|Throw the Old Couple Out!
The following is an excerpt from Mr. Behle's book "Creative Paper Formulas"
A short while ago an investor (Jim) came to my seminar with a particularly interesting problem. He was facing
foreclosure and eviction of an old couple. Their son had borrowed money from jim and used their property as
collateral by creating a second trust deed. The son lost his job and couldn't pay. Jim wasn't sure how to
handle it and wasn't excited about the prospect of foreclosure and throwing the old couple out. The most
viable plan he could see at that time seemed to be to try and sell the note to someone else (someone with an
indent in their chest where a heart should be).
Most wouldn't see any other options. I asked a few questions and this is what I found out. The second that Jim
held was about $15,000 and there was a first loan of $8,000. He is behind in payments by about $2000. The
property is worth about $95,000 and the owner of the property wants to retire and move in a few years. His
credit is good, but his borrowing capacity might be limited by his income and self-employed status. Jim's
borrowing capacity is good.
See any options?
I suggested that Jim work out a deal to buy the property now at fair market value with easy terms. The down
payment is the note that is owed to Jim and the balance of the seller's equity is taken back in a note with
easy terms. This note is secured by Jim's personal residence (he had wanted to take some cash out to invest
in notes). Jim then structures a lease for a fair market rent that runs for the period during which the
current owner had planned to stay. Jim then refinances the property and has his cash back and cash left over
to invest in discounted mortgages and receive a tremendous cash flow. Jim called the owner that night and
reported back the next day that this option might be perfect. On each side of the transaction, each party
Property owner's benefits
- Jim doesn't have to foreclose
- He gets title to the property immediately
- He shifts equity from his residence to this other property that he is going to finance
- After financing the property, he has cash to invest
- The rental payment covers the payment on the note to the
- Seller that is secured by Jim's residence
- Income from the money invested more than covers the payments on the new loan on the property
- He has increased his net worth
- He has increased his cash flow and solved a problem
- He now has a portfolio of paper to improve or trade.
This is an example of what creativity and a win-win philosophy can accomplish when it comes to collections.
There should never be a need for you to foreclose on a property. This is just one of dozens of ways to remedy
a bad situation and make a profit by doing so. I look upon someone falling behind in payments as an opportunity
to profit while helping someone out at the same time.
- He isn't foreclosed on or has his credit damaged
- He gets a sale for his property
- His cash flow improves because of the sale of the property
- He gets to keep the property until he is ready to leave
- He doesn't have to worry about selling the property
- No selling costs on his property
- Salvages the relationship with his son
The example above used a technique that I call equity arbitrage. If some further details would help, there are
some other articles at www.papergame.com
If someone falls behind in their payments to you, there are options other than just foreclosure. Here are some
steps to consider. They are divided into two categories but should be followed concurrently. Both creative
problem solving and prompt legal action need to be followed.
Creative problem solving
Prompt legal action
- Assess the potential of the transaction. Look at the note, underlying loans, value of the property and
inherent potential for different alternatives. For example, if there is equity, you might try "Equity
Arbitrage". If there is any private financing, consider "The Discount Refinance". If there is institutional
financing that is behind in payments, a "Discount Substitution" may be a good possibility. Checking the
title may tell you some of this information quickly.
- Talk with the payor. Now that you have some idea of the possibilities, meet with the payor. I invite them
to breakfast or lunch and talk over the situation. I find out the answer to the following questions. Why are
they behind in payments? What are their plans at this point? What do they want to do? Would they want to keep
the property (if possible) or sell? Could they continue making payments? What about the back payments? Could
they handle a higher payment? Do they need a lower payment?
- Total assessment of the situation. Now that you know a little about both the property and the payor, you
are prepared to examine the different options. This is a time for brainstorming, put down every option that
comes to mind and don't worry about what will work or which is best at this time. Be open to all ideas.
- Determine the best possible solution. Now you decide which options to pursue. Pick the most likely ones
and analyze them.
- Prepare and present solution. Take the best solution and write it up and illustrate it in a manner that
you can then take it to the payor and present it to him. Focus on the benefits to him and why it is a win-win
solution. If after presentation, you learn something that makes the solution unfeasible or if it is unacceptable
to the payor for some reason, then go back to step 4 and choose the second best solution.
The legal steps are hopefully just a precaution. It should be rare that you will find any situation where a
creative solution isn't possible - unless it never was a good note to begin with.
- Know your legal rights. First off, if you didn't know your rights up until this time, shame on you. Learn
what you need to do. What notices to send, when and how to send them, and how to proceed. Make sure you seek
proper legal advice.
- Establish a paper trail. In addition to the required notices, send plenty of correspondence to document
what is happening. Each letter reminds them and increases your chances of getting some prompt action.
- Take legal steps. By all means take your legal steps immediately. Don't ever let "the check is in the
mail" type excuses encourage you to discontinue or stall any legal actions.
- Use third party intimidation. Let them know your company is putting the pressure on them, not you. A
couple good third party techniques are to mail a letter on an attorney's stationary or at least put "c.c. Vic
Vicious - attorney at law" at the bottom of the letter - indicating that you sent a copy of the letter to your
attorney. Even the use of Private Detective Agencies has had some good success. Printing the big bold letters
across a letter "FORECLOSURE NOTICE" makes it look like it is the actual legal notice.
- Be prompt and follow through. Call or write immediately, don't let anything delay you, even your process
© 2000 Cashflow Specialists. All rights reserved.
John D. Behle, is one of the premier educators and practitioners in the field of "Real Estate Paper".
John has an extensive background in consulting and coaching. In addition to the original "The Paper Game"
book published in 1982, he is the author of 7 other books, several home study courses and over 200
nationally published magazine and newsletter articles on paper investment. You can visit him on the web at
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