No Equity Means Big Bucks

Anyone who actively invests in foreclosed and distressed property has no doubt come across the problem of finding deals with equity. There are a lot of foreclosures out there, but many times the owner owes what the property is worth, so investors walk away from the deals. Probably because they don't know what to do with a no equity deal, or they don't want to put an effort in to make the deal work.

In this type of situation you should do a discount mortgage. This means you get the bank to accept less than what is owed on the payment in full. There are a few steps to follow to make sure this will work. First, you must have the homeowner under control. You will have to work hand in hand with the homeowner if you plan to discount a mortgage. You will not be able to buy the property from the bank while it is in foreclosure, you can buy the mortgage, not the property. The bank doesn't own the property until after the courthouse sale.

Here is how it works: A homeowner calls you and tells you he is in foreclosure; he owes $95,000 on his property; it's worth $100,000 and he is eight months in arrears. He wants to move on with his life but can't sell his house because he owes what it is worth. Here is where you come to the rescue. You meet with the homeowner and have him sign an "Authorization to Release" form (this gives the bank permission to speak with you about the account) and a sales contract for the amount you are willing to pay for his property. In this scenario, we are going to offer $50,000.

Next, you call the bank and ask for the Loss Mitigation Department. This is the department that handles properties that are in foreclosure. Tell the person handling the account that you are trying to help Mr. Smith with his foreclosure and you are willing to buy the property from him. However, due to its poor condition, you are only willing to pay $50,000 as payment in full. Fax the sales contract for $50,000; comps in the area; an extensive list of repairs that are needed to bring the property up to marketable condition; a net sheet (a title company will help you with this); and some really bad pictures. The bank will then review the information and make a decision. Let's say they counter at $65,000; you counter again at $55,000; they accept! It's that simple! We discount many, many mortgages every year. Banks are not in the business of owning properties. They would rather discount a mortgage than go to the courthouse steps.

So... the next time you get a call from a distressed homeowner with no equity, what will you do? Walk away or make a few simple calls and turn your time into cash? I certainly hope you will make the small effort it takes to short sale the mortgage. It is such an easy way to make money in an industry where great deals are tough to come by. When you short sale a mortgage, not only are you helping yourself; you are helping a very distressed homeowner and giving them the chance to start over.
One can never go wrong when win/win is the solution!

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