Senario

Brad and Wendy are a young couple that bought a house in 2002 for $300,000. Today the house is still worth $300,000. Due to refinancing their loan to pay for some toys and trips, they own $275,000 on the house and have a PITI payment of $1,900 per month. They relied on both incomes to service this debt and Wendy has just lost her job.

If they list the house with a Realtor, they expect to net $256,000 after all fees and closing costs. Because of this, they would need to negotiate a short sale with their bank; however, as they are current with their payments, the bank will not talk to them. To get a short sale, they would have to stop making their payments for at least 90 days and that would ruin their credit.

Solution

Having received a postcard in the mail from a real estate investor, the couple decides to let the investor buy their property for $2,500 down, subject to the first deed of trust. By doing so, they have averted the need for a short sale, they have saved their credit, and they have reduced their payments from $1,900 down to $1,200 for the house they are now renting.

Summary

This was a good deal for the investor and it was a good deal for the couple.

The couple was able to keep their credit in good shape, didn’t have to deal with the stress of trying to sell their house, and was able to reduce their payment by $700 per month.

The investor was able to purchase a $300,000 property that didn’t need any work for a payment of $1,900 per month which rent from tenants will cover; albeit barely.

Extras

Lets suppose that the investor wanted to increase his cash flow. What could he do? Well, he decided to sell 1/4 of the title of the house to another investor of $400 per month. Now, he’s got a 3/4 of a cash flow positive property instead of 100% of a break even property. Had he wanted even more cash flow, he could have also sold the investor an option for another 1/4 of the title for an additional $200 per month.