Make Money on Over-Encumbered Homes


Make Money on Over-Encumbered Homes

March 1, 2016
Bill Gatten
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Bill Gatten

Consider this:

If you could know with confidence that a particular stock (‘say, “Peachy Computers”) is selling for $550 per-share today, and that it will more than double in value over the next two months, ‘would you be willing to pay $600 per-share for it (i.e., $50.00 per-share more than it’s worth)?

Gosh, I hope so, but now consider the same scenarios where you have a “cash partner” who will put up the $50 for you for half of the $50 in a couple months (‘a 50% ROI in two months?  ‘Not a bad deal for you and your benefactor Gosh, I hope so, but now consider the same scenarios where you have a “cash partner” who will put up the $50 and who will be satisfied with just half of the $50 in a couple months (‘a 50% ROI in two months?  ‘Not a bad deal for the partner and a super-dooper deal for you: ‘i.e. a ten-billion-plus percent ROI (which would be about the same ROI if you’d invested 10 cents).

Or (‘now a little closer to home), ‘let’s say you find a house with a value of $225,000, and you learn that the property is securing a loan of $250,000.  ‘Would/could this be a good deal for you IF, say, you knew for sure than the property would be worth $300,000 in three years, ‘i.e., given reasonable appreciation projections?

In your computations here, now consider the same house not appreciating at all over the next three years, ‘during which time you have a tenant-buyer (“partner”) living in it, making all the payments, and who posted a $10,000 Contingency Fund up front in order to get in without a full down payment or needing to qualify for a mortgage, ‘and who is also paying you $150-$200  per-month in positive cash-flow, while personally 100% of all maintenance, repairs, taxes and insurance along with the underlying loan’s principal and interest.

Would the forgoing opportunity be a good deal?

Considering this deal (never use the term “deal” in any conversation with a client  or prospect), remember that you got the house for nothing down and merely assumed and passed-on the existing recurring costs your tenant-buyer.

You had no standard credit qualifying process; and you’re holding $10,000 in a Contingency Fund…’all without a violation of the underlying lender’s \Due-on-Sale admonitions, or compromise of any federal regulation concerning restriction re. Owner-financing of real estate (Dodd-Frank)?  Also consider doing a transaction like this perhaps once or twice a month with others of the millions of over-encumbered properties across the US (‘i.e., by a method that very few others have the slightest idea of how to handle).

Alternatively, let’s now say that you are given an opportunity to take-over a $250,000 clean 3-bedroom, 2-bath, 1800 sq. ft. home in a nice area – i.e., ‘one on which you need make no payments (‘your partner will do that), on which you receive a positive cash flow of, say, $100 or $200 per month…’and all of this, without the necessity of a down-payment, new financing or credit qualifying.

Would you take it? 

Wait!  What?  No payments?   Before you decide on this one, remember that this fictional property, like the fictional stock purchase above, has no equity (‘i.e., its market value is $250,000 and the loan-payoff is $275,000).  I.e. ‘not only is there NO equity, but the “equity” is NEGATIVE by $25,000).  ‘Still interested?

Before you decide, note that should you accept the property as offered, you’ll have no maintenance costs or management or repair expenses.  Moreover, ‘it’s not you who is on the loan and who will be primarily responsible for making payments or paying for property taxes, insurance (‘or any HOA dues or assessments)…’and your name will not appear on the mortgage, ‘nor will it appear in the public recording of the property’s deed (title).

OK, Now decide:  ‘Pipe Dream, or Dream-Come-True?  Or… ‘is it one of those too-good-to-be-true scams that pop-up so frequently in our business?

I’m hoping (trusting) that your response to the questions above (i.e., “Would you do it?”) will be the same as mine would be, ‘which is, “Buddy, you can bet those hagfish-skin cowboy boots, I would!”

“But why on Earth,” ‘some might say, “would anyone choose to take on the responsibility of an overpriced, over-encumbered property with negative equity?”  [Analogous side-question posed as a rhetorical didactic statement] ‘Why do people keep buying stocks and bonds when their value at inception is exactly equivalent to their purchase price…i.e…’no equity?].

The real issue here is that Equity in real estate is wonderful when you have it; but it has never been the “Be-All and End-All” when it comes to real estate acquisition; and those who think otherwise are missing the point and some significant opportunities involving millions of dollars in potential income, profit and a highly satisfying life of financial security—and here’s why:

There are, after all, myriad readily salable benefits of real property ownership, aside from Equity, ‘some of which include:

  1. Income Tax Write-Off for mortgage interest and property tax (‘and its “transferability” for profit);
  2. Equity build-up from mortgage-principal reduction;
  3. Equity build-up from economic appreciation;
  4. Use as collateral for other real estate acquisitions or unrelated business opportunities;
  5. Rental, Lease and Purchase-Option income potential;
  6. Time-sharing potential in certain types of properties;
  7. Re-salability (marketability) i.e., packaging for early re-sale to other investors;
  8. Land Use, beyond residential occupancy;
  9. Profits derived from “flipping” and/or discounting one’s ownership or acquisition rights to another party;
  10. Pride of Ownership– ‘singularly the most sought-after, salable and coveted aspect of homeownership).

It should be clear in perusing the foregoing list that one needs only a few of these benefits (‘maybe even just one or two) to make money in the business of real estate acquisition.  For example, ‘consider how you might fare in your own real estate investing endeavors were you to have, say, only items  #3, #2 and #8; or perhaps only items #2 and #3; or #4, #7, #8 and #9 (…or maybe 9 out of 10).

The point is, ‘who needs “Equity” when all these other profit centers are so clearly abundant and so simply and easily at your disposal?


A serious “Don’t-Wanter” homeowner who is straddled with a $250,000 property earing a loan balance of $350,000 (i.e., ‘upside down by $100,000), and an aggregate PITI payment (‘i.e., principal, interest, taxes and insurance) of $2,530 per-month. [i.e., P&I = $1,880 + T = $525 + I = $125].

  1. Consider that any traditional home buyer acquiring a similarly valued home would need to take out a loan for $250,000 at, say, 4.5% interest if 100% financing were indeed available to such a buyer with perfect credit.  In this case, the aggregate PITI payment (i.e., principal, interest, tax and insurance) would be $1,750 (Est) per-month for 30 years (i.e., P&I = $1,390 + T = $260 + I = $100).
  1. Therefore, quite obviously, a seller of this over-encumbered property (i.e., $250K value with a $350K loan) can’t sell by traditional means without paying his bank $100,000 in cash and covering closing costs of about another $20,000 and paying all maintenance and management costs on top of that (i.e., ‘converting the over encumbrance to $120,000.  He/she is, instead, forced to rent or lease the property out for around $1,500per-month: i.e., leaving him/her with a negative cash flow of over $2-300 per-month: plus rental property management (‘not an enviable position in which to find oneself).
  1. ..’in view of ‘a’ & ‘b’ above, what might such a property owner say to your offer to take the property over and reduce his/her negative cash-flow down from to, say, $500 or $600 per-month to a lot less, while you simultaneously relieve him/her of 100% of all management, maintenance, taxes and insurance expenses…AND…’the $120,000 over-encumbrance?

Moreover, when/if you offer to take this burden off the owner’s hands, are you not essentially handing him/her a hypothetical check for $120,000 in non-taxable  debt-relief …after having calculated about how long it will take for economic appreciation and mortgage principal reduction to sufficiently to neutralize the overage (‘a simple process with any business calculator)?  And what if no appreciation ever takes place?  How much did you lose, given your right to walk-away at the transaction termination, either relinquishing title back to the owner-of-record or negotiating an extension of the original terms?

Realistically, if any reasonable person in this predicament would object to paying you, say, $5,000, $10,000 or $15,000 upfront, ‘or, say, $500 per-month for 60 months, for doing this for them, they are not thinking clearly at all?  After all, your fee is far less than closing costs and real estate commissions would be (‘even if a Realtor® would take the listing…’which they won’t) in a traditional sale if such a sale were possible.

  1. ‘By the same token, ‘what might a potential homebuyer with marginal credit and minimal down payment say to paying you a bit more than Fair Market Rent, in exchange for 100% the income tax write-off for property tax and mortgage interest, along with all (100%) of the benefits inherent in Fee Simple real estate ownership?  ‘All without a down payment or loan-qualifying,
  1. Think about it… ‘for someone in a one-third income tax-bracket, ‘the after-tax cost of renting for $1,700 per-month is actually $2,550 per month

(I.e., ‘after earning that amount and giving 1/3rd of it to the government for taxes, 2/3rds of the $2,550 is left-over to pay the $1,700 rent.  This obviously then means that the actual after-tax cost of renting in this case (or any other) is really $850 per-month more than the $1,700 rent (‘as a matter-of-fact, the renter is paying 50% of his/her rent ‘in income tax” (‘i.e., 1/3rd of what’s he/she earns, but 1/2 of what’s paid…(’that’s the unwritten, sort’a  secret and tricky rule of the IRS).  I.e.: “OK you want to spend a dollar? Well, then, but you’d better earn a dollar-and-a-half, so that when we take out our 1/3rd for tax, you’ll still have a dollar left to spend: we want half of what you spend, which is one-third of what you earn…’Like it or not, we are your 50:50 partner, Pal.”

Question:  Which is less expensive — ‘the after-tax cost of $1,700 per-month rent ($1,700 + $850 = $2,550), or an aggregate mortgage payment of $2,200 per-month with a tax deduction?

Answer:  Because of the tax deduction benefit, the $2,200 house payment turns out to be significantly less than renting the same house.

  1. Now—‘stop for another quiet moment and seriously consider how much a tenant-buyer might pay YOU upfront (‘or per-month, ‘over and above the “mortgage” payment) in exchange for your putting him/her into their “dream home” for what is tantamount to 100% fee-simple home ownership, without a down payment or any more credit-qualifying than you, yourself, might require.
  1. With $500 from the seller and $2,200 from the buyer per-month, you have a positive cash-flow, in addition to the upfront money (‘or the no-interest monthly installments paid to you for it).

Also…’in any such arrangement, your “seller,” your “buyer” and YOU, are well-shielded by the type of trust in which the property is vested: i.e., ‘protected against threatened litigation involving the property—by virtue of the Open Door Wealth Management Equity Holding Trust Transfer® in whose third-party bonded, licensed, non-profit corporate trustee, the property’s legal and equitable title are vested for an agreed-upon term.

Find a better system that this for dealing with otherwise wholly untenable investment real estate, and we’ll buy you soup taco (‘as flimsy a thing as one surely must be).