How Can I Help Sellers Who Are Late On Payments or Upside-down? – Real Estate Investing

How Can I Help Sellers Who Are Late On Payments or Upside-down? – Real Estate Investing

January 14, 2020 1 By Luis Garrison


Joe: Hey, it’s Joe Crump. I’ve got another
question here. This one is from Kim from Los Angeles. Kim says, ‘There’s two scenarios
that I’ve come across when talking to sellers. Number 1: What happens if someone is behind
in their mortgage payments? Is there a way to help them by selling the home rent to buy
with the tenant?” Joe: She’s talking about the for rent method
where we use the lease option memo and we tie up the property to buy it with a rent
to buy that’s assignable that we then assign to a new buyer and we take the lease option
fee, the first month rent goes to the seller, and we’re in and out of the deal, and we make
a chunk of money, then we’re done. So that’s what she’s talking about here. But, she’s
talking about somebody who’s behind on their payments, and if they’re behind on their payments,
you don’t want to do this with a buyer if that person is behind on their payments. So,
they either need to get current on their payments — there’s a possibility that you could come
up with their late payments out of your lease option fee but that’ll dramatically reduce
the amount of money that you can get to do that deal. I don’t usually do deals like that,
but you can look at that and decide for yourself. You can also have the seller talk to their
mortgage company and see if they can get a loan modification, which is becoming more
and more difficult these days for them to do, but it might be possible for them to bring
it current and then make the payments over time. That way, you’ll protect your buyer
in the transaction and the seller will be back on track and get their credit straightened
out over time. So it’s a real benefit if they can pull that off. But, if they can’t, I wouldn’t
spend a lot of time with a deal like that unless you can get it substantially under
market value. Joe: Remember, there’s only two ways that
you can make money in real estate as in investor: one is that you buy properties substantially
under market value for cash, and two is that you buy properties that are closer to market
value on terms or even above market value in some cases. So, if you can buy it on terms
then that means you can sell it on terms. If you buy it for cash, you can even do an
assignment for cash if you can get it low enough in price. But remember, the person
you sell it to has to come up with cash, and that makes it more difficult for them. That
means you have fewer people that’ll buy that property. So you want to focus on properties
that you can sell on terms most of the time because it’ll make it easier for you to sell.
We know this about a property on a lease option that’s properly priced, not just the purchase
price but the actual monthly payment, which is much more important than the purchase price.
Joe: The purchase price can be high, but the monthly payment has to be in line with the
market rent for that property. If you’re over that, it’s not going to sell. But if you’re
in line with that, and you use the techniques that I teach to sell, using Craig’s List and
using the signs in the yard and those types of things, to get it sold, that property will
sell in 30 days or less, and usually in just a couple of weeks. If the monthly payment
is high, it will not sell at all and you’ll have to get your seller to get their monthly
payment down because they’ll be competing with other properties.
Joe: I hope that helps. Oops. I’ve got question number two. Let me finish that. Question two
is: “If someone is upside down with their property value by $150,000 — Let’s say the
seller wants $500,000 but the current market value is $350,000. In one of your CD’s you
say that you can give the seller the sale price of the property they want of $150,000
more than market value today, if they agree to a longer term on the lease option like
5 years. My question is, how do you know how much above the market you can go with the
sale price, and how much longer do you need to extend the term by? Is this something that
one becomes more comfortable structuring the longer you’re doing deals? Right now it seems
so arbitrary. Or does the market naturally dictate what you can and cannot do with regard
to structuring the deal (meaning if it’s too priced high, no tenant buyers will respond
to my marketing of the property)?” Joe: So, you can sell the property for more
than it’s worth. We do it in California. We do it in Las Vegas. We’ve done it in lots
of areas where the property values dropped much more than they did in the Midwestern
states where they dropped 30-70% in value. And we have exactly these scenarios where
the property has a mortgage of $500,000 but the current value is only $350,000. But we
have been able to sell them for $500,000 — because the lease option buyer is looking for a way
to own that property. They will only pay market rent. So if you’ve got a $500,000 property
and let’s say it’s got a $4,200 a month mortgage on it but market rent on that is $2,800. So
you’ve got $1,400 a month negative cash flow if they only get $2,800 a month income on
that property. But the seller, having $1,400 negative is much better than them having a
$4,200 a month negative. That’s why this works — because it makes sense for people who want
to keep their credit clean. Now it may make sense for people to just let the property
to go back to the bank and take that hit on their credit. But there’s an awful lot of
people, like government workers, politicians and people that are in high corporate jobs,
who need to keep their credit clean because their companies check it. If you’ve got some
kind of security clearances, you’ve got to keep your credit clean because you become
a higher risk if you’ve got bad credit. So there are a lot of people out there that have
to keep their credit clean that have properties like this that have this kind of income that
you can help. And you can solve their problem and take their $4,200 a month pain and drop
it down to $1,400 a month pain, which is much better for them.
Joe: It’s like the heart surgeon. He comes to you and he says, ‘You need to have heart
surgery. I’m going to have to cut your chest open. I’m going to spread it with these rib
spreaders. I’m going to go in there and I’m going to cut around. You’re going to be in
lots of pain and it’s going to be horrible. And I’m going to charge you a huge amount
of money to do all of this. But the good news is that you’re going to live. The bad news
is that if you don’t do it, you die.’ So which choice do you make? And that’s the same situation
that these folks are in. it’s not a good situation but it’s a situation that makes sense to an
awful lot of people. So don’t let these prices intimidate you. And when lease option buyers
buy, the likelihood is that they are not going to exercise the option. They want ownership
without the responsibility of ownership. Less than 30% of lease option buyers will actually
exercise the option. And we want them to know up front that the likelihood is that they’re
not going to exercise the option — while they are there — while that buyer is still
there. They’re going to treat it like their own house. You know, you don’t wash the rental
car. But if you perceive it as your own, you’re going to take care of it on a much higher
level. Joe: People want to have the American dream.
And whether you buy it with a lease option or you buy it with a mortgage, it’s still
your house. If you’re a tenant, you’re a tenant — you’re renting from somebody else. But
as a lease option buyer, you are a buyer in that transaction. And that’s what people want
— they want to be able to tell other people, ‘Come back to MY house.’ They want to have
control of that house. They want to be able to paint the walls if they want to. They want
to be able to take care of it the way they take care of it. And that’s what we provide
— we provide the American dream for people who can’t qualify for mortgages, which is
a big portion of the country right now. And it’s been working for us for many years. So
there’s always people who have this situation and there’s no reason why you can’t make this
work for yourself. Good luck, Kim.