. You don’t even have to make the most profit on every transaction when you’ve got a buyer lined up do you. You can make a thinner slice to have a quicker customer. So, it’s worth your while and worth your cash to build a marketing campaign that does that very thing. You can do that with signs. You can do that with marketing either letters or flyers or postcards to apartment complexes that drive your customers to your Street Smart web site. Where the customer fills out the questionnaire and then they auto load into your back end database. When the customer presses submit that lead comes to you by email. But it also loads your back end database telling you how much money they’ve got to work with. When they want to move. What type of property they’re looking for? Number of bedrooms and bathrooms? What location they’re looking for. How much they can afford per month on rent. It’s absolutely phenomenal.
So Michael I’d highly encourage and I know you’re one of our web site customers. So, it would be very important for you to do that. So, you’re not going to have to worry about how long it’s going to take to get your property rented. However, with that said rent to own properties and owner financing properties typically take a little bit longer. Because you’re getting much more thoughtful customer. Someone who just wants to rent the property their not looking at it through the same eyes as someone who wants to buy the property. So, buyers are a little bit more hesitant. They want to make sure their making the right move. But on the other side, you are picking up non-refundable down payment. Either in the form of option consideration or down payment for them to owner finances it for you to owner finance it. So that gives you a pay back on carrying it a bit longer and for me I think it provides for us a better customer that’s not as difficult to deal with as a renter might be.
Question:
I have an opportunity to do a subject to. However, the deal is a local state employee credit union deal that has a loan provision that states the mortgage payment must be auto drafted out of the owner’s state employee’s checking account. How do you handle that?
Answer:
What you might do is get the customer to open a second account there at the credit union. This would be basically all your customer has to say is they want to open a second account. It’s likely that they wouldn’t have any problem with it. But if the credit union asks why they want a second account, they can say well I don’t want to co-mingle my other funds with this account, because this is an auto draft account and I want all my auto drafts to come out of one account. That’s not all of my money that somebody might be able to go in and take more then they’re suppose to take. So, I want to set up a separate account just for this purpose. Then Jim, what you would do is make deposits into their account, it would be that account that would be auto drafted. Maybe the next day right out of that same account. That should solve the problem and give you a great subject to opportunity on a credit union property.
Question:
I am dealing with a seller that has put his back payments into bankruptcy. He owes $188,000.00 total on his house. But $40,000.00 of that is on the bankruptcy, which is all back mortgage payments. Why that is incredible Jeff, I don’t know how the bank allowed him to get that far behind. He wants us to do a short sale since according to his credit report he’s actually behind. Yeah. He is actually up to date with his bankruptcy in current payments but it is killing him $2,700.00 per month. Can this be done? How does all that work?
Answer:
This sounds like the best approach on this one would be a short sale. Even though he is up to date on his bankruptcy payments he’s about to get behind again. So what you could say is you’re calling the bank as his financial advisor and recognizing that the property is the debt is $188,000.00. You’ve been able to find a buyer for the property. Unfortunately, it’s not what you’re owed. Would you be willing to work with us on a short sale? Then the bank says yes.
If they say yes, then you’re going to proceed from there to structure a transaction that makes sense. It looks like this is not going to work out as a subject to deal for you because of this $40,000.00 of bankruptcy on his credit report. You’re telling me that his current payments are current so that means the $2,700.00 per month is probably going to show up as paid at the bank. His bankruptcy payments on the arrearage are not what the bank is going to be looking at. They are going to be looking at his current payment history. So essentially, you as his financial advisor would be bringing an offer to the table and saying to the bank look this is the offer I have today. That number is going to be a cash offer that you’re going to like. Otherwise, this deal is not going to work Jeff, because there are too many other issues with it.
Question:
Do we submit an address change to the bank for subject to?
Answer:
Yes absolutely. Whenever you take over someone else’s financing you want to make sure that the lender does not continue to mail to the property. So many times, you can obtain the seller’s social security number. Not many times, every time I should say. You should obtain their social security number. You should also obtain any passwords, pass codes, mother’s maiden names anything else that they use to access it online. Then you go online and change the mailing address to care of you at your mailing address. Which I recommend should not be your home address. It should be like a mailing facility such as the Fed-ex store, the UPS store. Someplace like that.
Question:
Please talk about prepayment penalty on subject to. Don’t we get stuck with that?
Answer:
Oh, you better believe you get stuck with that. That’s why I always recommend that you carefully confirm that there is no continuing outstanding debt on that property. What I’m recommending to you is that when you’re about to take over a subject to you get a statement from the bank. Actually two different statements. One statement is for the balance that is due on the loan. Let’s say that you’re planning to reinstate it on a subject to.
Then what you would do is actually ask for a reinstatement statement as well as a pay off statement. Now that pay off statement is going to include the prepayment penalty. Your deal has to be predicated upon purchasing it with that prepayment penalty in place. In other words, you’ve got to add that prepayment penalty to your total loan. Otherwise, you can get stuck with that. Particularly if a new buyer came along and then wanted to buy it from you. You’re going to have to pay off this loan. I hate prepayment penalties.
One way sometimes to get rid of those is if the loan is in default and you bring a short sale to the table they will give a pay off that does not include the prepayment penalty. That’s one way you can disappear that.
Question:
When you are doing a subject, to what do you say when the seller asks how they are going to get another loan?
Answer:
The answer is quite simply. Mr. & Mrs. Jones I would be concerned about that too if I were you. When you’re back on your feet. When you want to qualify for another property its simple. Just call me; I’ve got mortgage brokers that can help you get the loan with no problem at all. Or if you have a mortgage broker and you’re working with them. Just have them call me. I can fax them over a copy of the deed showing them that the properties been sold.
When they see this deed, they will ignore the entry on your credit report of this mortgage. They’ll go ahead and just clear you for a new mortgage and ignore this entry on there. Assuming that the property had actually been sold and this is just showing on your credit report and hasn’t been cleared off yet. That’s typically how to take care of that situation.
Question:
How do you change the insurance when you do a subject to?
Answer:
You are going to in most cases the insurance that is already on the property is homeowner coverage. Our plan is to move a tenant in. So, we need to get rid of that homeowner coverage and put landlord tenant coverage on there. When you do that what you’re going to do is cancel the old policy. Have that refund back to the escrow account. Buy a new policy with your insurance agent. Have them bill the escrow account for the new policy. Then place the landlord tenant coverage on there. They’re going to insure the property in the name of the trust and the trustee. Your going to be named ___ (43:31) as their interest may appear. So you’re the manager of the property so that’s why you want to be on the insurance policy as well. They have no problem with that in most cases. If they do find another agent. Because there are plenty of insurance companies, let me tell you that will insure trusts.
Question:
How do you protect yourself against lawsuits from problem tenants?
Answer:
We’re pretty careful about those kinds of things. As you get indoctrinated more into the street-smart way into doing business your going to want to do it exactly the way I’m about to recommend. First of all any property no matter what name its deeded in now your going to deeded it out of that name and into the trust name. But it’s going to be a unique kind of trust. It’s going to be a land trust.
This land trust is going to take care of all your needs, wants and desires and solve your problems before they occur. So, this step one in your asset protection process is to get every deed out of your name and into individual trust names. We can add a second layer of protection, which is the personal property trust to that. The personal property trust gives you another additional layer of protection. The third layer is the L.L.C. or corporation. The fourth layer of protection is your living trust.
In your volume four, land trusts, you’ll actually see a chart in there that graphically illustrates exactly what I just said to you. You can see that each property goes into its own trust. The beneficial interest of the land trust goes into the personal property trust. The beneficial interest of the personal property go into the L.L.C. and the L.L.C. shares are held by the living trust. So take a look at that visual and that will help connect some dots in your brain.
Question:
How should we structure our business using different entities using L.L.C’s, corporations, limited partnerships?
Answer:
The answer is as I was answering you before how do you protect yourself from against lawsuits from problem tenants. I might add something to that one by the way before I move on from that question. Another way to protect yourself from lawsuits from tenants is once you’ve transferred your property into trust. Now you can send them the letter that I have built into the system that says you no longer own the property. The new owners have some paperwork they want me to go over with you. I’m going to remain on as the manager for an indefinite period of time. So this gives you the ability to come back in and reestablish your relationship under different rules then you had before and take back control. So, that also helps you avoid against lawsuits from problem tenants.
So how should we structure the business using the different entities tying into the answer before each property goes into own land trust. The beneficiaries of the personal property trust then underneath that essentially off of public record, your L.L.C. is going to be the beneficiary of the personal property trust that nobody sees. So, that gives you some privacy. Its gives you some asset protection. It gives you some huge savings in entity structuring because you’re not going to need a whole bunch of entities that require you to have annual dues, annual fees and annual tax returns.
Question:
Can a trust be the buyer and we sell the trust to avoid double closing cost.
Answer:
The answer is it depends on the lender. If the lender has no problem with that structure. I mean the lender who is loaning to your buyer. Provided that they have no problem with that then that will absolutely work.
Question:
Please explain your new land trust procedure. It seems to have change in the last 18 months. The seller puts the home into trust and then transfers the beneficial interest to you.
Answer:
Well no, it really hasn’t changed. Although I have added a few more elements to it. Let me just explain it this way. To avoid the lender calling the loan due on sale the procedure that you must follow is that the seller places their property into their own trust. Then they are the beneficiary of that trust. While they are the beneficiary of that trust they appoint you as the manager of the property. They do the change of address to you as the manager of the property. They sign all the other paperwork for that. Then when they’re done with that part of it they sign an assignment and quit claim of beneficial interest in trust. So, they’ve now appointed you as manager of their own property while they were beneficiary and then after that procedure they then assign their beneficial interest not to you but to another trust. This time it’s going to be a personal property trust. This is your volume five personal property trust that becomes the beneficiary of that transfer of beneficial interest.
Question:
I just started the course and I’m only half way through volume one. This is so overwhelming my head is spinning. I was just presented with my first potential deal and I don’t have a clue what to do. So, I was wondering if you could just tell me whether it has any potential. Here its is house is 38 hundred square feet, purchased for $385,000.00 one year ago. The mortgage balance is $270,000.00 adjustable rate, no balloon $2,000.00 monthly payment. Everything is current. Prepayment penalty is if under two years and the house is not sold.
The payment does not include taxes and insurance. They’re getting transferred so they took a second loan 30 years from thrivent $40,000.00 balance $400.00 a month with 10 percent down payment on a house they just started building on another state, moving on December 15th. Need cash by December 15th for the additional 20 percent they want to put down on the new house. Current house is in perfect condition on market fsbo for two months with no offers. Very bad market Twin Cities Minnesota. Will sell on auction if it doesn’t sell. Will not use realtor. Don’t need monthly income. They want $70,000.00 in cash. Could take some on monthly payments. Can I do anything with this? There is just so much to learn.
Answer:
First thing we’re going to do is we’re going to back into the number. You say that’s it’s a bad market there in Twin Cites. Well what’s the current value? The after repaired value just because a year ago they paid $385,000.00 means nothing in today’s market. It may be that that properties dropped down to $300,000.00. As I said with our ASG strategy, we’re buying from banks at greatly reduced prices. So today’s market we must confirm what that is and what the value is. Then from there we’re going to design an offer. So how do we design an offer? I want you to go to your volume one and there is that cost to sell worksheet that I mentioned earlier in the call. You’re going to use that by putting this $300,000.00 or whatever the current number is in the asking price column. As the reason that’s going to become the asking price is because we’re going to prove to the seller that that is the current value and we’re going to use real numbers, real comparables, real print outs.
In fact we have a service called comp wiz. Those of you that are on the call that don’t have comp wiz definitely need to call the office and get it. Because this is what appraisers use to value properties. It’s got phenomenally good information in it. It gives you some real good details on what to do in terms of valuing the property. They give you anywhere from 16 to 20 comps and all kinds of details. So together then you come up with that offer or the asking price and show them why. Then you work backwards from there on your cost to sell worksheet. So you take into account the realtor commission, closing costs and all the other stuff I’ve got built in. Deduct that from the beginning price and that becomes the first part of your negotiation.
That lower price could be significantly different then the $70,000.00 they want. Just because somebody wants something doesn’t mean that that’s what they’re going to get. They’ve already rung out $40,000.00 in cash by taking out that second mortgage. I would probably continue to make them pay that second mortgage with the balance being $270,000.00 we’re going to need to look at that very closely. Also the fact that it’s an adjustable rate. I don’t like that at all. We need to go back to the back as their financial advisor and get the bank to take that adjustable rate loan and make it a fixed rate loan. What comes to mind first is we make the adjustable rate loan a fixed rate loan. Then we have the seller be responsible for that $40,000.00 and have them pay that back. There may not be any cash in this deal for the seller depending on what that value is.