Case Studies
- Worn Out Landlord Wants Monthly Income
- How to Avoid Foreclosure and Save Your Credit
- How to Live Above Your Means Without Paying For It
- How to Turn a $2300 Payment into a $1300 Payment without Losing Equity
- $150,000 Hard Money Loan on $225,000 Spec House
- $800,000 Spec House Gone Wrong
- Trading One House in on Another
- How to Sell a $550,000 House in a Slow Market
Worn Out Landlord Wants Monthly Income
Scenario
You have a clear title house worth $250,000 and a cash buyer offers you $220,000, which you decide to accept because you’re tired of trying to sell the house and management of tenants is driving you nuts. Your cost basis was $130,000 and you’ve owned the property for 10 years. After paying the Realtor and closing costs, but before paying taxes, your net cash would be $198,000.
Your taxable capital gain would see the government steal about $22,500 from you, for next cash to the bank of $175,500. Assuming the bank paid you 2% on your money and you needed $1,000/month income, your money would last for 17 years.
Solution
If you sold your house directly to Kalomar, you wouldn’t have to pay any real estate commissions and if you let us pay you on terms, we’d buy the house for $250,000, so you are already $52,000 ahead of the example above. But wait, it gets better. Because you’ve sold the house on terms, the capital gains tax is spread over the amount of time we are paying you.
So lets say that we agree to buy your house for $250,000 at 6% over 30 years and we prepay the entire first year’s payments. Now you’d be receiving $1499/month for 30 years; all secured by the house you just sold us.
Summary
So, to sum up, if you want cash, you get $1,000/month for only 17 years. If you sell on terms, you can have your house sold in a week (instead of months and months) and you get $1,499 for 30 years.
Which one do you think is better?
How to Avoid Foreclosure and Save Your Credit
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.
How to Live Above Your Means Without Paying For It
Scenario
When it comes to a principle residence, few of us would not want to live in a nicer house. However, many of us would prefer not to increase our living expenses to afford such extravagance.
Solution
Dave and his wife Tracey walked through their neighborhood and found a vacant house that was for rent. They approached Mary, the owner of the house, and suggested that he sell them the house for a promise to make a payment of $1,500/month with no money down. As Mary was getting on in years she was looking to get rid of the work associated with property management. The reality was that Mary wasn’t a very good property manager and she’d never been able to find one either.
The reason she kept the house was that she planned to sell it in 10 years to pay for her grand daughters college education.
Knowing this, Dave and Tracey told Mary that if she’d accept their offer (market rent was $2600) that they would give her an option to buy the house back for the same price in 10 years or less.
Summary
Mary wanted the upside of the house, but needed to rid herself of the managemet hassles, so she traded near term cash flow for a reduced workload, and retained the upside.
As Dave and Tracey were going to live in the house and had good references, Mary knew they’d make good caretakers for her property, plus they would have to pay for property taxes and repairs during their stay. Net of taxes, repairs and property mangement, Mary would have only received $1,500 per month anyway, and she would have still had to deal with vacancies.
By selling the house to Dave and Tracey, she would receive a guaranteed cash flow, elimiated her liability (she can’t be sued for a dog bite if she doesn’t own the property) and Dave an Tracey got to live far above what their cash flow would support. Everybody wins!
How to Turn a $2300 Payment into a $1300 Payment without Losing Equity
Scenario
A couple owns a $25,000 house with a CountryWide loan with a $2,300/month payment which they can no longer afford.
Solution
The couple decides to make a trade with an investor who owns two C+ houses. The investor would rather own one B+ house and the couple need to reduce their payments by $1,000 per month.
The investor trades them two houses. One is worth $130,000 and the other is worth $100,000. The couple will live in the $130,000 house and make a $1,300 payment. They will rent out the other house for $1,000/month.
Summary
Without incurring much in the way of fees, both parties were able to trade what they had for what they wanted/needed.
$150,000 Hard Money Loan on $225,000 Spec House
Scenario
A $225,000 spec house with a $150,000 hard money loan is listed for sale on the MLS, but no offers are coming in. The loan is in arrears and foreclosure is looming.
Solution
Start by figuring out who the buyer would be for this house. In this case, a couple that owns a $150,000 house free and clear would love to trade up, however, they are fearful of having a house payment that they might not be able to make.
To do the deal, this couple traded $75,000 of their equity as a down payment on the $225,000 house. This qualified them for a $150,000 6% bank loan with a $900/month payment. The hard money lender then gave them a 1st deed of trust for $75,000 with a $1000/month payment to them for their remaining $75,000 of equity in the house.
Summary
The couple now has a new $225,000 house with a payment of $900/month. They are also receiving a payment of $1000/month from the hard money lender, so they are still living paymet free; albeit, in a much nicer house.
The hard money lender now has a rental $150,000 rental house that generates enough income to service the $1000 payment they are making to the couple. Obviously, this is much better than foreclosure would have been, plus, if they really need their cash, they have a 1st deed of trust for $75,000 secured by a $150,000 house that they could sell to raise the needed cash.
$800,000 Spec House Gone Wrong
Scenario
Bobbie built a $800,000 spec house financed with a $575,000 hard money loan. The house is vacant and she is behind in her payments. Foreclosure is looming and she’s not been able to sell the house in this market.
Solution
At the suggestion of an investor, Bobbie made a list of all the 4-12 unit apartment buildings for sale in her area and wrote an offer on every single one of them. The offer was to trade her $800,000 house straight across for an apartment building. One of the sellers of the apartment buildings was tired of being a landlord and loved the idea of having a free and clear luxury house.
Bobbie got the hard money lender to agree to swap the collateral for his loan from the spec house to the 8 unit apartment building and everybody was happy.
Summary
By substituting the collateral on the $575,000 loan from the spec house to the apartment building, what Bobbie really did was trade a property that didn’t generate any income for a property with 8 tenants in it. This was better for all parties involved and foreclosure was avoided.
Trading One House in on Another
Scenario
A seller has a $350,000 house that they used hard money to purchase. They had hoped to resell the house for a profit, but the market went the wrong way (sound familiar). The seller now owes $25,000 in back interest to the hard money lender and the hard money lender wants his money back. There is also $15,000 in back taxes due, and $10,000 is needed for closing costs.
Dave has made an offer on John’s property, subject to the sale of his old home.
Dave owns a house that is rented for $1595/month with a cost basis for tax purposes of $20,000.
Solution
I have a friend, Mike, who is an investor. Dave sells his house to Mike for $50,000 cash plus Dave gets a lease option on to buy the house back for $50,000 and the option costs $200/month. This $200/month equates to a 5% return on Mike’s cash. Mike has no risk because he’s got title to a house to secure his loan. As Mike wants to earn 8%, not 5%, the option is actually structured to go up by an extra 3% per year (so it will be $50,000 plus an increase of 3% per year until exercised). Mike’s total return is 8% per year, secured by the house that he now owns.
From a tax perspective, Dave’s cost basis on his house (when he exercises his option and buys it back) will now be $50,000 (plus 3% per year) instead of $20,000. Is that a good thing? Of course it is because now >$30,000 of his gain is tax free!
Summary
Put in simpler terms, if Dave were to have just sold his house for $100,000, his capital gain would have been $80,000. By trading the house in on the new one, with an option to buy it back, Dave has effectively reduced his taxable gain by $30,000. Do you think Dave might be happy about that?
