Today’s REI Classroom Lesson

Brian Meara explains what equitable interest is and how it pertains to your deals.

REI Classroom Summary

Find out how to obtain equitable interest and exactly what it allows your to do.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the 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 with another episode with another episode of the REI classroom and today we’re going to talk about what is an equitable interest and how do you obtain it?
Mike: This show was sponsored by
Brian: Okay, guys, what is an equitable interest, and how do I get one? And specifically, how do I use this in the world of short sales? In equitable interest, let’s start the foundation. It’s something that’s granted to you as the investor-buyer from the seller, the owner record. How do you get it? We use a simple three-page addendum called a Supplemental Short Sale Addendum. And there’s very specific language in that addendum and by the homeowner, the seller, granting and agreeing to this, giving you this equitable interest, this right, is how you get it.
A lot of you don’t understand it. “How do I get it recorded on public record? Do I have to do this? Do I have to get it notarized?” No, absolutely not. By simply executing that addendum, which again, is a very simple three-page contract, it goes with the agreement sale or with your purchase agreement, it gets scanned in as one document and sent off to the bank. So now all parties are notified that this equitable interest exists. You have provided full disclosure, which as you know in the world of real estate, especially real estate investing, is very important. Disclose, disclose, disclose and you’re ready to begin.
Now, what exactly does an equitable interest do for you as an investor? In equitable interest, first of all, you have to understand, is not an ownership interest. And that’s one of the biggest misconceptions out there. There are a lot of people who I believe incorrectly tried to take possession of someone’s deed. Now you have to understand, if someone is in a financial problem or going through a rough time where they’re not able to pay their mortgage, they’re literally losing their house, to come to them and say that you want them to sign over their deed into a trust is a very hard thing to do. And frankly, it’s a very unnecessary thing to do.
Now I can tell you that many years ago, one of the strategies that worked very well was to create a land trust, have the deed transferred over and obtain what’s called an equitable interest. Well, the way that we did it there, you would actually do an assignment of the beneficial interest in the trust and that’s how you enclose the deal.
Now if you have no idea what I’m talking about, don’t worry about it because we don’t do that anymore and frankly, I don’t know anybody who does. So the new way of doing this, again, gives the homeowner piece of mind that you’re not trying to take their deed, it remains in their name, you’re simply a buyer with that three-page addendum which grants you the equitable interest. “So then, Brian,” you say, “what exactly does it do for you?” Well, if it’s not an ownership interest, what is it? It’s a controlling interest, guys. It’s a controlling interest. Meaning, it gives you certain rights, legal rights, to do things with that property prior to taking legal ownership. Specifically, it gives you the right to market, to list the property, to market it for sale prior to you even owning it.
So if you’re going along in a short sale, you do your analysis in the beginning, you determine okay, here’s the top line price I’m willing to pay based on all of our analysis. And then the bank comes back and they want a certain price, which is always very high. And then you continue with your negotiating, you send in your supporting data, and you’re trying to go back and forth and get that price to come down, and generally, it does.
But at the end of the day, you realize that there’s just not enough room to buy this house. You were going to buy it, maybe just do a ride out the whole period and resell it for a profit. Or maybe you were going to do a little mini rehab or a full rehab, whatever the case may be.
Or maybe you were going to buy it and hold it and put it in your inventory, a buy and hold property, a long-term income. But after the numbers came back, it just doesn’t make sense. So you, as an investor, have every right to make the decision not to buy the property. So you, as a service to the homeowner, and also so how you can actually get paid for your efforts, you need to find out an alt. You need to line up and find an alternate buyer.
And there are many ways to do that, which we’ve talked about in other trainings. You can work your buyers list, you can do networking. There’s a lot of different ways to do it, but one of the smartest and fastest is to put it back active on the MLS. Every short sale legally has to be listed on the MLS. Your contract when you go and start your job in the negotiating, will allow it to go pending under contract, whatever your local MLS calls it. But at a certain point in time, if you determine it doesn’t make financial sense as an investor to continue and buy this property and you decide to back yourself out of the deal, you can then make the property back active and start collecting backup offers.
When these offers come in, you now have the legal right to receive them in addition to the homeowner so you can review them together and decide which one to take, which one to release your equitable interest to for a fee, which is how you get paid in a release and termination of contract. And therefore, you can actually get paid for never having done the deal, and never frankly having seen the house, which we’ll talk about in another training.
So, guys, that’s what an equitable interest is, that’s how we use it, that’s the legality of it. I tried to keep that pretty basic. There are a lot of in-depth trainings that we have on this, but for right now I hope that helps. And until the next one, get out there make some money and we’ll talk to you soon.
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