By Bill J. Gatten
March 13, 2000: I receive a call from my bandit sign (“I Buy Houses, Full Price, All Cash or Terms”). The caller, Mr. Brown, says he has a house with work to be done on it that’s worth $150,000; but which has a $154,000 loan on it. He says he’s just looking for someone to take over his payments. I ask how much work needs to be done. He says maybe $10,000. I tell him I'll call him back the next day after checking the title and getting some comparable value information (“comps”). The comps show a value of perhaps $160K after fix-up (still no equity for me).
March 15: I call and arrange to meet Mr. Brown at the property to see the mess (broken windows, a yard full of trash and termites). I comment that I can see that he is in a pickle with this one...he agrees. I tell him I’ll take it if he can pay $2,500 for possible termite work. He agrees.
After inspecting the house, I determine that actual costs to bring the property to a reasonable cosmetic condition (with good, but cheap, labor) might run $5,000 to $6,000. I reason, as well, that by keeping the loan in place, I can ask for $10,000 up front from a tenant/buyer on a 50:50 land trust equity share. I figure I can advertise it at $165,000 and perhaps be able to start out at break-even (without any out of pocket and with a couple thousand ending up in my wallet). I then have Mr. Brown sign a 15-Day Option (I try for 30, but he’s afraid of making another payment). Upon handing him the Option to sign (with a ten dollar bill stapled to the front), I also give him an unsigned Purchase Offer and explain that the ten bucks is just legal consideration (‘stops them from asking for an option fee).
March 16: I hot-foot it down to the county court house to recorded the Memorandum of Option, then over to the newspaper office to run my ad:
NO BANK QUAL, NO DOWN,
NO CRED. APP
3 Pmts & Clos Costs Moves
you in. $165K 3+2, $1,350
p/mo+tx and ins. Needs TLC.
March 18: For a couple of crisp hundies, my friend “Bob” puts a coat of gray paint on the front of the house and frames all the window and door openings with bright white 1 X 6 boards: just the front, not the sides or back. He then collects the trash in the front yard…and throws it in the back yard. Next, he mows the front yard weeds and plants some flowering plants along the front of the house. After three or four hundred dollars at most, the house looks “cute and cozy” from the front (‘called “Curb Appeal”). The plan is to then begin work on the rest of the house, in hopes that someone might just drop by and offer to finish it for a reduction in price.
March 20: Bob dismantles the kitchen cabinets. No real work, just creating the illusion of “work in process.” Note that I haven’t myexercised the Option yet and I’ve only spent about $500 at this point for everything.
March 24: The ad hits and the phone starts ringing. I repeat the same mantra with every caller. “Yes, I have this little place on Fig Street, and if you can afford the ten thousand to get in, and the $1,100 payment, I’ll just GIVE it to you. (Pause) The only thing I want is for you to put it in your own name, or sell it, in a few years. Then if there’s been any appreciation we can just split it.”
With each caller, I tell him or her that the house is being worked-on, but that if they want to see it, they have to wear “rose colored glasses,” because it’s under repair. Remember… it looks great from the curb: I just want them to see “potential” at this point.
March 26: The fifth or sixth caller calls back and asks if we can meet at the house to work something out. After re-inspection of the mess, he asks when I might be finished with it…I tell him maybe in two months. He seems discouraged. I then tell him that if he’d like to finish the work himself, I’ll knock a couple thousand off the price, and reduce the upon front by $2,500 (i.e., now he can get in for $7,500 plus the first payment when due). I then complete a purchase offer—from him to me—and have him sign it and accompany it with a non-refundable check for $3,750.
March 27: I return to Mr. Brown, and give him my signed purchase offer.
April 1: I have Mr. Brown execute the “Joe Brown Land Trust” (as its only beneficiary), appointing one of my two trustees as the title holder.
April 4th: I complete the “Assignment of Beneficiary Interest” agreement from Mr. Brown to my resident co-beneficiary and me. I then complete the “Beneficiary Agreement” between us all. Our percentages of beneficiary interest in the trust are: 10% to Mr. Brown; 40% to me; and 50% to the Resident Beneficiary. A separate agreement requires Brown to forfeit his 10% to me at termination (he just needs to hold onto it for the term to avoid due-on-sale issues, property tax reassessment and the payment of transfer tax).
April 10th: My new resident co-beneficiary brings in the rest of his money, signs all documents, makes his first payment on the contract and is given the keys.
April 11th: The trust deed is recorded; a triple-net lease agreement between the trustee (Equity Holdings, Inc.) and the new resident beneficiary is executed. All documents are sent to the trustee, who appoints the collection service who handles collections and disbursements for the term of the agreement.
May12th: I receive my check from Escrow for $3,500, less the cost of title search, IRS filing fee, and a one month Contingency Fund (with which to evict if I ever have to). Now, when the trust and the accompanying lease agreement terminates, the property will be sold; all costs of sale will be paid; I will get back the equity that I carried (the difference between the loan amount at start and the $160K the resident came in at; the resident beneficiary will receive a refund of the non-recurring part of his $6,500; and all remaining proceeds will be divided between the resident beneficiary and me.
March 22, 2003: the resident beneficiary refinances the property at a value of $250,000; I receive a check for $50,000. This is on top of the $6,500 received up front and $100 per month in positive cash flow for three years. Not bad for an over-encumbered property that no one else wanted, and which I got with No Down, No Credit App., No New Loan; No monthly payments; No management; No maintenance, No upkeep or refurbishment costs. Furthermore, the underlying lender’s Due-on-Sale clause was not violated; the property was protected from creditor and tax liens, bankruptcies, marital dissolution and Probate should any party have died during the term.
Cool, eh?
Bill Gatten
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