This blog began as a shot at a little comedy but then I realized it was a good opportunity to help sellers and investors understand how a short sale can become a lease purchase. A short sale presents at least two possible opportunities for a lease purchase. One for the seller and the other for an investor. Actually, for the seller, the lease purchase is an opportunity to avoid a short sale. Let me explain....

The humor in the blog came from a thought that you can learn how long a house has been vacant by looking in the refrigerator. This picture of pizza slices isn't extra cheese. It's petrified cheese from being in a warm fridge for probably 2 years or more. At least that's how long the owner finally divulged.

Now back to our lease purchase lesson.

Lease Purchase When a Short Sale is Slightly Below Market Value

The house I went see about a short sale had been kept up by the owner since it went vacant a couple of years ago. That can make it attractive for a lease purchase because neither the seller nor an investor needs to sink a bunch of money into repairs.

When a seller can't get the lender to approve a short sale they can try a lease purchase. But only if the value of the outstanding loan is close to the current market value or the lease/monthly payment will cover the current monthly loan payment.

I think you see where I'm going with this. A lease purchase it typically for more than market value. Typically about 10% more. So if the house value is within 90% of market value, the seller can use a lease purchase to put a tenant in the house at a monthly payment covering his or her loan payment during the lease phase. When it changes to a seller financed mortgage payment, the monthly payment will still cover the seller's original loan payment. Finally, when the lease purchase balloon payment comes due in a few years, the seller pays off the original loan in full.

There's a possibility this can be done even if the market value is a little less than 90% of the original loan. A lease purchase comes with an above market interest rate. The interest portion of the monthly payment can conceivably make up another few percentage points that the house value is below the outstanding loan.

Investor Version of a Lease Purchase With a Short Sale

The previous example is a creative use of a lease purchase bailing out a seller that can't get approval for a short sale. The investor version of a lease purchase is more common and done more frequently.

It's simply negotiating a short sale for well below market value. This can and is done frequently. The reason is that the short sale costs the lender significantly less than a foreclosure. The lender avoids all of the legal costs. They never take possession of the house so they never have to pay taxes, maintenance, and other associated costs.

There can be a nice profit when an investor buys a short sale and flips it with a lease purchase. Negotiating a below market value short sale and then selling for about 10% above market with a lease purchase can create a nice spread that becomes all profit for the investor. Sweetening the deal is the above market interest rate the investor will collect monthly until the lease purchase balloon payment comes due.

Oh, one more comment about the pizza. When I opened the frig and noticed the power was on and there was a large bottle of Mountain Dew along with the pizza box. I should say the power to the frig was on because there was a light that went on, but the frig was not cold. I did the unthinkable - OPEN THE PIZZA box. What I found was GREEN/YELLOW petrified pizza in there. The funny thing was it was so old it really didn't smell bad anymore. I am still wondering exactly what type of pizza it was originally . I started to laugh and asked if I could take a picture for my blog. The seller thought that I was quite crazy I am sure, but I found it the funniest thing that happened in my day.

Learn to laugh at the small things in life that can keep you going. This business does have some weird things that happen, learn to enjoy them.

 

 

Thanks for reading the blog. Your turn now, please leave questions and comments below.

 

Shortsale Investing - Does it Really Work?

I have recently put a few shortsale offers in due to the shortage of REO (real estate owned) / Bank Owned properties on the market.   What I have found interesting is there is not nearly the competition from other investors.  For instance, with all bank owned deals that are any good, they all seem to go to "highest and best".  Highest and best means each person has 1 time to come back and put their best offer in. Then the bank usually selects one of those highest and best offers.  It becomes very competitive and hard to guess what to offer.

Recently I put have put in 4 shortsale offers.  They all got accepted as is, and there were no other offers.  Now I understand I might not get them all, but that is ok.  If I get half of them, I will be happy.  It is like putting a few deals in my pipeline for the future.

A few tips I would like to share when making a shortsale offer:

1)  Try to make your inspection for AFTER the bank approves the shortsale, otherwise you could be spending money on a deal that doesn't ever go through.

2)  Try to make your earnest deposit either very low or not to be deposited until the bank approves the shortsale offer.

These two things have really helped make my shortsale offers easy and risk free.   Now, I will say that a few agents won't allow these, but because I am a real estate agent and know many agents in my area, this has really helped me get these through.  It might be something you have to work through over time to create a proven track record, and you might want to consider getting a real estate license.   See my article and quick video on Getting Your Real Estate License for Real Estate Investing.

What is my exit strategy?  For the most part, I am using a lease option for 1-2 years and then converting to a land contract (seller financing) if they can't get a mortgage.  I could flip some of them or go straight to a land contract, however, I don't want short term or "dealer" status with the IRS. I want to keep the majority of the profit in my pocket and not Uncle Sams.

I have spent some time recently talking to shortsale negotiators and they have shared that 80-90% of their deals are getting approved now.   So is it worth it?  I think so. Consider shortsale investing.