Why dont we want to buy the owners property? Because we are not interested in buying or owning property! We are interested in making Quick Cash. The property includes too many liabilities, like a loan that is in the foreclosure process.

What Is the Owners Equity?

The owners equity is the difference between the value of the owners property and any monetary liens or encumbrances against the owners title to the property. If an owner owns a property free and clear, the owners equity equals the value of the property.

Since the owner we are dealing with is in foreclosure, there is a monetary lien in the form of a mortgage or trust deed against the owners title to the property. The owners equity is the value of the property minus the mortgage balance minus the back payments minus any foreclosure expenses that have already accumulated.

In a non-foreclosure situation, if the retail value of the property is $200,000 and the mortgage balance against the property is $140,000, the owners equity is $60,000.

In a foreclosure situation the value of a property is no longer the retail value. The property may be run-down. The owner does not have the luxury of a normal marketing time to bring in the highest price. In other words, the value of the property is lowered automatically in a foreclosure situation. Lets say the value of the property is now $185,000 to $190,000.

The mortgage lien goes up in a foreclosure situation. The missed payments are added to the remaining balance of the mortgage. If the owner is behind in their payments $10,000, then the mortgage lien is now $150,000.

If the lender has formally initiated the foreclosure process, there are now foreclosure expenses added to the mortgage balance. Now the owners equity could be substantially reduced. For illustration purposes we will forgo the foreclosure expenses.

Foreclosure Situation

Non-Foreclosure Situation

Foreclosure Value: $185,000 Mortgage: $150,000

Owners Equity: $ 35,000

Retail Value: Mortgage: Owners Equity:

$200,000 $140,000 $ 60,000

Your Offer

Instead of the owners equity being $60,000 in the non-foreclosure situation, the owners equity is $35,000 in the foreclosure situation. The owner has suffered a $25,000 loss in equity.

Please be clear on what we are saying here. The owner has suffered the equity loss. With a new owner back in control of the property, who is not in a foreclosure situation, the value of the property goes back up. When the value of the property goes back up, the owners equity increases dollar for dollar.

You are going to offer the owner $10,000 for their $35,000 equity. If you keep the property, you are going to have to pay the lender the $10,000 in back payments to stop the foreclosure. Now you will have $20,000 in the property. If you have to make repairs and do fix up, you may have $3,000 to $5,000 more involved.

Then you add in making mortgage payments, property tax payments, and insurance payments. Resale costs could add another $5,000 to $10,000 or more to your investment. When you add this all up your total is $30,000 to $35,000!

This becomes a negotiating tool for you with the owner. Your point with the owner is that the maximum you can offer them is $10,000 cash for their equity. By giving the owner $10,000 for their equity, you will have $35,000 in the property before you make any money!

We have found that when we show owners these types of figures, they are much more amenable to accepting our offer. We are not trying to be mean to them or take advantage of them. We are trying to help them. But we (you) cant help them if we (you) cant make any money. Otherwise, we (you) will be in a foreclosure situation ourselves!

Your Offer

Repairs and Fix Up Carrying and Resale Costs Total Invested

Cash to Owner Cash to Lender

$10,000 $10,000 $ 5,000 $10,000 $35,000

Making Money

Speaking of making money, lets look at the numbers. The mortgage balance is back to $140,000 (actually a little lower because the back payments reduced the principal, but really not worth mentioning). The property restored to retail value is now worth $200,000 (or perhaps a bit more).

If we sell the property to a retail buyer, we will make a $60,000 gross profit minus the $35,000 invested, equaling a $25,000 net profit. That is a 70 percent return perhaps over a three-month to six-month time period. That makes the investment worth the risk.

If we flip the contract to a real estate investor, we will have no cash to the owner, no cash to the lender, no repairs and fix-up costs, and no carrying and resale costs. Do you think it is possible to flip our contract for $5,000 to $10,000? What is the percentage return on our invested money? Did you say infinite?

Making Money Retail Buyer Wholesale Buyer

Sales Price: $200,000 Flip Fee: $10,000

Mortgage: $140,000 Mortgage: 0

Gross Profit: $ 60,000 Gross Profit: $10,000

Invested Money: $ 35,000 Invested Money: 0

Net Profit: $ 25,000 Net Profit: $10,000

In the next chapter we will show you how to negotiate with the owners lender. These are negotiations with the lender in the pre-foreclosure time period. Being successful in these negotiations can benefit you and the owner. The bottom line is the bottom line when you negotiate with the lender. We devote a later chapter (Chapter 17) to negotiating with the lender after the foreclosure sale takes place.