The “Over-Encumbered” Gold Mine





Via the use of the EHTrust Transfer™ an investor can acquire interest in a negative-equity property and essentially ignore its over-encumbrance without a contractual obligation to retire the mortgage until such time as economic appreciation and loan principal-reduction would reduce the debt obligation sufficiently for the loan balance to be less than value.

After all, if a property owner pays the investor to take over the property, while a credit-challenged, would-be buyer, pays a reasonable mount to get into the property, ‘why would that not be a beneficial opportunity for all parties?

In such a case, the Settlor-Beneficiary eliminates a burden; Resident Beneficiary achieves ownership benefits in a home that he/she likely could never own otherwise, the Investor Beneficiary receives cash up front and along the way.  Even the lender is (‘should be) pleased in knowing they no longer need worry about foreclosure on a non-performing asset that is un-marketable without a major financial loss.

In this arrangement, the Mortgagor (i.e., the owner-of-record) places the property in an EHTrust™ and names the investor his/her Remainder Beneficiary (”Investor Co-Beneficiary”).  Then at this point, the Investor Beneficiary finds and installs, a tenant beneficiary (“Resident Co-Beneficiary”) in the property who, in exchange for all benefits of home ownership, assumes all (or a major portion) of the monthly costs of ownership (i.e., payments, taxes, insurance, upkeep, HOA, etc.).

Example: A $200,000 home with a $235,000 loan remaining to be paid at, say, $1,400 per-month (PIT&I).

This property as a rental would rent for maybe $1,300 per-month, thereby leaving the owner with a large negative cash-flow considering the cost of maintenance, management, repairs, utilities, etc…i.e., of, say, $500 per-month or so, considering a normal vacancy rate and management expense.

Furthermore, ‘any attempt by the owner to sell at this point would likely bring a negotiated offer of no more than $190,000,  leaving the seller with a $45,000 mortgage deficit: ‘plus thousands more in closing costs (‘pre-sale refurbishment, commissions, escrow, title, inspections etc.).

With all this in mind, assume that a fictitious conventional buyer with AA credit, who could arrange for 100% financing at, say 5% interest (over 30 years), would pay $1,250 per-month.  ‘So, we’ll assume then that a Resident Beneficiary in an EHTrust™™ should pay roughly the same amount per-month.

NOW…’consider what happens when the property owner enters an EHTrust Transfer™, wherein the in-coming beneficiaries agree to pay the over-encumbrance (‘someday), and pay the same monthly sum as would that fictitious buyer (above) with 100% financing (i.e., $1,250 p/mo):

Suddenly (Viola!) ‘The seller no longer has the $45,000 mortgage-debt on his/her shoulders re. the cash-draining, unwanted property

  • The Resident Beneficiary is covering all payments, costs of maintenance and repair
  • In that the Resident beneficiary has access to full tax deductions for mortgage interest and property taxes, he/she cans pay more per-month than the after-tax cost of renting (‘thereby allowing for a positive cash-flow for the Investor Beneficiary)
  • The trustee’s collections representative is handling the accounting for all payments and disbursements of insurance premiums, taxes and mortgage payments (‘and HOA fees, if applicable)
  • And,…’perhaps even more importantly, the property is now well-shielded from any beneficiary’s legal errors or actions, such as IRS claims; creditor claims on the property; claims in domestic dissolution, probate actions, and bankruptcy

As well…’the $150 per-month short-fall in payments can be paid by the Settlor (seller) which amount is better by far than the Previous $5-600 per-month negative, coupled with the $45,000+ mortgage-debt.

Security for performance by the Settlor Beneficiary (“seller”) can be a collateral assignment of, say, another property or an item of personal property (car, boat, motor home,  motorcycle, etc.) of equivalent value.

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