High Equity Foreclosures

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Brian: Hey guys, Brian Meara here with The Investor Entourage, today’s host of the REI Classroom. And the topic we’re going to talk about today are high-equity pre-foreclosures and what do you do with them.
Mike: This REI Classroom real estate lesson is sponsored by FlipNerd Investor Coaching, your blueprint to investing success.
Brian: Okay, guys, going back to the beginning, many, many, many years ago, I always told people that there were two parameters, and two parameters alone, in order for me to even consider analyzing a deal when it comes to a short sale. Number one, the people need to have negative equity. They need to owe more on the mortgage than what the house is worth, okay. Number two, they would have to be behind in payments. They would have to be at least one full month behind, have to be in default. Now, there are many different reasons for that, but basically, if the person isn’t in default, the bank isn’t going to really negotiate and play ball, so we always want to make sure they’re in default.
But here’s where things are different. Here’s where things have actually changed recently. I have come across quite a few people who actually have equity in their home, but they’re behind on the payments. So let me run a scenario for you.
They bought a house, maybe they’ve been paying on it for a little while. Let’s say they owe $250,000, but maybe the house is worth $350,000 or $400,000. That would have equity, right? So you’re talking about a high-equity pre-foreclosure. What makes it a pre-foreclosure is because they’re behind on payments. Just because somebody has equity doesn’t mean that there’s not a deal there anymore. I used to think that way, and for the purposes of talking about a short sale, yes, you have to be behind, you have to have a negative equity situation. That’s a classic short sale. And I’m not talking about a short sale here. I’m talking about a deal. I’m talking about a pre-foreclosure, and here’s why.
Well, let’s run the scenario. Somebody has equity in their house, but they lost their job. Somebody has equity in their house, but they’re going through a divorce. Somebody has equity in their house but, you know, they got sick. Whatever the case may be, they have fallen behind on payments and they can’t get caught up, but they want to stay in the house. If it’s a divorce situation, the wife maybe wants to stay there with the kids. Maybe it’s just somebody who lost their job, they really don’t want to uproot their children and have to put them somewhere else so they want to stay in the house.
Well, here’s the problem. As you know, if they continue not to pay, a foreclosure will take place and they’ll be put out on the street. They’re going to lose everything and they’re done. How can we, as investors, help them? What we’ve been doing, and a system that we’ve created is basically where we will come in, and using private funds, using different funds and private funding that we’ve set up, private money, we will actually come in and pay off the mortgage. We will completely pay off the mortgage.
Now, notice something. Because it’s a high-equity situation, it’s not a short sale. We don’t need the bank’s approval. We don’t need to negotiate for four to five to six months. We simply pay them everything they want. We will then also sit down and do a financial analysis with this person, determine all of the debt in their life. Let’s add up all their credit cards, let’s add up the car payment, and let’s take one fell swoop and pay it all off. Let’s completely rehabilitate them and lease the house back to them.
We’re taking ownership. We’re taking a huge risk by paying off all their debt. We’re paying off their mortgage, but we’re going to rent the house, lease the house back to them with a lease option. So the family gets to stay in the house, and at a future date, generally 18 to 24 months later, they’ll have the option to repurchase the home that they were losing. The solution helps the family by avoiding foreclosure, staying in the home. It helps the bank by not having to actually do a foreclosure. It helps the investor for making money on that spread. And people say one quick thing people would say to me when I’ve been discussing this is, “Well, wait a minute, aren’t you taking advantage of people and just equity stripping, and taking a strip, taking their equity?”
Well, let me get this straight. If nobody stepped in to help them, the bank would foreclose because they can’t pay anymore, and they’re going to be on the street and they’re not going to have anything. At least, coming in and doing this, the family gets to stay in the home, and as we discussed, all parties win, which is the solution, guys, of every single real estate deal that we enter into. We want all parties to win. We want everybody to walk away from that table feeling like it was a good thing.
Now, keep one final thing in mind. Because the foreclosure never took place, because maybe they were on the verge of bankruptcy and now they’re debt-free, that never took place, what does that do for them? Well, it allows them to rehabilitate their credit in about 18 to 24 months. So they’re actually going to qualify for a mortgage, they’re going to be able to become the owner of the home again that they never had to leave because of the solutions that we provided.
You know, guys, real estate investing has always been about being creative, thinking outside the box, like they say, right. This is a new procedure that I’m implementing nationwide, which has been working extremely well, and it’s just something else for you to consider as you’re out there investing. So don’t turn down those high-equity pre-foreclosures. If you don’t know what to do with them, you can reach out to me. So anyway, guys, until the next time, I hope that helps. Have a great day and we’ll talk to you soon.
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