We recommend you sit with your back to an outside wall. That way the owner(s) are giving you their full attention and will not be distracted by what is going on in the rest of the house. Please ask that TV or loud music that can be heard in the kitchen be turned off or down.

Ask questions first. Expand on your knowledge of the owners situation. Make sure you understand the owners situation completely before you propose any solutions to their foreclosure problem. Then make your foreclosure options presentation. We give you the complete foreclosure options presentation in Chapter 7. For now we will just sketch the foreclosure options for you.

Foreclosure Options The eight foreclosure options are reinstatement, redemption, deed in lieu of foreclosure, legal delay, bankruptcy, renegotiate, sell the property, or do nothing. Some of these foreclosure options are time-sensitive. Others require an expenditure of money that the owner probably doesnt have.

By analyzing the owners situation, you can determine the best solution. If they have the ability to get their hands on some money, they may be able to reinstate, redeem, or renegotiate their loan with the lender. If they want to go the legal route, they may seek a legal delay or file bankruptcy.

If they have enough time, the owners may be able to sell the property or negotiate a deed in lieu of foreclosure with the lender. If the owners do nothing, they will lose their property at the foreclosure sale.

Foreclosure Solutions You are the solution to the owners foreclosure problem. Lets assume the owners have neither the money nor the time to make something positive happen on their own with the information you have shared with them. This is where you step in and propose some very creative solutions.

The simplest solution is for you to buy the owners equity. The owner would give you a quitclaim deed to the property. You would reinstate the loan and own the property. Or you could flip the property for Quick Cash and let the new buyer work things out with the lender.

Buy the Equity Lets say the property is worth $210,000. The loan balance is $150,000. The owner is behind $12,000 in payments. The owners equity position is $48,000.

Owners Equity

Property Value $210,000

Loan Balance $150,000

Behind in Payments $ 12,000

Owners Remaining Equity $ 48,000

You offer the owner $11,000 for the remaining equity. You, or the new buyer, will have to come up with an additional $12,000 to reinstate the loan.You would be paying $173,000 for the property. If the property has a value of $210,000, this looks like you have $37,000 in equity.

Equity Sharing Lets get more creative. We have the same owners with the same numbers. They really want to keep their property. They have had a temporary financial setback. They feel that if they can buy some time and get some financial help they will be able to keep their property.

You propose paying the $12,000 they are behind in their payments to the lender in return for a 75 percent equity position in the property. Remember, the equity in the property will be $60,000 after the loan is reinstated ($210,000 property value minus the $150,000 loan balance).

You will pay 25 percent of the future monthly loan payments, and the owners will pay 75 percent of the future monthly loan payments. You will pay $12,000 cash and have a $45,000 equity position in the property. The property owners will retain a $15,000 equity position in the property.

This deal is a win for you and a win for the property owners. Plus, instead of having just a renter living in the property who may tear the property up, you have co-owners who have a stake in the property.

Purchase Price

Loan Balance Behind in Payments Equity Offer Purchase Price

$150,000 $ 12,000 $ 11,000 $173,000

Equity Sharing

Your Equity

Owners Equity

Property Equity: $60,000 Equity Percentage: X 75% Equity Position: $45,000

Property Equity: $60,000 Equity Percentage: X 25% Equity Position: $15,000

Equity Sharing Redux Equity sharing is a way in which two or more parties, one being an owner-occupant and the other being a real estate investor, pool their funds to buy or hold a property. There are many ways that equity sharing can work. In the usual equity-sharing agreement, a non-owner-occupant puts up the down payment, and the owner-occupant, in effect, becomes the tenant.

The owner-occupant will pay the fair-market rent and both the owner-occupant and non-owner-occupant split all the expenses of the property based on their ownership percentage. It does not have to be 50-50 (see previous example).

From a tax point of view, the owner-occupant will usually get the write-off of their share of the interest on the loan and the property taxes. The non-owner-occupant will include half of the rent as income and deduct their share of the interest, property taxes, and all expenses on the property and depreciation on their ownership interest.

The portion of the Internal Revenue Code (IRC) that relates to equity sharing is section 280A. One of its main purposes is to make sure that fair-market rent was charged in an equity-share arrangement, especially between family members. Section 280A is somewhat vague and provides no definitive guidelines on equity sharing.

Additionally, thus far, there have been no court cases, few rulings, and no specific regulations dealing with the subject. Your tax advisor should be included in any decision you make regarding equity sharing. We include a synopsis of section 280A for your review because of its specific foreclosure application.

IRC 280A Equity sharing can be used in foreclosure by having the non-owner-occupant supply the cash needed to reinstate the loan and share in the monthly operating expenses. Owning half of the property, and therefore being obligated for only half of the expenses of the property,will be a great relief to the owner-occupant, allowing them to maintain an equity interest in the property and keep a foreclosure off their credit record.

The non-owner-occupant owns a portion of a property with a tenant owner, which should eliminate the need for a property manager. A buy-out or refinance arrangement can be structured in the Shared Equity Financing Agreement to the satisfaction of all parties concerned.

Reverse Lease Option (Sale Leaseback with Option to Purchase)

As a final creative solution we give you the reverse lease option. When we think of lease options, we think of leasing the property with an option to purchase the property at some point in the future at some agreed-upon price.