Good day everyone and welcome back to another installment of our Street Smart Group Q and A where you have the questions and hopefully I have the answers. With 30 years experience I can guarantee you I have a good shot at it. To update you on the current market as I usually do on these Group Q and A calls let me just say hooray, hooray, the government has taken over fanny may and Freddy Mack. These were already ___(27) governmental agencies and over the years the government who had originated these corporations passed them on to private enterprise and remained in some limited amount of control over those two institutions. The government created these two institutions in order to have a free flow of money from the financial markets to back up people giving mortgages. So, it was the thing that created a tremendous housing boon in this country where it was difficult to get mortgages but when they created a back up buying unit to take those mortgages off the originators hands it created a tremendous growth in housing in this country. Now the government has taken them back and the government says wait a minute these private enterprise folks did the wrong thing. Which we all know they did. They bought mortgages they should not have bought. They allowed lenders to do all kinds of strange and exotic lending that they should not have done.
As a result now we have a housing crisis. 9% of all mortgages in this country are in default right now and there is a tremendous number of foreclosures happening. Someone called me the other day and said that they were planning to filing bankruptcy, had stop making mortgage payments on their houses, had a variety of second homes not really in our business of renting out properties but just had their own personal residence and then several, several second homes as well as vehicles. Just stop making payments on everything including credit cards etc. and interestingly the lenders have not called the loans and he had stopped making payments back in May. So, it is interesting to see what the lenders are doing right now. First of all they do not want any more foreclosed properties. They do not need anymore. They have got their allotment than you very much.
What does all this mean to us? Well first of all with Fanny Mae and Freddy Mack taking back or the government taking back Fanny Mae and Freddy Mack then that is going to provide a tremendous amount of liquidity which means that I believe the mortgage industry will get going again where many loans were dying at the table because the lenders would back out at the last minute. It was only because they did not have a resource to sell that mortgage to. Now they will have a resource and I believe that will kick start a number of things in the economy. That is all good news.
For those of you who are looking to sell property that is great news if you are going to sell it for cash. For those of us who are looking to acquire property it is still great news because the lenders are inundated with bad mortgages and defaulted loans. Right now adjustable rate mortgages are adjusting and in 2008 and 2009 there is over a trillion dollars of adjustable rate mortgages that will adjust upward. That is going to be terribly bad news for the economy. Many people were are on option arms and were paying interest only payments, very low interest only payments. Now what is going to happen is these are going to adjust to market rates. They may have only been paying one and a half percent interest, now they are going to be paying 6% or more in interest. Suddenly their payment is going to go through the roof and that is going to cause and even higher amount of default.
As we look at this we are going to see a large number of properties coming onto the market. Yes it is going to depress prices, am I worried? Absolutely not. If you can buy right and buy cheap with the factor being how much can I rent this thing for and bottom line to the entire conversation, if I can rent it for $1,000 and I am buying it with financing that is only costing me $700 then I know that I have got a spread. Is it likely that rents are going to go down? No! It is likely that rents are going to go up and the reason is that we have a number of different factors happening in the economy. First of all a lot of people are being foreclosed on and they are moving and they are moving into rental properties. That is actually having the opposite affect on rents and increasing rents not decreasing them. Most of our platinum’s are reporting anywhere from 95% to 100% occupancy which is a wonderful thing which also means this is the time to raise rents. You raise rents when you have demand, you lower rents when you do not have demand and you have to find the economy and the market where ever you can.
Okay, good news. So, let us go with Janice who has a question, Janice from Connecticut. Hi Lou. I have sales team live sending out direct mail for me to free and clear absentee owner 60, 90 day late. I am noticing people that call in listening to the scripts on PB next for 3 to for 4 minutes and then hang up. That is do not choose to leave a message or ask to speak to an operator ____(601). Sometimes I can trace these people down by their telephone number. If times permits do you recommend following up with these people or do you consider them not real motivated? Next. Thanks for your input.
Janice I consider these folks to be looking for an answer. So, the answer is yes you do want to follow up with them. PBNext does capture their telephone number when they call in. That is one of the great advantages to having it. When they listen to any part of the message that means that maybe they got interrupted, maybe they did not hear what they needed to hear, maybe they did not want to wait to hear through the entire phone tree. I does not really matter it is a lead. Follow up on your leads. It could be that you will open the door to a conversation that was completely different then the one that they were having in their mind before. Now a human being is talking to them and asking them questions and everything is relative in this business. If you do not have many leads then of course spend time following up. If you have tons and tons of lead then you are not going to have the time to do that. Does that mean that you should not follow up? No it does not. It means you should get some help and have someone else take the seller questionnaire script and use that to follow up with the customer and ask them all those pertinent questions. They can do that online, take down the information, press submit and the whole deal comes to you by e-mail.
Now we have a subject two question from Carol ___(735) who says hi Lou. The question is about a subject two deal. This seller does not want to sign over the deed. What are the other options? Thanks for the great advice on these calls. Well great Carol. So what you do is go to our back up plan. Now here is the formula that I use. First of all yes I do want you to get the deed if at all possible because you have the most control and the least amount of headaches. If they will not give you the deed then you say Mr. and Mrs. Jones I am so glad that we were able to work together, the transaction it looks like will work for us. I do have another option that makes a lot of sense and I think you will agree. We will allow you to go ahead and keep the deed in your name. You will give us what is called an agreement for the deed. That means that we are going to enter into a contract and if I do what I say I am going do then you will give me the deed. That means that I am going to agree to make payments to your lender on a regular basis and if I do that after one year you will give me the deed. Will that work for you? Then if they say no I do not want to give you the deed until you pay off the underlying loan then of course you can adjust the length of time accordingly but in the mean time yes I do want you to go back to those folks. Now if they do not like the agreement for deed concept then you back up to your lease option concept.
Let me quickly say that your books volume number 9 which is lease options and volume number 10 which is owner financing have two sections. One is your buying section and the other is your selling section. Of course now today you are buying so we want to go to the agreement for the deed in the owner financing in the buying section and that is the paperwork you want to offer to your seller. If they say no for any reason to the land contract or contract for deed or agreement for deed, by the way, they are all the same, then you can back up to a lease option and you can option to buy the property and also lease the property. Of course these documents are favorable to you so you do not have to worry about using those. As you improve your skills and come back to MDM and continue to hone and sand that block of wood and get better and better at it, you are going to find that getting the deed is not difficulty. It is just that you need some more words and some more magic words to be able to reason with the seller in a way that has them say yes. That is just a matter of training and that is what happens as you build your business you are going to get more and more exposure, more and more training and there is going to be more and more reason for sellers to give you exactly what you want. Good luck on the Carol. Let us know how that works.
Okay. Tara Moore Miller says hi I am…I did a marketing program that invited people to input their property information on my new website from you. This was very successful. Over the weekend I met with two homeowners who are interested in paying for the difference between how much I can purchase a property for and how much they owe. They will continue to make payments going forward. I will be taking the property subject to their lean with a note for how much they will pay. My question is how do I make sure they continue to pay and not leave me with the entire mortgage. One also wants to make sure I am paying and not leaving them with the mortgage. I need help. Well Terry Moore, great questions.
First of all congratulations, you followed the program and what was supposed to happen is exactly what happened. You will learn a lot more at millionaire deal maker on exactly how that is supposed to go but I am very proud of you and you will be able to make a lot of money off these properties. Now, to protect yourself.. First of all you are going to use the SP version of the contract which means seller pays. That is in your MDM paperwork, Millionaire deal maker. It is slightly different contract then you are used to. Our buying volume one has the traditional buying contract but the SP version is the seller pays you to buy their property. Now in that contract it talks about the purchased money note but this time it is going to be the note from the seller paying you to buy their property. Now you are going to need to secure yourself as much as you possibly can so naturally it is a good idea to go ahead and get an application from the seller. You can use the 1003 mortgage loan application that is in borrowing volume 6 or alternatively you can just use our standard rental application and that can give you some data on where they work, how long they have been there, how much they earn and their spouse and so on. This data is going to be important to you later if you ever have any collection issues. Yes, you do need to know their social security numbers, yes you do need to know where they work, yes you do need to know details about their lives and information about their vehicles and so on.
So let us start with the vehicles. If they are free and clear, then they have a title which means you can become a lean holder on the title. You can register with the state, you can take their actual title, submit it to the state and have yourself registered as a lean holder. That means that if they go to sell the property their vehicle, the state will report that you are a lean holder on that vehicle therefore you would have to be paid off in order for them to be able to sell or trade that vehicle. That is all good news for you. We always ask for collateral. We do not always get it. Sometimes you find that people have time shares, they have lots, they have jewelry, they have wedding rings, they have boats, they have all kinds of different paraphernalia that we can use to secure our mortgage. So, what we are doing is depending on how much you are taking back then that is going to determine how much collateral you are going to need and yes I do want you to get them to sign a promissory note and yes in that promissory note which is in your volume one I want you to go ahead and list exactly what their payment plan is going to be and exactly when and how much they are going to pay on a monthly basis.
To begin with I want you to get whatever cash you can down. 1,000, 2,000, 3,000 whatever you can get. The balance is what going to be financed. Now, an advanced method on this is to not have you be the lender on this but to have your LLC or corporation be the one who actually makes the loan. It could also be a trust. This loan is actually made to them. So, let us use and example. Let us say that it is the amount that they are going to pay you is $10,000 and they have agreed to pay you $500 a month on that $10,000 loan. Well it should not be you that is making that loan because essentially the idea is that a third party lender has come in and given you the check for the $10,000. Now they owe this third party lender this amount of money whatever it is, the $10,000 and over the $500 per month until paid then you have got that spread that is coming in to that other entity. Of course that other entity is also controlled by you but they do not have to know that piece of information. In the mean time you have got a bit of leverage because you can still talk with them as the individual who purchased the property if they get in trouble with that other lender and you can try to do a work out. In the mean time that payment is coming in and one thing I would encourage you to do is depending on how much it is try to get it as a draft away from their check. Many employers will actually set up situations where you can have an amount deducted from the check and mailed directly to a third party similar to how they do a garnishment except this is not a garnishment. It is simply an agreement that their employee has agreed to have a certain amount deducted from every pay check and sent on to a third party.
So, that is how you are going to protect yourself in this. I am going to tell you that there is some risk in this so make sure that the deal actually makes sense for you and that you are going to be able to get a monthly cash flow on the property. If at all, if there is any risk at all that you will not be able to get paid that is what you need to pay attention to and ask yourself does this deal make sense even if I do not get paid and that will be your final answer on that one. Great Terry Moore, keep me posted, I want to find out more about how this works and I will see you at MDM.
All right. Vicky ____(1722) has a short sale question. She says hi Lou is there a form that I need to be having the homeowner sign that has to do with insurance on the house? I am closing on a short sale deal at the end of the month and from now until I close the house is sitting vacant and there is insurance on it with the homeowners that are getting foreclosed on but if the house burns down then I am screwed. Isn’t there something that protects me if that was to happen? Thank you Vicky ____(1756).
Well here is what I would recommend Vicky, we have renovators insurance. I would call renovators at 1-800-790-4872. Tell them that you are street smart and that you are with Lou Brown Street Smart system because you do get a better rate. Explain the situation that you are under contract however you are not entitled to the property and ask them how to best handle this situation. They offer a builders risk policy that allows you to be able to add and deduct properties after the fact. So what that means is the policy is set up but you do not report what houses were included under the policy until the following month. Let us use an example. This is September, you would have to do your report on October 1 and pay for whatever houses were included in that policy for the month of September on October 1. It should be obvious to you that gives us a bit a lee way doesn’t it. That lee way then can give you the chance to go ahead and put that property on the list if there were to be a problem later.
The other alternative is to contact the seller’s insurance company makes sure that there is still insurance on the property, notify them that the property is vacant, however most policies allow for at least a 30 day vacancy period. So, they may be within that 30 day period before you close on your short sale and then you have got the opportunity to just use their existing insurance explain to the insurance company that those folks have assigned the property to you and that you now control the deed and that they are to change over that insurance to your name or at least have you listed ATIMA as their interest may appear on the existing policy. That could be another alternative recognizing that there is a whole variety of insurance companies out there and there is a whole variety of ways that they do business. So, I want you to know that what works at one company may not work at another company and vice versa. Vicky goes on to say, p.s. Mark and I are coming to Millionaire Deal Maker in October. See you then. Yay I am so glad. We will be looking for you.
Now, folks listening to the call Vicky and Mark are super stars and I think they qualify for a millionaire club. Vicky you need to call in and let’s go ahead and get that going for you so you can be inducted in the millionaire club when you come in October. They have been doing a number of Street Smart deals that in fact have been very, very successful so you will get to meet them at the Millionaire Deal Maker in October. That sounds great.
All right. Linda Bennet has a question. How can you sell a house you bought but have not closed in a short sale where seasoning is required? Well Linda that is a tough one because it really depends on who the lender is. Some lenders are doing loans now without requiring seasoning, others are not. So in your example the question would be are you the one getting the loan or is it a third party who you have sold the house to that is getting the loan. If they are getting the loan then you are going to have to communicate with their lender and explain the situation. Now, some attorneys and title companies are still doing simultaneous closes but they do it only for those customers that they know very well and they know that it is not a fraudulent situation. It goes back to what is acceptable to the lender. He who has the gold makes the rules and sometimes those rules can be bent for certain situations. The right kind of customer with the right kind of length of time on the job, the right amount of money in the bank, all the other indicators pointing positive, sometimes they will step over certain other guidelines in order to have that business because they know it is very good business. It is just like any business person. Many times we have to look at the over all picture on a tenant, we might typically turn down but based on the over all picture we will bend our rules slightly to make those adjustments.
So, other companies are just like us and they will bend the rules to get certain types of business so I encourage you lender to get deeply into what that buyer is doing. If you will notice on our addendum to purchase and sale agreement in volume two it talks about you having the power to have your client go to your selected lender. Why do I like my client to go to my lender because my lender will talk to me, my mortgage broker will talk to me, they will tell me what is going on, they will tell me what works and what does not work with this client and that is very important because now I know how to adjust accordingly . For example, let us say tat they got the loan excepted except for the fact that these folks do not have enough money. So, that particular lender I can ask the question, will the except a gift letter and then they check on that and find sure enough they will accept a gift letter. So, guess what? My borrower can then get a gift from us or from a third party or from their parents or from any other source to be able to make up the difference. So I would not know though if I did not control that lender. If I did not know what the issues were I would not be able to influence the outcome of that and not to pull the wool over a lender eyes, just merely to meet the guidelines that they have already set down but again I would not know that if I did not know that lender. So always try to get control of that lender if you possibly can or talk with the mortgage broker if you do not have them and say look what can I do to help. Tell me what is working and what is not working with this client and let us see if we can help the situation. That comes back to your question on seasoning because again you can redirect that mortgage broker to go look for someone who is not going to have seasoning as an issue because obviously it is an issue for you.
All right Eric Howard has an REO question. When trying to buy REO property from the bank what is the best department to deal with? It seems that some banks do not want to sell. Well the best department to deal with Eric is the realtor department most lenders do not want onesy calls coming in from people searching around and hunting around for REO properties. In fact they do not even want the public to know that they have REO properties. So what they do is instantly after they have foreclosed on the property they will go ahead and list that property. When they list it with an REO agent then that agent goes and seeks buyers. Well here is what is good with REO agents they have a list too and they have a list of all the whole sale buyers that have contacted them over the years to buy properties. So, how are you going to find these people Eric? You are going to sit down, pick up the phone, get out the yellow pages, go to realtors and start dialing. You are going to dial every realtor in town and you are going to ask the following question, who in your office specializes in REO properties or bank owned properties and then there is typically only one or two in each office that deals with these banks and they have cultivated a relationship with a particular lender to funnel all of their foreclosures to them and it is very handy for the lender because now they have got somebody they know and trust and who will do everything they can to get a good contract on it and do them favors and so on. So they typically send their business over and over to the same people. That is who you want to get in contact with.
Now here is what I want you to say after you find these folks, I am a buyer of properties in the area, I want to get to know you better. I want you to know that I will not waste your time. If you send me a lead I will make you an offer. It may not be an offer that you are going to be crazy about but I promise you I will not waste your time and I will make an offer. Will you put me on your list of your properties to come up the next time you have anything or do you have anything now? Just get in a relationship with them and then over time go to lunch with them and just pick their brain, find out how long they have been doing it, what do they know, what would they suggest, how could they help you in having your contracts accepted and so and just in relationship with them. It is a very powerful relationship too because they can do an awful lot of leg work for you and bring you some really good deals. Listen to be carefully…before they hit the MLS…you see these realtors are not fools, they do not want to waste their time either, they would rather go just like the bank wants to go to them because they have relationship, they go to their list who they have a relationship with and they do not waste each other time and so on and so they are able to get the properties moved.
Many times they never make it to the MLS. Just keep that in mind. It goes to that top ___(2833) who has cultivated relationships with those REO brokers who have cultivated relationships particular banks. It is daisy chain so you have got to get in that daisy chain somewhere and this is extremely powerful and advanced information that I am giving you all right now. Spend some time on your calendar to calendar some time to make those outbound calls and get those relationships going because those will be deals that you otherwise would not have known about. Keep that in mind, this is part of your overall marketing strategy.
All right we have got a selling property question. Hello Lou, when analyzing a potential buyer’s ability to pay what do you watch for? I have heard that the house payment should not exceed one third of income. Is that PITI? Are you looking at gross earnings or take home pay? Are there any other gotcha type things to watch for? I love these Q and A’s thanks again Janice. All right, I am very excited about doing these Q and A’s too because I can really give you some very pinpoint information that is stopping you along the way and I want to make sure that everybody really takes advantage of these things. So, does that include PITI? Yes it does. What we look at is let us say that someone is earning $3,000 per month. Then I am going to look at approximately one third of that being available for housing. When you go past one third or 33% you are getting into dangerous territory. Will I go past one third? The answer is yes but I am going to look at the overall picture of that client. How long have they been on their job, how stable are they, how stable of a family life do they have, what are their goals, are they looking to put their kids into schools in that area. You know I am looking at the entire picture of this family and the stability of this family before I will go over that one third mark and you can do this, this is a business decision. This has nothing to do with the fair housing law. This has to do with you making a good business decision.
Again I am looking at gross earnings. If they do not even know what their gross earnings are and they only know what their take home pay is then you are going to take a quarter or 25% of that take home pay as available for housing. Gotcha type things, well gotcha’s are people who do not have a rental history, who say that they live with their mama and my question is how long you been living with mama because that likely means that they got evicted from some other apartment some place or other house and now they are living with mama only out of necessity. The other thing you are looking at is longevity on the job and stability. As I said before those are very important factors in determining if you have a qualified client and remember that you are preventing a problem before it occurs when you do not allow anyone access to your property who is going to cause you problems and headaches. Good question Janice.
Flora Villa has a land trust question. She says in the land trust can you have three trustees and as many beneficiaries as you want so which one gets the tax benefit or can it be a personal property trust or living trust? Which is better? Thank you. Well, Flora great questions. The answer is yes you can have three trustees. Now here is the question, do you want them to be co-trustees or do you want them to be successors to one another? Let me give you an example. Let us say that you have your brother-in-law as your trustee and then you have your mother in her maiden name as your successor trustee to your brother-in-law and so on. Then you have a lineage that you can transfer ownership and transfer title and transfer responsibilities to and from. However if you make all three of them trustees then all three of them must be present to sign any paperwork and that means that if you go to sell the property and you have three trustees then each one of those trustees are going to have to sign in order to transfer that property. Now in some cases that makes sense because it is an oversight situation. One trustee cannot sell without the other trustees consent and it could make sense to do that on a very expensive property but on other types of deals it will drive you crazy and it is an unnecessary step.
Now your next question is about beneficiaries. You can have as many beneficiaries as you want but it depends on how you want that ownership to be divided. So let us say that you are buying a piece of real estate and you had 5 partners and there is a total of 5 owners of that property. Then each one of them could be listed as co-beneficiaries of the trust and the tax benefits would be spit accordingly. One fifth to each one of the 5 beneficiaries who are the ones that put up the money to buy the property. Alternatively let us say that this is a deal where you are buying it, it is in your estate, then you would be the 100% primary beneficiary but that does not mean that if you had 5 children they could not be successors. They will be successor beneficiaries to you. So you are the 100% primary beneficiary and then under you in the absence of you or at your death it automatically and immediately transfers to the ownership of the following beneficiaries and you can control that in any way you see fit. For example let us say that these 5 beneficiaries of yours, you really do not want it to go to all 5, you want it to go to one of them. So, you put that next one as your successor, then you can have the next one as successor to them and so on.
Very important that you understand exactly how to set up the documents when you are doing the trust. I highly encourage you to get to the MAS which is coming up again in January which is Maximum Asset Shield and that is where we go over this stuff in great detail in class and you actually bring your own deed to class and we work the trust in class. Literally you are filling out your paperwork at your seat as we are going through the explanation of how it is done. So, Flora that can help you a great deal when putting together your trust. In the mean time that is what these Q and A calls are all about so that you can move forward with the information that you already have in your course. You have got filled in versions and blank versions of the paperwork there and of course if you are on our direct Q and A program you can also fax in all of your documentation and we will be glad to take a look at it to make sure that you did it the way you wanted to do it. You also leave MAS with a special auto fill disk that you fill out one page and it automatically fills out all of your paperwork and that is a really exciting thing.
Now we got Carol has a question. This question is about trusts, I am putting an out of state property in a trust for both estate planning purposes and to get it off my credit report. Do I need to change the name on the mortgage and all the utilities and renters insurance? How far do I go with this? Well Carol that is a great question. You are going to start with deeding the property out of your name. Once the deed has gone out of your name and into the trust name then you are going to notify the lender that for estate planning purposes you have transferred the property into trust. Now they control the mortgage, they do not control the deed. You control the deed but they control the mortgage and it is completely up to them whether they cooperate with you or not. Many lenders will, they want to charge you a fee but usually it is anywhere from 50 to $150 to have that mortgage changed over into the trust name but you have to determine if it is worth it to have that happen because then once that mortgage is transferred out of your name and into the trust name and the reporting now is done not to your social security number but to the trust ID number then you can obtain your credit report and say wait a minute I do not own this property anymore and that would be absolutely true because the trust owns the property now and you would report that back to the credit bureau and the credit bureau now usually marks that as assumed by another party. So, it is still on your credit report however it is not counting in your score because they say that that is not your mortgage anymore. It has been assumed by someone else which is all very cool.
Now, get it off your credit report was the next part of your question and then you said do I need to change the name on the mortgage, I have explained that and all utilities and renters insurance. No you do not need to worry about that. Now I do not know if by renters insurance you actually mean property insurance and if it is your property insurance then yes you do need to change that. The property insurance should read in the name of the trust and the trustee with you listed ATIMA as their interest may appear as an additional insured on the policy.
We have got ____(3921) from California. Hi Lou. I am opening a trust banking account on behalf of my personal property trust. Should the name on the trust checking account be the same as the name of the personal property trust or should it be different? All right let us answer that one first. Yes, if you are creating a trust to solely hold the bank account then the bank account should be in the name of that trust because that is the only asset that that trust holds is that bank account. So, if it is a choose a name, carpet management trust or any kind of name that you come up with, that name that you have got on that account is the same name that is on the checking account and it is the same name that is only the trust itself. Very good.
Secondly if I name myself as the trustee of the checking account when I am also the beneficiary of the personal property trust, would I not expose myself to the public incase an attorney perform an asset search to the bank to find my name attached to the checking account as trustee? Please enlighten me and clarify. Okay, _____(4042) first of all getting banking records is not that simple. They can try to obtain information but the most information that the attorney ever gets is from the actual person who is being deposed. It is much harder for them to get these records from the bank and in fact they have to go through a judge and they have to give the judge a lot of reason that they need to obtain this information. Usually that is not even available or possible until after the court case has been completed and a judgment has been rendered. Now, here is the question, does the judgment go against you personally or does the judgment go against this bank account? Well it is going to be hard for this bank account to get a judgment against it since it does no business.
All it does is write checks. It does not enter into contracts, it does not enter into agreements of any kind, it does not do anything except hold a checking account. So as a result it is unlikely that the judgment itself would have this bank account name on it which also would make it difficult for anyone to be able to collect from this checking account unless you allow it to do so. Which hopefully you would have been tipped off long before and the money would be out of that account. It simply would not be there. So you would not be exposing yourself on public records because in fact that checking account is in the name of that trust and you are a trustee of that particular trust. Unless someone sues that particular trust with you as trustee they are unlikely to get a judgment which would allow them to get into that account. Hope that made sense ____(4238). Good question.
We have a tax retirement account question. When helping someone come up with a down payment on a loan I recall seeing a reference indicating that we could help them use money from a retirement fund. Is there a way to withdrawal money from a retirement fund, i.e. 401K for purchase of a new home without penalty for early withdrawal assuming there is no loan provision in the plan? Well, it really depends. It depends on how that 401k account is written. It is a pension fund and as such within that company there are certain rules and regulations that are allowed or not allowed in the case of that particular account. So we have to look at what is a possibility with that particular account. You have to go to your administrator and say hey I would like to buy a new home. How can I withdrawal from my 401k, how much can I withdrawal and is there going to be a penalty. There usually in most plans not a penalty for the purchase of a personal residence. Here is where it gets a little sticky. You may forget to move in or you may change your mind about that property after you get it bought but that could be a separate issue and it is unlikely that the 401k police are going to come knock on that door but that is a risk if you do not use it for your own personal residence.
Now, some 401k’s also allow you to move your money into a self directed IRA account which means you can direct the funds and that would be another way that you could get the money out of the 401k. So, I encourage you to follow up with your administrator, see what is acceptable under your 401k and then create accordingly. Great questions. You guys are getting advanced here. Theses are not simple questions but I am glad you are asking them
Eduardo ____(4452) has a land trust question. I a house in a land trust that holds title to the property and the beneficiary is a personal property trust as you suggested in your class. I am planning to sell it with agreement for deed and would probably have a servicing company collecting the payments. One, who should be the sellers name on the agreement for deed when I sell the property with owner financing? Should the seller be the personal property trust? If I want to put the funds on my personal property trust bank account or the land trust that shows on the public record? Well great question Eduardo. Here is what is magical about the connection between the trust and you. Remember that you are trustee of the land trust that holds title to the property hires you under a management agreement to manage that property as such he gives you the authority to collect rents, to sign mortgages, to do anything related to that property. That gives you the power to be able to collect rents, collect mortgage payments, collect anything and make the deposits of that money and it is your job as manager to write the check to whomever the beneficiary is. Now if you happen to be also the beneficiary you could just leave the money in the account and use it but that gives you the ability to control all aspects of the deal and still have the ownership being in the third party trust because of your management agreement.
Number two, how can I get the new agreement for deed buyer and/or loan servicing company to make payments to my personal property trust so I can deposit them on a bank account under the name of the personal property trust if the title…if the property is titled under the name of a land trust. I want to make sure I do all the paperwork correctly incase I need to have the buyer refinance later on. Well your loan servicing company should be receiving the payment from the borrower, your client, in their name. Then they would in turn process that payment and then write a check to whomever you tell them to write a check to. To you, to your trust banking account, whatever you want them to do with that payment is exactly what they will do.
Number 3, do I need any additional paperwork like some kind of agreement between the land trust and the personal property trust to allow the personal property trust to collect payments on behalf of the land trust that owns the property? If so what kind of paperwork exactly would I need and how should it read? Thank you in advance for your prompt response. Okay so the answer that yes you would have the paperwork be your management agreement and the management agreement is in your volume 4 land trust and it is your trustee hiring you to be the manager of the property. Separately if you now want to employ a loan servicing company as part of your team you can do that and then that loan servicing company would be able to do it. So hopeful Eduardo that takes care of everything that is stopping you on trusts and those are very great questions.
Bill says Lou, if I have A1 credit, I am current on my payments can I ask the lender for a loan modification and will it effect my credit? Great question. You are exactly who gets hurt in an industry and a market like we are in right now but basically you are the kind of customers they expected to have, A1 credit and current on payments. The answer is there could be some negotiation room and there could be the ability to go in and have a chat with the lender and see if there is something you could work out. By that I mean let us say that you have an adjustable rate loan and the adjustable rate loan is going to adjust in an ugly way. Then the thing to do is contact the lender and say hey I like to and believe in preventing a problem before it occurs and guess what there is about to be a problem. When you adjust this it is going to cause a great financial upheaval in my life and I am hanging on by a thread right now and it is only going to get worse if you hit me with a higher payment. What can we do now to modify this loan into a fixed rate loan and change the interest rate to an interest rate I can afford that makes sense. What can we do?
Their first thing is going to be refinance, refinance, refinance and I want you to say to them look I cannot afford all these cost and why would I refinance anyway just modify the existing loan. Take it from an adjustable rate to a fixed rate, change the interest rate from this high rate to a low rate and then let us move on. That way all of numbers can make sense and look good and that could work for you. Again, it is going to depend on who the lender is and what loan product you actually got in the beginning which is an important factor in how these decisions are made. Of course, none of us really know what that answer is. What is your loan product and all that sort of thing. It is really going to be looked at by the lender and then they will determine what they can do with that particular loan product.
Anna says how can a seller purchase a new home when you have taken over their loan? The mortgage is not released and still remains on their credit correct? Well Anna it does remain on their credit and so what we tell them to do is when you are ready to buy another house tell your mortgage broker that the property has been sold and by the way that is absolutely true. Have your mortgage broker contact us and we will fax over a copy of the recorded deed. That will be proof positive that that property has been sold. Now what happens is the lender typically ignores the entry to the mortgage on the credit report because now that property has been sold and it does not get counted in your overall financial picture any longer. The other good news is that if you are going to make payments on time that will give them a very good credit score and credit rating anyway so they win on both accounts and you have just got to council with them on how you are going to do it and how they need to cooperate with you. Of course they should not tell the lender or the mortgage broker that the property was sold subject to the existing loan.
Now we have got a question from Paul who says he has a house currently listed as a realtor. It is a 2 bedroom house, it is $15,900 and a $3,000 minimum commission paid to his company. That is $12,900 that would be the cost. The rental possibilities are $400 per month, he is in Toledo, Ohio and so that is a market where you can actually pay prices like that which is a pretty neat thing but you do have to have customers and make sure that you have customers. So, he says there is $1,500 minimum work needed and he is asking what should he do. Should he keep the property listed and just make the commission and move on or should he go ahead and buy the property himself? The problem is that is an all cash deal and that he is going to have to come up with the cash. Well Paul, here is exactly what I would do. I would go back to the sellers, I would tell them that you have found a buyer for the property, the buyer is asking them to carry back financing. Ask them what were you planning to do with this $12,900 anyway. You are probably just going to stick it in the bank and wouldn’t it be better to have an income stream and get the property sold right away. The new buyers are willing to pay $200 a month until paid, will that work for you? Then all of the sudden now you have got a $200 a month cash flow but more importantly your cost of funds is $200 but more importantly then that your cost of funds is principle only with no interest because of the way I worded it, $200 a month until paid. That is one of the magical things that we talk about at Millionaire Deal Maker to get you totally engrained in the process of converting the seller into the bank to finance the property that you are going to buy from them. It is a magical formula that once you learn it, it is something you will never turn away from because it is so incredibly powerful for your business. so here’s to you Paul and I want to hear how that comes down but I am highly recommending that you go back to them and structure it that way. I will see you at Millionaire Deal Maker because you need a lot more work on that kind of knowledge.
From Joe, can you componentized property you already own? Joe I have got some good news for you the answer is yes you can. There is a magical form that the IRS provides, in fact we go into more detail at this at MPI, Massive Passive Income which is the holding and selling side of your business and we teach you exactly how to get that property componentized into an entirely different way. Which is really great about that because now you are able to take the carpet and depreciate it over 5 years, you are able to depreciate the cabinets, the countertops, the sink, the faucets, the door knobs, the doors, the roof, the plumbing, the heat and air conditioning, the electrically and all the other component parts of a house. According to congress you can write them off much faster then the house itself depreciates. So while you can write the house off over 27 and a half years you can write it component parts off over a lot shorter period of time.
Now what does this do? This gives you excess depreciation. That excess depreciation could be used as a credit to off set ordinary income and there by putting you in a position to lower your tax bite and possibly zero out your taxes as we go into a lot more detail on that one at MPI. But like you asked that question Paul, how do I make this deal work.
This is a question from Mark who says it is a short sale. The current occupants have lived in their home for 20 years. They refinanced some years ago and used the money to make home improvements. Sadly their payments jumped up to $900 per month and have fallen into pre foreclosure status. The homeowners wish to stay in their home and are willing to lease from the new buyer at $600 and they can also pay all utilities. Just over $70,000 is owed but a short sale has already been worked out through another business for $34,000. The area comps average over $60,000. The short sale price of $34,000 includes all closing costs and commission. Short sale expires at the end of this month. I wish to purchase and hold for cash flow. All right.
First of all leaving the sellers in the property is not an option, period. There is too much case law, too much headache, heartache and breakdown that comes later when these people decide that what you did was steal their house and I just do not want you to even go down that road. There has just been too much that is not street smart about us doing that process. I know you have heard it from other guru’s that that is what they do. I do not recommend this program. I do not recommend that you ever leave a seller in the property. Now that does not mean that you cannot continue to do business with them. Let us say for example that you have another house or you find another house for them. Yes they can move into that house but it is clear that there was no intention what so ever of them ever getting this property back. You see, the argument that sellers like this make is that you did not intend to buy the property, you intended merely to hold the title to the property and then later they would come back and pay you off and get their house back. You see that cannot be argued if they actually moved out of the house and went to another house. It is a far stretch but if they stayed in the property you could have a problem. Hopefully that takes care of that piece of business.
You say that the short sale is worked out for $34,000 that sounds like a go. You are telling me that the comps are over $60,000 then all you need to do is find a lender who is going to lend you the $34,000 and that should be very simply and easy to do because there is so many people with IRA’s that are earning nothing and are even loosing money on their IRA’s and now suddenly you are able to come in an offer them a mortgage on this property at $34,000 proving to them that the property is worth a lot more. What safer place could they have their money then on this house right here and then you can make them either interest only payment, you can make them an amortized payment, you can let the interest accrue and pay them no payments with the interest accruing against this property and therefore that will make your cash flow go through the roof because even in this case you say these people were willing to pay $600 a month, you might even be able to get more then that. So, I would definitely look at this as a cash flow generator and seek out the financing that is going to be necessary. Start with people you know, start and say I have got a great deal for someone with and IRA or a 401k that can invest in a mortgage on a property. This makes perfect sense for them and who do you know, who do you know, who do you know. Just start asking question of everybody you know and I bet you there is somebody that knows somebody that you could do business with them.
Wow. We have covered a lot of ground today folks, all the way from buying to selling, to holding, to trusts, to analyzing buyers, to every aspect of the business and I am very excited about that but that is exactly what these Q and A’s are designed to do is solve and answer your questions where you are right now in your business and what we can do to forward that business.