Using Financial Judo Series (Part 2 of 2)

Last week we talked about how we could overcome the problem when the seller wants cash for his equity, and we didn't have any.
If you didn't read last weeks installment, you can read it in the story archives.



After working out all the other details of the sale with the seller, what appliances would

be sold, which would be left, preliminary title work things,

move out date, verification of mortgage balance, etc. they were

pretty excited. (Dey wus gonna be freed!)



I called them and said I was going over the figures once more

and I wanted them to see something.



I asked him and his wife to get on the phone at the same time

and to take out pencils. I said we were willing to close quickly so that they could move

before the baby came, but we could not pay them more than they

could get from any other buyer, that would not be fair.

Particularly since we were the ones helping them out.



They agreed.



I began with the fact that since the house didn't sell for the

asking price, it was probably a little too high, at least 10%?

They agreed. They had the house listed with a realtor, that

would be another 7%, right? Right.



It would have taken a regular buyer 2-3 months to get qualified

for a mortgage and to close, wasn't that right? Yes. During

that time, they would have had to make mortgage payments,

repairs, maintenance etc. right? Uh, Right. (They could

see the Camel's nose entering the tent, they feared his Hump

was sure to follow, and they were right!) Another 2-3%



OK.



I had them write it all down:



Discount 10%

Realtor 7%

Holding cost 3%



Total costs 20%



I then had them write down the following, 20% of $160,000 =

$32,000, subtracted from $160,000 = $128,000 minus the

mortgage, $150,000 = -$22,000!



I didn't say a word, I let them contemplate their own figures.



Instead of walking away with $10,000 they would have had to Pay

big money to get out of their house!



There was stunned silence on the other end of the line.



These figures show you why responsible banks and mortgage

companies don't lend more than 75-80% of the value of a

property. The costs involved in a quick sale eat up At Least

20% of the asking price.



After what seemed to be an eternity, the husband said, "We

don't have that kind of money." I told them I was shocked too

when I saw the problem, but I felt I had a way to get them off

the hook.



We would take over the property for the value of the mortgage,

("Subject to" the mortgage) and we would agree to lend them

the money to make up the 2 months mortgage payments ($2,708) if

they would pay us back at the rate of $200/mo. They agreed.



"Counsel the equity." Let them do the math. Let the realization

of what their figures mean sink in to them. Remember, figures

don't lie, and they aren't about to call Themselves liars!



Going back to our definition of equity, above, if the value of

the property is $100,000 and the mortgage is $85,000 the equity

is________? If you had answered, $3,000, $0, or -$4,500 your

were right, too! It depends on whose valuation you use.



The price a willing buyer under normal circumstances would pay

for the house may well be $100,000. The price the property

would sell for at a forced sale would be at least 20% less,

wouldn't you agree?



I just got off the phone with a distressed seller. His house,

actually a beautiful 3 bedroom, 2.5 bath condo in Orlando,

appraised at $360,000 with a $320,000 mortgage on it.



He had bought this beautiful place thinking his old home had

sold, but the sale fell through when the buyer could not get a

mortgage.



He was in pre-foreclosure. (I know All!) He was 3 months

behind, paying $3,560 per month on the mortgage, home owner

association fees, taxes and insurance and it was killing him.



He had paid out over $28,000 in mortgage payments, home owners

association dues, etc over the last 8 months with no end in

sight. He wanted to recoup some of that cash so he was asking

for "at least" half of his equity.



In this case we used the "Half Full'Half Empty Tea Cup"

maneuver. Here is how it worked.



I explained to him that we would be glad to help him (boy

wouldn't we, the house was beautiful!) but we would be foolish

to just change places with him. We would not be very wise

business people if we did business that way. Sort of like the

guy in the life boat changing places with the guy overboard!



I told him we would have to value the property at the

distressed or quick sale valuation in case we couldn't sell or

rent it after we bought it. The benefit to him would be that we

could close quickly, 2-3 weeks in fact. Reluctantly, he

accepted the fact that instead of getting half of the equity,

he would get none and he was satisfied! (The Ultimate Tea Cup

move, Half Full becomes Empty!)



I am now sending out a contract to him for $317,000 (subject to

a verification of mortgage amount, among other things). His

$41,000 in equity will end up in my pocket, (too quick? I'll

show you it again...) along with my "Standard Fee" of 2 1/2% of

the selling price ($7,900)! He will also make up the 3 back

mortgage payments.



So the next time a seller rolls up and bellows, "I need my

equity out or its no deal!" Use some Financial Judo and you may

find that equity in Your pocket!