I put this on my blog; my facebook and my email list because I think it’s so important.
Since I come from a family of attorneys, I am always worried about, “what if”. I try to look ahead so that I try to minimize any possibility of legal hassles. One bad deal can erase a bunch of good deals and can cause major damage. I always try to avoid trouble- especially when dealing with someone in foreclosure.
I am sure you all know that if someone has a Notice of Default filed against them, they have special rights. You don’t want to be called a foreclosure consultant. That is bad news for you. Don’t ever tell anyone you can stop the foreclosure. You are trying to buy their house. You even have to use a special contract called an Equity Purchase Agreement.
One of the clauses in these contracts are an “unconsciounability “ clause. That means you can’t cheat them out of their rights. If they have equity you need to make a deal with them. Even if the contract does not have it in there, it’s wrong to cheat someone. I believe that what goes around comes around so you need to act in a professional manner.
So what to do with their equity?
I do not believe in equity shares. That is only looking for trouble. These contracts talk bout share of the profits. So what is profit? That is a vague term that can be interpreted many ways. I surely don’t want to be in front of a judge having to explain how I got to that amount. Trust me you will lose. You are the big bad investor trying to cheat the poor homeowner in foreclosure.
What I do is negotiate with the owner what we both consider a fair amount considering the house is a mess and I have to borrow the money from a hard money lender who will charge me points and an outrageous interest rate. That’s not including what I have to put into the property to make it salable. Then there are realtor costs and escrow costs both in and out.
I explain to the seller about the time value of money. That means that the longer they are willing to wait for their money, the moré they will get. If they want it all at the close of escrow, it will be a lot less than if they are willing to wait a few months until I have a chance to fix the property and re-sell it. Of course if they are willing to wait a really long time, I don’t need to get any discount. I tell them to think about it.
When we have come to an agreement, we create a trust deed which is usually in 2nd position behind their existing loan or a new one that I have created by borrowing the money.
This is a much wiser method.