To Much Equity?
I have found as the snow melts in the Great White North people's minds turn to thoughts of spring and selling their home.
My ad has my phone ringing off the hook but what I am finding is a lot of sellers who have large amount of equity both real and imagined. Last one guy thought house was worth 95,000 really worth 75,000 owed only 40,000. I used everthing under the sun to eat up the equity still had 20,000. (Just like I was taught by John) What do you do with deals like this? Most are older but nice houses in good areas.
It may be a fault but I want to own every house that I look at. Unrealistic I don't think so. Just saw a post on the site that said he did it because he didn't know he couldn't. My dog weighs 8 pounds my cat weighs 15 my dog has no clue he is not suppose to win yet he drags that cat all over the house. Remember it is not the size of the dog in the fight but the size of the fight in the dog...... I just need a little bit direction.....
Thanks for the help
I was coming across the same situations. Owner owes $200K, house listed at $500K, but can't sell.
Anyway, your missing the point of the whole transaction. Why are these people selling? What is their motivation? In that post you read about John's student getting $20K because he didn't know he couldn't. John also said, he learned how to say no first before he said yes. You are getting way too emotional and falling in love with the idea of making money off of all these houses. Slow your role. Take your time. Seek their motivation. Analyze the property, does it fit your buying program? Learn how to say no before you say yes.
When you get down to numbers where the equity is still high, offer them 40% of their equity. Make a low ball offer for their equity. If they want more, ask them to carry a note with interest and you will pay them in full as soon as you get cashed out, but at the most, the note will have a 5 year balloon on it. Hell, don't even tell them that, show them a return on their money over the 5 year period and ask them to carry the note, don't even mention paying it off early. Don't make their problem yours and get in over your head and go bankrupt.
The most important thing is to seek their motivation and play into that.
Thanks for the great responce. You are right about falling in love with making money. My wife thinks I am a type A. I love the deal this is fun.
But back to the point.... You are saying is see what moves the seller. Why are they selling? Why did they call me? So the question is how do you find that out? I know you follow John's ideas so how did you work this in. Do you do it on the phone when they call? At the presentation?
Again Thank you for the help a little outside my world advise is always needed.
James
Well you could do it over the phone in theory, but I think during your presentation is more appropriate.
Whenever you are talking to them, you should be feeling them out. Get them to tell you their story. They will definately tell it to you, and the key to why they sought you and out and what they are looking for is in that story.
I've never read John's book, so I'm not sure how he would go about it, but the above worked for me.
How are the houses selling in that area? Do you have a buyer's list? If so, equity does not have to be a deal killer. The question is will they take a Sub2 when they have equity? If they are motivated, they may.
Some options:
-Get it under contract at a discount, flip to an investor for a finder's fee. They cash it out, the seller gets paid, etc.
-If you have some money, you can give the sellers a portion, and have them take a second for the rest. If you then sell it to a qualified buyer, you cash them out (maybe at a discount).
-If you wrap a new mortgage around it to your own non-qualified buyer, you should get enough down to pay them for months, or try to make the payments to the seller from the CF.
Good luck
Peter
I seek the motivation on the phone when they call me. Think of the sellers as your customer, and you want to know and research all you can about them before you meet them. I want to know why I am there before i get there. I don't wait until I am in front of a seller to understand why they are selling. Before I drive over to a house, I want to know why they called me? what is their situation and what makes it unique? how can I help them? and is there more than one possible way to fix their problem?
When someone calls, I go through a general script to get the information. I made it very simple because I don't always answer my phone; I sometimes have someone do that for me. The paper I give them to collect the information has all the general house characteristics on it, along with the following questions:
Are you the owner of record?
How long have you owned the house?
Why are you selling?
Behind on payments? Y / N How many months?______ When is the foreclosure sale date?_________
When do you want to be out of the house?
What is the value of your house?
How did you arrive at that number?
Is your house listed with a realtor (how long)?
Does it need repairs?
You could probably think of more questions to ask and the more times you do this, the more questions you will know to ask. The bottom line, just ask the questions. General questions, but nothing threatening. You will get good at this and will be able to recognize the personality of the person over the phone and they will sometimes volunteer information. Other times you may need to coach answers out of these people, and that is what your script is for.
Know all you can before you go over there. Know what your going to say before you go in, know what your going to offer, and know how your going to get out of the house after you buy it.
And let me add this...I try to make sure that nothing is a suprise to me when I am face to face with these people and I'm prepared for what they have to tell me.
When you get real good at talking to sellers you will be able to lead the conversation and make the sellers say almost anything you want. That's just the art of negotiating.
Hey James, We Minnesotans are so outnumbered here I had to reply. Most of the callers from my ads seem to think because I buy houses I am rich and will buy theirs at their price because they want me to. Since I'm still fairly new at this, I'm having a little fun with it. Met a guy last night with $70k equity in a $120k house and wasn't particularly motivated, but we got to talking about the (nice!) remodeling he did after he bought it, and now I have another contractor contact, and he has an investor contact for future reference. Another curious caller turned out not to have a house at all, just wanted to know what was going on, so I signed him up, so to speak, as a birddog. Woman wants to sell me her trailer for too much, but now I'm getting interested in trailers (oops, I mean "mobile homes"
and have been learning about them. Could provide a heckuva rental return, if nothing else.
If I can't do a deal with someone, at least I hope to get them on my team one way or another, and pick their brains for ideas, plant seeds for future possibilities. I like asking the "who do you know..." question, too, since that can be a good source of leads. Figure even if none of it bears fruit, it's good practice as I polish my pitch and technique, which I hope to continue improving until I retire...next year!
Again Thanks for the great post.
N,
Your script is very good and to the point. I must have misunderstood the part about the phone interview in John's manual. I thought I was to get the face to face interview but I can see that I am missing this key to closing more deals.
Loon,
wow Jack of all trades. I have been getting to know a lot of people. I try not to burn any bridges. We should think about starting a minnesota club here on the board.
Also like the ideas thank you to everyone keep them coming.
I think that along with Nebuloused (hope I spelled it right!) comment and John's manual you ought to read "how to win friends and influence people" this goes to the heart of the sellers motivation and helps it work for you.
Randall
I'm a little confused, why is too much equity a problem? I would think that would give the investor more bargaining power because almost no matter what you offer the seller, the seller will make some money, especially if the seller is in a bind, and then the investor reaps the rewards. Or with a motivated seller with a lot of equity- if the house is in good shape, get an appraisal and get a loan close to FMV, pay off the rest of their loan, and pocket all the equity cash- use it for holding fees or other properties or whatever.
Am I missing something here?
Casey,
I don't understand what you are saying? Where is the profit for me, if I have to put so much of my own money into buying one house? If I use a bank, then we start adding on the cost, I might as well just buy it straight out.
I try to buy houses for as little amount of cash out of pocket as possible, then resell on a cd. I try to always make a minimum of $25k. So you can see how high equity can cause a problem.
in high equity deals why not pay part cash & part in a note. ask them to carry a 1 yr. note back which you will payoff when the property is sold with no prepayment penalty.
If you fix it up fast & have it priced right you should be able to pay off the balance fairly quicky.
Sanjosee,
Your idea is the best solution however how do you present the idea. It must be a win win. How much cash do you want to tie up? Thanks for responding[ Edited by JamesStreet on Date 03/02/2004 ]
If I'm following Sanjosee correctly I think it goes as follows. In your example there is 20K of equity floating around. So lets say you offer the buyer 5K cash and he takes back a note for 15 K with a one year ballon and no prepayment penalty. Once you've cashed out on the house you pay off the sellers note and move on.
Roger
Very true but it ussually takes my buyers 2 years. I don't think the 1 or 2 years is a big deal. I like this but is there other ways? Thanks
"TOO Much Equity" isn't a bad thing, it's just that when there is so much, sellers aren't all that flexible. A house can have 100K in equity, but if the house is in foreclosure, you may be able to get the house for what is owed in back payments. I know of a friend did this and picked up 50K in equity because the house was in foreclosure and 6K was all that was need to bring the mortgage current.
With little equity deals, they are easier to do (the sub to way) because the seller knows they won't make anything off of the house so they aren't looking to get rich from you or anyone else. They just want someone to rid them of their headache..
Nebulousd makes a very good point. What matters is the fact if the seller is motivated. So this is what I have gotten down so far.
1. Know the sellers motivation. I can do this on the phone or in person but it needs to be done.
2. don't worry about to much equity. There are options from having the seller take back a note, to making sure that it is real equity. Knowledge is power at this point.
3. Think like a creative investor. I have the ablity to buy ever house but am I sure I want to.
4. Make sure you have an exit plan.
Nebulousd did I forget anything? Also thank you for the story about equity. I bought my first Sub To for $10 and it had $15,000 in equity. Sold it on a CD $100 a month bump and $22,000 when my buyers refi. Got $3000 down as well.
Thanks everyone. Hope this post helps.
With all the talk of equity I thought some of you needed to see this post.
I think this is a questions that most new investors have to answer.
Hope it helps