Using Financial Judo Series (Part 2 of 2)

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!