Houses in America are the best value they’ve been in many generations according to a housing analyst I interviewed recently. He enthusiastically reminded me that this is the time investors can “…pay below-market prices as banks try to unload properties.” This is a reality in every region of the country right now. My own research confirms that finally housing prices are bottoming or have bottomed in the U.S. The real estate market and inventory are finally beginning to stabilize. Banks are getting their real estate off their books at prices we haven’t seen in many years.
Two Great Opportunities Dawn at the Same Time
The first one is almost a no-brainer. Buy as many houses as you can afford for cash or mostly cash in areas that residents want to live. Clean them up and turn them over to a property manager to find qualified tenants. Even if the owner-landlord breaks even each month (or has an insignificant negative cash flow) there’s a very good chance that in a few years these rental income properties can be sold for a handsome profit.
The other opportunity has to do with trust deeds. Let me explain. A trust deed (aka deed of trust) is a deed that gives legal title to real property and conveys that title to a trustee (the lender). The trustee holds the title as security for a loan between the borrower and lender. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary of the trust deed. This is how someone with cash to loan can be the bank and earn above-market interest rates that create a dependable monthly income stream.
The first step is to find houses at greatly reduced prices during this extreme buyer’s market. At the same time, you find people who want to own a home but can’t qualify for a loan because of the very stringent criteria that conventional lenders are currently enforcing. There are good people who don’t have the highest credit scores. These people are used to home ownership. They don’t want to live in apartments yet they can’t qualify for bank financing or conventional mortgages to buy a house. So they look for investors to be their bank and they are willing to pay a premium interest rate – one higher than a bank would charge them for the privilege of borrowing the investor’s money. Many of these potential buyer-homeowners have the money for a large down payment, and they’re willing to pay between 1 and 3% higher than the going interest rate on the money they borrow. Trust Deeds are also referred to as Land Contracts and they have many pluses.
The Big Payoff and the Dual Incentives
Your client would begin by finding houses that have been foreclosed or otherwise drastically reduced in price. If they don’t have enough cash they may consider partnering with a close relative or friend. Then help them find the people mentioned above who have enough money to put together a sizeable down-payment but are having a hard time qualifying for a conventional-style loan. You may want to use of a realtor who specializes in putting together these kinds of transactions. The borrower then buys the house with their down payment and the money they borrow from your client. The interest rate on the loan is negotiated, and often is between 5% and 8% in today’s financial environment.
The loan is usually a 5-year, interest only loan. If your client needs their principal back before the 5-year period is over they can sell their loan and trust deed with the help of a Collection Escrow Company described below. The lender holds the first deed of trust, which means that if the borrower defaults on the loan, the trustee (the lender) has the power to foreclose on the property on behalf of the beneficiary [who is also the lender]. In most U.S. states, a deed of trust can contain this special power of sale clause that permits the trustee (your client) to exercise these powers without having to go to court. If that happens, your client gets the property back plus they keep the down payment that the borrower-buyer has forfeited. Then they can resell it to a new buyer.
The dual incentives are that your client earns generous interest on the money loaned and they have the potential of owning property purchased at bargain prices that may appreciate over time. You or a Collection Escrow Company who specializes in processing these loans for investors will screen the borrower-buyers before your client loans them the money so they’re less likely to default.
The rule-of-thumb here contains two main caveats: First, only do this with properties they wouldn’t mind owning (or getting back through foreclosure) and secondly, make sure the borrower puts up a big enough down payment so they are less likely to default on the loan. The companies who specialize in helping investors originate and process these loans are a good source of information for all the details involved in this potentially lucrative transaction.