Short Sale Using Option Contract

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There are many short sales being closed with large profit margins right now. Here is a deal we funded for Brian Kurtz and he was so nice to put this detailed outline of his first SS deal to share for everyone. It was much longer and more detailed but I had to shorten it to post. (to many characters)

This post will be rather long. I’m going to try to answer most of the questions everyone is bound to ask in advance. That being the case, I’ve created 3 deal reviews with the third being a play-by-play review of each stage of the deal. If you want to replicate the process you’ll want to pay attention to the in-depth review as it has the details that will help keep you out of trouble.

Links to download scans of all the actual documents AND the checks are available at the very bottom of this post.

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Basic Review

So here’s the general overview.

Sellers owed $470k (a first and a second both owed to Homecomings). We’ll call them Mr. & Mrs. Smith. The loan was in in the wife’s name.

Mr. Smith got a job transfer to Colorado. Home now has to be sold so they can move on to the next stage of their life, but obviously they owe significantly more than what it’s worth.

I made an offer to the bank through my LLC to buy the house at a significant discount. I then began looking for an end buyer by listing the home on the MLS. Found the buyer, worked through to closing.

On closing day we arranged for a back-to-back double close where my LLC bought the home at 2pm and the end buyers purchased the home from my LLC at 3pm.

You can see the idea is pretty simple. Buy at the absolute lowest price you can negotiate with the bank taking the short sale and get them to agree to. Then resell to an end buyer for a profit. All without making a single repair to the property or spending your own money. Tall order, right? But my partner and I pulled it off.

We did this transaction without using a dime of our own money. But my lender never did a credit check, never did an appraisal, or a verification of income. The entire deal was done with full disclosure to both the lender taking the short sale and the end buyer’s lender. No fraud in any way/shape/form.

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Process Review

Here is how the deal is structured to get you to the closing table, with full disclosure to all parties involved.

Upon the initial meeting with the original seller I explained the short sale process and they were on board with the program. As long as they avoided foreclosure and didn’t have to bring large sums of cash to the closing table to buy their way out of their home they didn’t care how much I made.

We signed an Exclusive Option to purchase at a price of $287k. (remember that they owed $470k) They also signed an extensive disclosure statement and a Record of Option.

I then recorded my LLC’s interest at the County Register of Deeds. This places my LLC in chain of title with all documents specifically empowering it to list the home for sale and clouded title so that no closing could take place unless the option was addressed.

I then had my LLC list the home for sale and placed it on the MLS. We started the home at $359k but lowered it to $339k over a few weeks. I didn’t lower it below that price because the EXACT twin of the house directly next door closed and sold for $370k and I began do doubt how much of a discount I could get on the purchase.

We secured an end-buyer through another agent in my office and moved forward to closing.

After much drama, stress, and strain we showed up and purchased the home using private money and then instantly resold to the end buyer. The total profit on this deal ended up being $53,830.16

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My funding source, Coastal-Funding.com, is informed that we are in the home stretch on this one and to begin planning on setting up the wire for funds. You may or may not know that this company does interm financing for these back-to-back double close deals. No credit check, no appraisal, no job verification. Nothing. You could have had a finalized foreclosure and a BK yesterday and still be able to buy houses at 100% financing, rolling all costs in just as long as you are double-closing on the same day to an end buyer. How cool is that?

Sept 5th (Friday – Closing Day)

2:00 PM – Money is taken care of on Coastal-Funding’s end so my partner and I show up to take care of the first leg of the transaction where the LLC Buys from the original seller. That takes all of 15 mintues.

3:00 PM – End buyer shows up with their attorney in tow. This did NOT go smoothly. We had to be put in separate rooms for the closing. It was out of control in their room. The buyer’s attorney and the buyer’s agent both started picking apart every piece of paper, fluffing their feathers in front of the buyer trying to show how “knowledgeable” they were on real estate matters and generally trying to justify their pay.

They did dig me for an extra $5,000 at the closing table. THAT suggestion came from the attorney of course. My broker prepared a hold-harmless release for all agents involved and told me I better come back with it signed. Attorney though that one up...saying that this “new” chain of events entitled the buyers to a contribution.

I settled at $2,500.

In the end we closed. Bought for $251,780 at 2pm and sold for $325,000 at 3pm. Total profit (Commission and “The Spread) was $53,830.16. When was the last time YOU made $53,830.16 in one hour helping someone avoid foreclosure?

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Below are the docs, so you can examine them yourself:

1)Option Contract for Sale and Purchase – This is the instrument that gave me the right (but not the obligation) to buy the home for a period of aprox 1 year at the price of $287,000. As you’ll see in section 6e, the option discloses that the buyer (My LLC) intends to sell the home for an immediate profit. The bank taking the short sale gets a copy of this, so they KNOW upfront what my LLC intends to do in this scenario. Section 6f – also specifically grants powers to the buyer to list the home for sale. Sweet!

Here’s the link to download: http://www.shortsaleshow.com/proof/OptionContractV1.pdf

2)Affidavit of Understanding Addendum – this is a giant CYA disclosure so that a seller can never say “I never KNEW what I was doing. If I knew that this guy was going to make $50,000 an hour “helping” me then I would a never done it. I was wronged and want the $50,000.” Notarized baby.

Here’s the link to download: http://www.shortsaleshow.com/proof/U...Disclosure.pdf

3)Record of Option Contract for Sale and Purchase – this is the document that was designed to put the world on notice that your interest exists, that you have the power to list the home for sale, and sell for a profit. This was NOT acceptable at my Country Register of Deeds and was rejected. I understand it works in most areas with mine being the exception to the rule.

Here’s the link to download: http://www.shortsaleshow.com/proof/RecordOfOption.pdf

4)Notice of Claim of Interest – same as above except it fits the format my county wants it in. It also doesn’t have to be signed by both parties…only by the party claiming interest.

Here’s the link to download: http://www.shortsaleshow.com/proof/N...OfInterest.pdf

5)Renegotiation Explanation – this is the letter, and the contractor estimate I used to get the price knocked from $287k to $252k. I didn’t scan in the home inspection. I assume you’ve already seen one before. $300 buys me $35,000. Pretty good deal.

Here’s the link to download: http://www.shortsaleshow.com/proof/R...xplanation.pdf

6)Title Commitment A to B – this is the title commitment issued to my LLC when they bought the property.

Here’s the link to download: http://www.shortsaleshow.com/proof/A...Commitment.pdf

7)Title Commitment B to C – this is the important one because it is what the end lender was reviewing. You’ll see in the structure of it that Fee Simple Owner was the ORIGINAL owner and for the end buyer’s to be granted clean title a Warranty Deed had to be issued first to my LLC, and then a warranty deed issued to the End Buyer. This is an IMPORTANT POINT because the end buyer’s lender is put on notice here that their buyer is NOT buying from the original seller, but from my LLC who may or may not be making a profit. Thus full disclosure is provided to the end lender! Seasoning is not an issue as long as the end buyer’s lender is Conventional and is not applying seasoning “risk overlays” in addition to Fannie/Freddie Standards. Excellent Smithers.

Here’s the link to the download: http://www.shortsaleshow.com/proof/B...Commitment.pdf

8 ) A to B HUD Closing Statement – Here you see all the figures on the purchase of the home by my LLC from the Original Sellers.

Here’s the link to download: http://www.shortsaleshow.com/proof/AtoBHUDStatement.pdf

9)B to C HUD Closing Statement – Here you see all the figures on the sale of the home from my LLC to the End Buyers.

Here’s the link to the download: http://www.shortsaleshow.com/proof/BtoCHUDStatement.pdf

10) Coastal Funding Payoff – Here is the simple document that shows the fees I paid to borrow the money to facilitate this deal. Simple and clean:

Here’s the link to the download: http://www.shortsaleshow.com/proof/CoastalPayoff.pdf

11) Proof Checks – Here you’ll see proof positive in the from of the two checks issued at closing. One for Commission, one for Profit Spread. Nice.

Here’s the link to the download: http://www.shortsaleshow.com/proof/ProofChecks.pdf Special

Thanks to www.Coastal-Funding.com for making this possible and way to easy!!!! (1)

(1) Source from WannaNetwork Forum.

Education then action is key to success. If you want to learn how to do a short sale like this, please contact me in the Contact Us section of my blog.

Happy Investing!

Tony

Residential Real Estate Encyclopedia (R2E2)

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Nouveau Riche offers a home study course to review while you begin your investing career. The Residential Real Estate Encyclopedia (R2E2) is a 15 volume set recorded and written by our educators at college. In this set you will receive information on:

The Checkered Flag – A Winning Approach to Real Estate Investing™

Murphy's Law – Legal Pitfalls in Real Estate Investing and How to Avoid Them™

Diamonds in the Rough – A Guide to Successful Rehabs™

Long Profits on Short Sales™

The Reference – The Building Blocks of Real Estate Investing™

Give me a Break – Tax Minimizing Strategies for Real Estate Investors™

Property Professor – Standard Edition - A Powerful Analytical Software Tool™

Tenants, Toilets, & Termites - Successful Landlording Without Losing Your Money Or Your Sanity™

Effective Real Estate Negotiations®

It’s All About the Money – Raising Private Money for Real Estate Investments™

Divide & Conquer- Creating Wealth In Creative Ways With Multi Family Dwellings™

Put the Gold in Those Golden Years - Simple & Safe Wealth Maximizing Strategies to Enhance Your Retirement™

Here Today, Gone Tomorrow – The Wholesale Real Estate Game and How to Win It™

Flippin’ Explosion – Fix ‘n Flip, the Fastest Growing Trend in Real Estate™

The Standard - Unconventional Profits from Mortgage Financing™

For more information on Nouveau Riche, their products or to attend a local briefing, please contact me in the Contact Us section of my blog.

Happy Investing!

Tony

Seller Financing

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In an earlier article I mentioned a big factor in building your wealth is using leverage. A great form of leverage for obtaining real estate is using seller financing. There are several ways to get seller financing for your deals. The seller can take back a second mortgage, you can take over the property 'subject to' the sellers existing financing, write-up a wrap-around mortgage, and if you are investing in commercial properties you may be able to assume the existing mortgage. Assuming a loan does not exist in residential loans anymore. In this article, I'm going to focus on 'subject to' financing.

As you start to invest you made need to educated certain professionals along the way because they tend to only know one way of operating real estate transactions.

Case in point: I was showing a group of people how to fill out my contracts so they can start making offers on deals. First thing they did was take my contract to their attorney for him to review for accuracy and legitimacy. I'm glad they did this. Trust but verify. I love it! In our next session they came back telling me their attorney had an issue with some writing on my contract. Their attorney told them no title company will close on a deal 'subject to' the sellers existing financing.

The group happened to have their laptop with them. I asked them if they had a HUD 1 Settlement statement in their word documents. After hearing yes, I asked them to open it so I could show them their attorney was wrong. The HUD 1 Settlement statement is a document with all the numbers and closing fees for a real estate transaction. Page 1 of the HUD, Left Column, Line 203 it clearly states 'subject to sellers existing financing.'

I told them to call their attorney and point this out to him. His rebuttal (of course) was "I wanted to make sure you are covering your bases." He was simply saying he didn't know this existed. Imagine how many more transactions he could have closed for his business if he understood this strategy. Title companies issue the HUD 1 for closings and attorney's use them every day.

The more education you have, the more benefits you will receive!

In a 'subject to' transaction you negotiate with the seller to quit claim the deed of his/her house to you but keep the financing in their name. You are now morally obligated to make their mortgage payments. If this is an investment strategy for you, you should have already complied a list of sources to put renters into the home to cover the mortgage payment.

With the transfer of deed, you now own the property and the equity that exists. You must ease the sellers mind ensuring them you will pay their bill every month. As an investor you are not going to put forth all this effort to close the transaction and not make the payment. However, as the investor, you need an exit strategy in case you cannot make the payment further on down the line if you have a shortage of cash or no renter.

My business partner and I put a clause in our contracts every time to get rid of the property if we cannot pay the mortgage because of depleted funds. It doesn't matter if we have $500,000 in our accounts, we still put a clause in for our protection and that of the seller.

If you want to be successful, you must treat this as a business and run it morally and ethically. This will result in building a positive reputation as an investor and more referrals will come your way. There are a lot of people not operating their investing business in an ethical way. The seller suffers and eventually the investor gets caught and is shut down.

I cannot stress enough the value of the right education and who is teaching you. Nouveau Riche's real estate investment college does exactly this. Also, there is a huge community of other investor's in NR that you can talk to and generate more ideas. I'm constantly learning new ways to invest, negotiate and profit on my deals because of the people I associate with. In turn, I do the same for new people getting involved who want to make a difference not only in their life, but the lives of others.

To learn more about Nouveau Riche please contact me in the Contact Us section of my blog.

Happy Investing!

Tony

Nouveau Riche Real Estate Investment College: Knowledge – Power – Freedom

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The title says it all. Nouveau Riche (NR) is a company that teaches real estate investing in a college style format. They use the scientifically proven Instructional Systems Designs (ISD) process to create real estate investors. ISD is the taxonomy for accelerated learning and maximum retention used by colleges all over the country. If you can educated a person to become a doctor or lawyer using the ISD process, why not a real estate investor?

With close to 40 classes being offered, NR designed their curriculum so each individual can choose their own path. Whether you want focus on short sales or fix ‘n’ flips, NR put together a Personal Preference Questionnaire (PPQ) to determine your Curriculum Path that best fits your investing preference. The college offers 100 – 400 level courses allowing you to grow and expand on each course. From ‘Establishing Your Business Vision’ and Understanding Mortgages’ to ‘Rehabbing’ and Multi-Family Properties, NR offers a myriad of classes to start you on your path to wealth.

Each class is taught by an investor/practitioner in their area of expertise. Every instructor must be actively investing, have achieved millionaire status showing proof via their financial statements, and have a FBI background check in order to teach at NR’s college. This ensures credibility of the type of instruction every student will receive.

The college is currently being held at the Renaissance Glendale Hotel & Spa in Glendale, AZ. Classes are offered at different times throughout the year lasting a week for each session. NR is in the process of building a $74 million Entrepreneurial Center that will house the college sessions along with their students. The center will have state of the art technology to further enhance the educational experience for their students.

This year alone Nouveau Riche has been featured in ‘Your Business At Home’, ‘Success’ and ‘Success From Home’ magazines highlighting experiences and success stories from their students. NR has generated tremendous growth over the past 7 years educating people from across the country. They are sweeping the nation teaching people how to establish and run a successful real estate investing business.

Their world premiere education stands on its’ own. I could not think of being taught how to invest in real estate and run a successful business by anyone but millionaires. How about you?

To learn more about Nouveau Riche’s real estate investment college, please contact me in the Contact Us section of my blog.

Happy Investing!

Tony

Retirement Planning and Real Estate Investing

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Disclaimer: I am not a licensed attorney, accountant or financial planner. The information provided in this article is exactly that, information. You should seek a licensed professional when getting ready to establish your business entity, tax strategies, asset protection and retirement planning.

Retirement Plans are a great source of money to use for investing in real estate. A retirement plan is not an investment but a vehicle in which you place your investments. Whether you have a mutual fund, LLC, money markets or real estate, these are investments you place into a retirement plan. The two types of plans are a Defined Benefit Plan and a Defined Contribution Plan. Both have there own set of rules of how they are set up, the amount you can contribute per year and how and when you can receive your money. You can only contribute earned money into these retirement plans.

A lot of people do not know that they can establish self-directed retirement plans to control their own money and grow it tax deferred and tax free in real estate. The reason for this is the retirement plan owns the account and not the individual. You can take money out, invest it in a piece of real estate tax free, and after the money comes out of the property, put back into the retirement account tax free. As long as you do not borrow on the account, it is tax deferred money until you are ready to do so.

Example: Tom has $5,000 in a self directed IRA. He finds an apartment building that fits the criteria of his buyers and places the $5,000 into escrow. The property is being sold well under market value with a $3 million equity position. Tom knows his buyers can move quickly with cash to buy the building. Tom contracts the property and assigns his rights over for an assignment fee of $200,000. Tom then puts the $200,000 back into his retirement account tax free and it will be tax deferred until he draws on the account.

If you approach a financial planner and tell them you want to do this type of investment, they will tell you it can’t be done. Well, it can’t be done by them, but it sure can be done by you. They may tell you it is illegal. But the truth is they can’t do it because they will not earn a commission on the transaction. It is legal to do all day long in a self-direct retirement plan (SDRP).

***The wealthy write the rules. When you know the rules, you can play the game!***

Is it really legal? Check Section 408 of the IRS code, this governs retirement plans and IRS publication 590, pages 40 and 41 tells you what are prohibited investments from your retirement plan. Real Estate is not listed as a prohibited transaction. Make sure you consult with the right professional to set up the transaction properly. There are written instruments needed to make the transactions possible. Once the plan is in place you can take checkbook control of your IRA.

This topic is extremely detailed. I wanted to give you a little taste of using your retirement plan as another vehicle for investing in real estate. There is currently $3.7 trillion dollars in retirement accounts and this number is going to swell over $10 trillion dollars over the next 10 years as the Baby Boomers start to retire. Investing in real estate is the safest, most profitable investment in the history of business and finance. When educated by the right people you have the ability to grow your wealth at your pace. Curtis DeYoung teaches IRA and Retirement Planning at Nouveau Riche’s real estate investment college. He has many years of experience in this area. I highly recommend his services. Click on American Pension Services in the Recommended Links section of my blog.

Happy Investing!

Tony

Taxes for Business and Real Estate Investing

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Disclaimer: I am not a licensed attorney, accountant or financial planner. The information provided in this article is exactly that, information. You should seek a licensed professional when getting ready to establish your business entity, tax strategies, asset protection and retirement planning.

Tax planning strategies for your business and real estate when utilized properly will save you more money resulting in higher profits and lower expenses. It may seem time consuming for you to maintain good bookkeeping records of your taxes plus the cost of professional services, but the long term benefits of hiring the right individual will be substantial. Even though you are using a professional for your taxes, I highly recommend having a basic knowledge of tax planning.

Keep Receipts and good Records- It won't keep you out of an audit 'per say', however, if you do get a letter or call from the IRS, it will certainly help you to have good records to present your side of the story. We recommend clients keep as many receipts as they can and keep their tax and important business records for at least 6 years. One of the most efficient and effective ways to keep receipts is through the new software and equipment Neat Receipts©. The most important thing is to find a system that works for you and be consistent. (1)

Establishing your entity, type of income generated and the types of assets being held by your business will help you determine the type of tax planning you will need. Each entity has its pros and cons and when it comes to these specific factors, there is a recommended structure for all of them.

S-Corporation- In some instances, clients should actually transfer the ownership of their real estate to an S-corporation. This is in a situation where the taxpayer is considered a "dealer" or "real estate professional," and the sale of the property is short-term in nature and will create a self-employment tax problem. For example, if you are flipping short-term property, building spec homes, completing "short sales" or flipping foreclosure property, the property should really be transferred to an S-Corporation before the sale.

On a cautionary note, please consider three important issues: 1.) Sometimes "due on sale clauses" in your mortgages apply to certain types of transfers, 2.) title insurance policies are generally not going to cover the entity you transfer the property to, but only cover the original buyer; consider a warranty deed to ensure the policy is not terminated, and 3.) transfer taxes may apply in certain states to a transfer of real property. For example, Florida has an onerous transfer tax scheme; in summary, we want to point out that we rarely see "due on sale clauses" as a problem and "title policies" thwarted with a transfer to your own trust or entity. (2)

Another factor that will determine your tax structure as a real estate investor is what type of investor you are. Whether you are a dealer/professional or non-dealer/non professional there are benefits and drawbacks for both. You may want to consider a multi-entity structure depending on the type of business and investment strategies you will engage in. A multi-entity structure when set up properly has great tax advantages.

Owning your own small business is a great tax strategy with many tax deductions to consider. Not every deduction is available for every business owner. You should speak with your professional team to verify what can and cannot be deducted. One deduction I personally like is paying your spouse and kids to do work for your business. I was amazed the first time I saw this diagrammed from our educator at Nouveau Riche. Be sure to keep a record of what your family members are doing in the business so you can show it at tax time.

There is a lot of information on tax planning. It’s impossible for me to type 10% of what is out there. I didn’t even cover that much in this article. I wanted to give you a taste of what is possible. Understanding the concepts will give you enough to get started. Leave the actual work to the professionals and stay informed.

Mark Kohler’s Tax Strategy and Legal Strategy classes were my two favorite at Nouveau Riche’s Real Estate Investment College. He makes it exciting and very easy to understand so you can grasp the basic concepts. You need to have an understanding of these principles before engaging in your business or investing. This information will help you immensely, minimizing your risks and maximizing your profits.

Happy Investing!

Tony



(1) Source – Kyler, Kohler, Ostermiller E-Newsletter March 2008.
(2) Source – Kyler, Kohler, Ostermiller E-Newsletter May 2007.

Entity Set-up for Your Business

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Entity Set-up for your business

Disclaimer: I am not a licensed attorney, accountant or financial planner. The information provided in this article is exactly that, information. You should seek a licensed professional when getting ready to establish your business entity, tax strategies, asset protection and retirement planning.

Protecting yourself from liability when you operate a business should be your number one priority. Although there are a variety of entities you can establish based on the type of business you are going to run, I’m going to focus on four of them in this article. They are a Sole Proprietorship/General Partnership, Limited Liability Company, (LLC), S-Corporation and C-Corporation. These entities can be set up for any kind of business. They are not limited to real estate, but as I break them down, you will see where a certain entity will work for you and how it relates to your business.

A Sole Proprietorship/General Partnership is a cheap and easy way to get started with your business. There is no written agreement that needs to be established to start operating and moving forward. A General Partnership only requires a handshake but every partner is liable for their actions and can put the partners at risk based on those actions. The major downside of both is you have Unlimited Liability. If you are sued, the courts can not only go after the assets of the entity, but your personal assets as well.

A LLC, S-Corp, and C-Corp all provide asset protection but differ on your tax planning, shareholder planning and raising capital. Proper formation, annual meetings and operations for your business are essential. Do not co-mingle your personal and business finances and you should follow the procedures of operating your business under one of these entities. It will be easier come tax time and keep you reputable. If you enter into a Family Limited Partnership you will want to consider asset protection and have 2 entities. With the right education and professional help, this will do wonders for your business.

A LLC is a great entity for buying and holding real estate rentals including both residential and commercial properties. Along with a Sole Proprietorship, a LLC has Self Employment Tax. However S.E. Tax does not apply towards rent, royalties, capital gains and any long term passive type income. It is a great entity set up for long term real estate investing.

C-Corps is great for raising capital and if you want to take your business public in the future. The negative side for a C-Corp is double taxation. When you take money out of your C-Corp you have to pay Corporate Tax before you pay your individual Income Tax. Why throw away your money if you are not planning on going public with a C-Corp. This leads us into the S-Corp. A great entity if you are providing a product or service.

S-Corps have no Corporate Tax and no Self Employment Tax. You do need to take a salary but here is where the beauty lies with S-Corps. You can divide the money you take out of the S-Corp into a salary/dividend split. You pay normal taxes on your salary but on the dividend split you only pay income tax. If you made $100,000 in your business and you did a 1/3 - 2/3 split, 1/3 going to salary, you are paying normal taxes on this money and only income tax on the dividend money. You save yourself money with this type of entity and accounting set-up. S-Corps are great for short sales, wholesales, fix ‘n’ flips, any short term real estate investing and any business providing a product or service.

LLC’s, S-Corps, and C-Corps all provide the same inside liability protection. Based on the type of business you are operating will determine the type of entity set-up you will choose to protect yourself. Do not believe the hype of the existence of a ‘bullet proof’ entity. If someone tries to tell you there is such a thing do not believe them. The corporate veil can always be pierced if someone wants to diligently go after you. These are the four most widely used entities but this is the extreme tip of the iceberg for corporate protection. I have not even gone into multiple entity set-ups, talked about insurance protection or asset protection for some real estate investing.

As I have said in the past, in is not what you are being taught but who is doing the teaching. You can learn a lot more by attending Nouveau Riche’s real estate investment college and purchasing their home study course. The educators are millionaires in their areas of expertise and cannot teach unless they have reached this status and prove it. If you are interested in learning more about our college and other products, please contact me in the Contact Us section of my blog.

Happy Investing!

Tony