All Forum Posts by: Derek Dombeck

 Sure, I'm happy to help. Send me a PM

I owned a hard money lending company for 10 years that we built from the ground up. There's many variables to consider regardless if you lend directly or find a broker to deploy your money. 

Which market to lend in, that states foreclosure and usury laws, do you have trustworthy boots on the ground there, and can you handle a default situation if and when it happens? 

1st rule of lending........ never lend on something you wouldn't want to own, because someday you may have too.

I'm happy to help more offline. Contact info is in my signature.

 Not in your area........

 There was a set price and he never bought it back.

Yes, your local REIA is a likely place to find an interested person, but don't overlook BP. Perhaps you should post in the market place forum and find someone in this community.

Please don't advise bankruptcy, as that should be a last case resort.

I had 1 very similar to this before. I caught up a couples defaulted loan which was 15K in arrears, which I paid directly to the lender for security reasons, in exchange for an Option to purchase their house. The price was negotiated and we all agreed on a 10 year term, but I could not exercise my Option for the 1st two years unless they fell back into default. Also, they could buy my Option back within the two years for 30K. If that happened, my yield would be minimum 50% ROI. Furthermore, I had the right to purchase for cash or subject to their mortgage balance plus some cash for the remainder of purchase price at the time of closing.

So, they got to stay in the house and fix their credit for 2 years while they fixed their credit and could then refinance to buy my Option back. If I had given them a loan with payments, it affects the debt to income ratio. Instead I hedge my returns by saying to them, I don't want you to have to worry about more payments right now, but I will need a better sale price in exchange.

I like to do these deals in a retirement account that's tax advantaged. 

Ultimately they failed and I did buy the house subject to, but they had a couple more years in the house and I gained all the equity over those years without the holding costs.

You certainly can go to a local REIA and seek out someone with cash or a self directed IRA that may either give you a loan in 2nd position or you could sell an Option on your house for the cash you need. If you sell an Option, you would not have debt payments, but they may want to exercise the Option right away, so you meed to think about the language you put in it.

Example. 

I gave an owner $4500 to stop a tax foreclosure on his property in exchage for an Option to purchase it for 18K sometime in the following 10 years. But I could not exercise my Option for the 1st 2 years and they had the right to buy my Option back in that same time period. 

It's been 5 years now and I still hold the Option. The property owner doesn't owe me anything, but within the next 5 years he will have to sell to me or renegotiate with me.

In my opinion, the L/O in this case, does not give you enough protection based on the significant Option consideration you are paying. If you breach the lease agreement in any way. You could be evicted and that money would be forfeited. That could be as little as not mowing the grass in a timely manner.

A land contract, wrap around mortgage, or subject to purchase with a seller 2nd carryback all run the risk of a due on sale clause being invoked. But, at least there is time for you to have some plan B moves and still own the property, because when the lender calls a note due, it doesn't happen over night. Plus you have equitable interest and or the deed which would take a foreclosure proceeding to take away from you. 

The bottom line is you shouldn't use any of these strategies without proper education or hiring a competent person to guide you AND you should have the ability to reposition the debt IF the sellers lender calls the loan due.

I like to do Options with smaller dollars to get high yields with low risk.

Example. A property owner may need a roof on their house they can't afford. You give them 20k for the roof in return for an Option to purchase  the property for X, sometime in the next 20 years. You have locked in a purchase price you are happy with and they have what they needed.

Now you may be thinking, they won't do that because they want to keep the house. You can add language that says, you cannot exercise your Option for the 1st (fill in a timeline) years. 

They get the use, ownership, tax advantages, maintenance responsibilities, and you get the upside equity if it appreciates. If it doesn't go up for awhile, that's fine as you have many years to choose from for the purchase. 

Many times, the seller will approach you in the future and ask if there's a way to not sell the house to you. That's time for a new negotiation and they will likely buy your Option back from you.

You can also sell or trade Options for cash or anything else you like and they are great to hold in retirement accounts too.

I currently hold an Option which I paid $4500 to the local County for the owners delinquent property taxes to save his house from foreclosure. My purchase price is 18k total of which the $4500 gets credited towards when I exercise the Option. This is a fixer upper shack on 2 acres that's probably worth 100K now and I had a 10 year Option which has about 5 years left. 

So if I buy his property today, I would have to add the $13,500 to my initial $4,500 to close the deal. This gives me a Net profit of 82K which is an Average Annual ROI of 57.4% based on the total 18k investment. But in reality, I only had $4,500 invested the majority of the 5 years, so the yield is over 90% Annual ROI.

I hold this in my retirement account, so it's not money that I need to live on and it's tax advantaged.

The sky is the limit with Options. 

Your approach is correct, but if the delivery is wrong, they may not be hearing you. 

If you can get them to sit down and figure out the actual losses they will take on paper, maybe it will sink in. If you leave it up to them to figure out, they are probably never going too.

Another strategy could be to Lease the entire portfolio with an Option to purchase for cash (or terms ) after they pass away. The kids will get a step up in tax basis at that time and will be likely able to get the full benefit of the portfolio tax free.

So I think you may be confusing Lenders Title Insurance with Property Insurance. 

Often the borrower/buyer will pay for a title insurance policy to insure against title issues or flaws, but it's usually a rider to a standard title insurance policy the seller typically pays for. In this case since your family is the seller and knows there are no title issues, it's a pretty safe bet you wouldn't need that policy.

In regards to lein position, you should have a promissory note secured by a deed of trust that gets recorded ahead of any other encumbrances and that's what keeps you in 1st position. 

Also make sure the buyer lists your mom as a lender on the property insurance policy, NOT as an additional insured party. There's a big difference in the order of payout in the event of a claim.

If the buyer defaults on the payments or any other stipulations of the note, you will need to hire an attorney to foreclose and get the property back. You should familiarize yourself with your state laws on that.