How Can You Create Long Term Wealth With Short Sales?Posted on March 10, 2014 by
Investors get into the real estate business to become ‘Millionaires,’ however, many listen to courses that contain outdated information where the systems are no longer working. They follow the wrong advice which seriously stalls a successful kick start. This industry is changing monthly; be sure your trainings are coming from a Mentor who is out doing deals on a consistent basis. I stand firm on my philosophy of “Don’t quit your job until you have at least one year salary in the bank.” Why, you ask? Because it puts unnecessary pressure on many marriages, families and individuals when they quit their job and the deals are not consistently coming in yet. I not only teach Short Sales, I also teach how to buy, hold, flip, subject to’s, lease option techniques, etc., which allow you, the Investors, to truly understand all of your available exit strategies.
In order for anyone to become a Millionaire with consistent and dependable cash flow, they must hold properties. In my Real Estate Junkie Course and my Mentor Program, I always recommend that you flip 2 houses and then hold 1 house. Below is an example of a short sale deal where the Investor ended up holding the property. I negotiated the short sale with my student and also partnered with her. My exit strategy was for her to hold the property, lease it out and my student will never have to lift a finger or do any maintenance to the house for a 15 year term. I explain this exit strategy from A-Z in my Mentor Program. One important criterion for holding a house is that it has 3 bedrooms, a garage, a basement (if applicable) and a swimming pool is optional.
The Sellers on this deal were two sisters, neither of which wanted the property. They owed Wells Fargo $110,000 and had not been paying for months. One sister lived in Florida and was responsible for finding tenants then cleaning the property after they moved out. In 2010, that sister quit claimed her property interest to the 2nd sister because she was done dealing with tenant issues and dirty cleanups afterward.
We listed the property for $24,900.00 and made an offer on the property for $19,900.00. We submitted all the short sale documents to the lender and ordered title work. When title work came back, unbeknownst to the Sellers, Wells Fargo had entered a Full Satisfaction on the loan of this property. In order words, the Seller now owned this property free and clear. However, we still continued on with the short sale process with Wells Fargo to confirm that they no longer have this mortgage and that the mortgage was totally satisfied and that the Seller would not be responsible for any debt owed on this property. After multiple calls to Wells Fargo, we received confirmation that indeed the mortgage was fully satisfied and the Seller was no longer responsible for the debt. Are you shocked yet?! This was a free house and the Seller did not know about it! This has not been the first time, while doing short sales, that I have discovered that the mortgage was fully satisfied and that the Seller was not responsible for the debt on the loan. This was originally a Wachovia loan and then Wells Fargo took over all loans given to them. There are many houses out there just like this one wherein the Lender satisfied the loan due to government requirements to pay back the homeowners who they have harmed.
This unexpected situation changed how much the offer would be from the buyer. The house itself wasn’t in too bad of shape. It was all brick, 3 bedrooms, and 1 car garage. The best part about the inside …. it was completely tiled throughout. The kitchen cabinets were a mess, but were salvageable. It needed new plumbing under the sink, full interior paint job, an air conditioning unit since the last one was stolen, a new bathroom cabinet, faucet, mirror, washer and dryer hook up, windows need to be replaced (broken glass), front door needed to be repaired, and the yard needed to be cleaned up. The outside of the house and the driveway needed a power washing, too. However, my partner who kept the property, decided to also paint the exterior. The total rehab cost, including the cost of the home inspector (which we normally do not have when we are flipping a house), was $17,186.00. Now, remember this was my partner’s first deal, and in my opinion some of the costs could have been avoided by doing it herself and/or passing the responsibility over to the new Tenant Buyer.
My partner and I did a telephone call with the Seller and asked her “How much do you need in your pocket in order to be done with this property” and she said $2,000.00. What that did for us was allow me to back into the deal and reach the correct purchase price based on fees that were going to be charged to Seller. After backing into the deal, the purchase price was $7,800.00. After rehabbing the place with the cost of $17,186.00 for materials, labor and home inspector, the student used her own funds to purchase the property, $265.00 for the trash, $947.16 for the utilities, and the total she purchased the property for was $26,198.16. My student immediately rented the property for $800.00 a month with a $3,000.00 non-refundable option.
So … let’s figure out how much money she needs before the property is owed free and clear with her recovering all of her rehab money. First, we can take the $3,000 option money and deduct it from the $26,198.16 leaving us with $23,198.16. Based on the yearly NET, which is after taxes and insurance each year, they will net $7,705.00. When we divide $7,705.00 into $23,198.16 it will take the Tenant Buyer a total of 3 years and one month. IMPORTANT NOTE: My partner must be very smart with that money that is received as rent and not just blow it. It should go into an account and collect until another deal comes along. Also, since she originally just had this purchase money sitting in the bank, collecting a very minimal percentage of interest, this was a smarter way to invest. Always remember, the tenant will pay your loan down and you need to figure out when the house will be free and clear. Based on my strategies that I teach the students in my Mentor Program, she will receive a MINIMUM net profit of $118,575.00 over the life of the terms and agreement between the Tenant Buyer and my partner/student.
Market, market, and market and go get some short sales deals and you never know what you might find! I call this deal a diamond in the rough and a huge blessing that allowed my partner/student to hold a property and not do a single repair to the house during the term of the agreement.