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Dancing Around Default

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Edgar Degas

Is there hope for the real estate market? Yes, and she called me the other day.

Hope and her husband bought an ‘architecturally significant’ home near the top of the market as a rehab investment a couple of years ago.

Current market value is $775,000 (down from $1,000,000), and escrow is not closing, even after 75 days. The German buyer’s offer was contingent upon the sale of his home, and apparently Europe is having its own real estate issues.

Because they expected escrow to close, and because they could no longer swallow the negative cash flow, they quit making their mortgage payments and are now more than 2 months behind.

If they don’t find a replacement buyer, they can look forward to an N.O.D. (Notice of Default) in the next couple of months from their lender starting the foreclosure process. Every day their existing equity is disappearing.

They have a little over $100,000 in equity. They have two loans against the property totaling $650,000. One of them is a fixed product, the other is variable.

Their agent told them that she knew of another buyer who could put $400,000 down, if they would ‘carry’ the rest. That’s when Hope called me. She wanted to know if I could help them put this deal together somehow.

I echoed with a resounding, ‘Yes!’

There are several possibilities that could work, depending on their needs and risk tolerance.

The simplest and cleanest way would be to take the $400,000 down payment, and create a $375,000 first note and deed (AITD or ‘wrap’) that would almost immediately be sold on the secondary market.

Even though they would have to take a discount, the amount they would receive from the note investor would likely pay off the remainder of their b

ank loan, and cover closing costs.

They would walk away from the property with no strings attached, but they would also have to give up most (if not all) of their equity to do so (the discount on the note and closing costs would eat it up).

That idea didn’t make Hope very happy. She and her husband absolutely needed to pocket every penny they could, and they were willing to take some calculated risks to be able to do so.

They were willing to leave some of their existing financing in place for the next buyer.

With the $400,000 down payment, they would pay closing costs (including real estate commissions), pocket their equity, and pay off their variable loan and some of their fixed loan.

If all parties are unconcerned about the bank potentially ‘calling,’ or ‘accelerating’ the loan, then a simple AITD (All Inclusive Deed of Trust) would suffice. In the event that the bank exercised its due-on-sale provision, the buyer will simply get a loan to pay it off.

If it’s unlikely that the buyer would be able to easily replace the existing financing, then a different method needs to be used to protect all parties from potential acceleration.

Sellers have used Lease Options, or Contract for Deeds, or simply just not recorded the deed, but these methods leave all parties exposed. The judgments, liens, divorce and/or probate proceedings of either party could attach to the property and jeopardize the investment.

Creating a real estate partnership makes a lot more sense and is safer than any other non-traditional vehicle. The property is placed in a Title Holding (Land) Trust, and both buyer and seller remain beneficiaries for a specified period of time.

So, t

here is solid hope that this real estate scenario will quickly go from eminent default (and a negative cash flow) to cash in the bank and peaceful slumber.

When sellers apply the right strategy to their particular situation, they are empowered to achieve desired benefits regardless of market conditions.

Always consult with your CPA, tax attorney and/or financial advisor before selling any real estate.
Dawn Rickabaugh is a real estate broker with expertise in seller financing and real estate notes. www.NoteQueen.com; 626.641.3931; dawn@notequeen.com

July 7, 2009

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Dawn Rickabaugh


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