Over the next few months, the publication date may be erratic, but please be patient, once I get a laptop, it won't be an issue. Another busy month in the arena.

We'd love to hear suggestions and specific questions you may have regarding real estate investing. Send us your questions and topics and we'll include answers, discussions with experts and responses in subsequent issues.

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Today's Topic: Foreclosure Solution
Issue #006
October 11, 2004
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Also this issue: Nominate real estate investing service providers for our free directory.

Foreclosure Solution

Foreclosure solution - a story about using a creative approach to solving a foreclosure crisis for a client.

On a recent Friday, during a meeting with a real estate broker to list an investment property - my cell rang.

One of my private lenders was on the phone with a tip about a young man facing an imminent foreclosure auction. In fact, the call came in at 12:00 p.m. and the deadline with the bank was 3:00 p.m. that same afternoon.

By 6:00 p.m. that night, the deed to that house was in my hand, all supporting documentation was signed off and notarized, the bank had confirmed the wire receipt of the funds reinstating the loan, and the homeownwer was relieved, happy and extremely grateful. We were successful stopping foreclosure again.

So much so in fact, that when I called the private lender later that evening to tell him the results, the first thing out of his mouth when he got on the phone was:

"So I understand you own a house."

The seller had called him prior to my call thanking him immensely for sending in the 'Marines' and saving the day.

Let's take a look at the details of this transaction and see why the seller was so happy.

Here is the situational background...

First off, the seller is a single dad - with two charming and delightful young daughters - in the 11 and 13 range. He is well mannered, looks you in the eye when he talks and seems like a generally nice guy who is a loving and responsible father. He also has a healthy, beautiful female German shephard who is obviously well loved.

In late 2002 he sold this house to a buyer who got a new 80% first and the seller took back a $43K second. Over the course of the time since that sale, the buyer defaulted on the first. In fact, he never moved into the house - but had rented it out to a tenant who didn't pay.

My client filed a foreclosure and got the deed back with a 'deed in lieu of foreclosure' as a settlement to his foreclosure action.

The problem is that he had not planned for this event in advance and had to beg, borrow and 'steal' every dime he could scratch together to bring the 1st deed of trust current. He negotiated an arrangement with the lender to make a monthly payment every month plus an extra $800 to pay off the arrearages over time - after he sent the lender $8000 cash.

This created a $2353 a month payment which was tough - particularly with a recent slow sales month. The client is self employed.

The meeting with the real estate agent ended about 1:30 and at 1:45 p.m., I called the seller. He was meeting with another 'investor' at the time. He called me back about fiften minutes later. While waiting for his call, I did some research on the title and the chain of events over the last two years so that I could be informed when we spoke.

We agreed to meet within an hour so I could see the house personally and make a decision if I wanted to participate or not.

Prior to meeting with the seller, I created the documents necessary to complete the transaction - including:

=> a purchase and sale agreement
=> option to purchase
=> declaration of land trust agreement
=> assignment of beneficial interest in a land trust
=> seller acknowledgements
=> several more trust related documents
=> quit claim deed
=> limited power of attorney
=> and several other disclosure documents we use in these situations...

The Terms of Our Agreement

When I walked in to the door of the sellers's house, I had a file with these documents in it and my checkbooks. I arrived about 3:07 p.m. and the seller had been in touch with the bank to inform them that we had a solution and that we would be wiring money this afternoon.

The lender agreed to extend the deadline until 8:00 p.m.

We discussed all the the options for about 45 minutes and in the meantime, I contacted my sister who agreed that I should go ahead with the deal.
These are the terms that we agreed to:

1) We would bring the loan current - by wiring $1300 (the balance of the September payment) to the lender that afternoon and buy the house 'subject to' the existing underlying financing.
2) We agreed to pay the October payment before the end of the month.
3) We agreed to give the seller a month breather and told him to save his October payment and plan on making a payment in November instead.
4) The seller agreed to reconvey and record the release of the second deed of trust on the property.
5) The seller agreed to deed us the house.
6) We agreed to sell the property back to the seller on a two year lease with option to buy at $226K.
7) The seller agreed to pay $1450 a month beginning November 2004.

Let's see how this agreement works out for both parties...

The seller agreed to sell his equity in the house for a significant discount. Bear in mind that the second would have been totally wiped out the following morning at 10:00 a.m. had we not agreed to buy the house that afternoon.

He gets to stay in the house and keep his daughters in the same school district and allow the dog to keep enjoying her nice fenced yard.

His cash crunch has been resolved.

The current value of the house came in at $240K when I looked at 'average comps' online. Instead of taking the deed and selling the house on the open market for $235 or 240K to a third party buyer, we agreed to split the equity with the seller - if he performs on the lease payments as agreed for 24 months.

That is he will be able to buy that house in 24 months for $226K if he makes the payments on time according to our agreement.

Why is this an advantage to the seller?

==> He gets a guaranteed equity in 24 months. He has about $14K in equity going into the deal, versus $0 Equity had we not come onto the scene.

This doesn't include any additional appreciation that is likely to occur over the next 24 months. The actual appreciation in the Seattle Puget Sound market has been ~8% per year consistently - on average - for the last several years, although it varies quite a bit depending on specific neighborhoods and location. Even if it drops to 4%, he will have a house worth ~$259,500 at the time he exercises his option. If it holds steady at 8% appreciation, his house could be worth about $279K at the end of the option period.

==> By restructuring the debt and bringing new financing to the deal, we will create an affordable payment for the client, after we bring in a new loan which will close on Dec 1.

==> We are helping the seller restructure and improve his credit rating by enabling him to establish 24 on-time payments on a lease with option to buy agreement. His credit rating has taken a serious beating in all of this.

Our benefits in the deal...

==> We get about $36K in equity just by singing the documents. We figure it will take about $190K to get the title cleaned up and buy out the existing loan. We will do this after the November payment when the prepayment penalty goes away on the existing note.
==> We will get $200-300 a month positive cash flow during the term of the option.
==> We get the tax benefits of depreciation.
==> If the seller defaults on payments, his option agreement will be null and void and we can resell the house to another third party buyer and make the difference between $36K in equity and whatever the prevailing market is at the time of default.
==> We will get the benefit of two year ownership and minimizing the capital gains rate when we resell.

Although we could have done this deal with a resell price at $240K and set it up for $50K equity to our benefit.

We didn't.

We gave him some breathing room on his cash flow problems, we provided him an equity of $14K, restructured the debt to make the payments affordable for the client, enabled him to eliminate a massive disruption in his family life - particularly impacting his sweet daughters - who in my opinion, have been through enough trauma the last several years in the divorce.

Net Results:

1) We created a win-win situation for both parties.
2) We have protected our position and have added a house to our portfolio. (It's a cute house by the way - in very good shape.)
3) We have a buyer who has a great deal of incentive to follow through on his agreement and who will maintain the house that he is going to buy.

I just hope we get four more calls like this between now and the end of the year.

That's it for now...

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See you next time.

Best regards,

Michael Barrett