But that’s fine; I’ve been around long enough to know opportunity when I see it. Even when things are difficult, opportunity is out there. And, as usual, whenever opportunity is restricted in one area, it becomes present somewhere else.
A little while back I wrote about the opportunities in hard money. This is where you fill the gap for lending when banks will not lend money so easily.
Well, today I would like to tell you about finding opportunity in real estate again, but coming at it from a slightly different angle.
Let’s suppose that you are in the market for a property—it could be a single family residence or a multi-family or even an office building or strip mall type property.
For ease of discussion here, let’s say you want to buy a house, but you don’t qualify for a traditional loan. Today, this is not unusual.
So, how can you buy the property?
Well, first of all, it has to be the right property with the right set of conditions.
If you find a property that’s been on the market for 6 months or longer—and there are millions of them across the country—then the seller may be willing to cut a deal.
But, you must have some things working in your favor, such as steady income, some savings, and very little debt. As many people are aware, these factors will not automatically qualify you for conventional financing, since most banks’ lending requirements are unreasonably tight these days.
So you have a little money in the bank and your debts are low relative to your monthly earnings. But maybe your credit isn’t so good, and you don’t have a lot of spare money in the bank.
Depending upon the seller’s needs, you may well be able to negotiate purchasing the property with no down payment…well, at least not in the traditional sense of a down payment.
I’ll tell you what I mean. If the seller wants out of the property, and no buyers are interested, you can offer to buy the property by structuring a “vested equity agreement” over time.
How do you do this?
Very carefully; but it can be done with the right contract in place.
Say the seller needs to get out from under the property and the mortgage payment is $1,500 per month.
You can offer to take over the actual mortgage payments with no down payment.
If the seller agrees, then you will be able to acquire the property without the need to part with cash, other than to take over the mortgage payment.
But, you need to be sure of a few important details before you agree to take over the payments.
First, find out about all the loans against the property.
How do you do this?
You can order a property profile from a title company, or online, if you are savvy enough.
Once you know what the loan status on the property is, you need to decide whether you want to take over payments on that loan. For example, if the loan is an adjustable rate mortgage (ARM), you should probably avoid the deal.
Why do I say that?
Because—and I’m speaking generally here– it is very likely that the payments adjust higher in the future, and you don’t know if you will be able to refinance that ARM loan in the future. But, if the loan is a 5 or 7 year fixed loan, with at least three years remaining on its fixed rate, then you have a judgment to make.
You have to judge whether you will be able to refinance the loan within the remaining fixed period, or if you will be able to handle a higher payment in the future.
As you may have surmised, the best situation is taking over payments on a fixed rate loan. That way, you know exactly what the payments will be in the future; even you are not able to refinance the loan later on.
So now you’ve found your property with a fixed rate loan on it; how do you go about taking over the mortgage payments?
Well, there is a necessary process to follow, and it will probably vary from state to state, but the basic ideas will apply everywhere. First, you need to understand that most mortgages have a “due on sale” clause.
What does this mean?
It means that if the mortgage company knows that a sale of the property is taking place, they will require full payment of the mortgage from the buyer.
But, this is not what you want to do.
How do you get around this?
What you do is set up a trust to receive your payments. You can do this through a title and escrow company. Most escrow companies have service departments for this and other similar purposes.
You and the seller sign the documents that spell out the vested equity agreement, and you begin making mortgage payments upon taking possession of the house.
But here’s the deal…
You will make the mortgage payments to the trust of the escrow company, not to the mortgage company itself.
The escrow company will make the mortgage payments to the mortgage company on behalf of the trust.
After a specified number of monthly payments, the title of the property is changed to your name, to reflect the fact that you are in fact the one paying the mortgage.
Now you have, in fact, acquired a property without qualifying for a loan, without making a down payment, without a credit check. You have acquired a real investment as well as a tax deduction, and…you have helped someone who needed to get out from under a property. What a wonderful outcome!
That’s the great thing about the right opportunity; it’s a winning situation for both sides.
All the best,