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Over Encumbered Properties



Bill Gatten

Consider this:

If you knew with virtual certainty that a stock (‘say, “Peach Computers”) that is selling for $550 per-share, would more than double in value over the next two months, would you be willing to pay $600 per-share for it (‘assuming you had no other way to buy to it)?

Alternatively, let’s say that you are given an opportunity today to take-over a clean 3 bedroom, 2 bath, 1800 sq. ft. $250,00 home in a nice area– i.e., ‘one with no payments, a positive cash flow of, say, $200 per month…’and without the necessity of a down-payment, new financing or credit qualifying.  Would you take it?

Wait!  Before you decide, remember that this fictional property, like the fictional stock, has no equity (‘i.e., its market value is $250,000 and loan-payoff is $275,000).  I.e. ‘not only is there NO equity, but there is NEGATIVE equity).  ‘Still interested?

Note here, as well, that should you accept the property as offered, you will have no maintenance, management or repair costs.  Moreover, ‘it’s not you who will be primarily responsible for making payments or paying for property tax, insurance (‘or any HOA dues or assessments), and your name will not be on the mortgage.

Next question:  Pipe dream, or dream-come-true?  Or is it one of those too-good-to-be-true scams that pop-up so frequently in our business?

I’m hoping (trusting) that your response to the first two questions above (i.e., ‘Would you do it?) was the same as mine would be…i.e.: “You can bet your booties!”

“But why on Earth,” some might say, “would anyone choose to take on the responsibility of an overpriced, over-encumbered income property with negative equity?”  [Side analogy: ‘Why do people keep buying stocks and bonds when their value is exactly equivalent to their sale price?].

The real issue here is that Equity in real estate is wonderful when you have it, but it has never been the “Be-All and End-All” when it comes to real estate acquisition; and those who think otherwise are missing the point and missing-out on millions of dollars in potential income, profit and a life of financial security.

There are, after all, myriad readily salable benefits of real property ownership, aside from Equity. Some of them are listed here:

  1. Income Tax Write-Off for mortgage interest and property tax (‘and its “transferability”);
  2. Equity build-up from mortgage-principal reduction;
  3. Equity build-up from economic appreciation;
  4. Use as collateral for other real estate acquisitions or unrelated business opportunities;
  5. Rental, Lease and Purchase-Option income potential;
  6. Time-sharing potential in certain types of properties;
  7. Re-salability (marketability);
  8. Land Use, beyond residential occupancy;
  9. Profits derived from “flipping” and/or discounting one’s ownership or acquisition rights to another party;
  10. Pride of Ownership– ‘arguably the singular most sought-after, salable and coveted aspect of homeownership an elevated price).

It’s clear in perusing the foregoing list that one needs only a few of these benefits (‘maybe even just one) to make money in the business of real estate acquisition.  For example, consider how you might fare in your own real estate investing endeavors were you to have, say, only items  #3, #2 and #8; or perhaps only items #2 and #3; or #4, #7  and #9 (or maybe all ten)…


A “Don’t Wanter” homeowner is straddled with a $250,000 property with a loan balance of $350,000 (i.e., ‘upside down by $100,000) and an aggregate PITI payment (i.e., principal, interest, taxes and insurance) of $2,530 per-month. [i.e., P&I = $1,880 + T = $525 + I = $125].

  1. Consider that any traditional homebuyer acquiring a similarly valued home would need to take out a loan for $250,000 at, say, 4.5% interest; and if 100% financing were indeed available to such a buyer with perfect credit, the aggregate PITI payment (i.e., principal, interest, tax and insurance) would be $1,742 per-month for 30 years (i.e., P&I = $1,342 + T = $260 + I = $100).
  2. Therefore, quite obviously, a seller of the over-encumbered property described above (i.e., $250K value with a $350K loan) can’t sell traditionally without paying his bank $100,000 and covering closing costs of about $20,000.  He/she is, instead, forced to rent or lease the property for around $1,600 per-month: i.e., leaving him/her with a negative cash flow of over $900 per-month, plus all the effort and expense of rental property management and maintenance (‘not an enviable position in which to find oneself).
  3. In view of ‘a’ & ‘b’ above, what might such a property owner say to your offer to take the property over and reduce the negative cash flow down from $900 per-month to, say, $400 or $450 per-month, while you simultaneously relieve him/her of 100% of all management, maintenance, taxes and insurance expenses…AND the $100,000 over-encumbrance?

    And by doing this for the seller, are you not essentially handing him/her $100,000 in debt-relief?  Realistically, should any reasonable person in this predicament object to paying you, say, $25,000 upfront, or, say, $500 per-month for 60 months, for doing this for him/her?

  4. Then, by the same token, what might a potential homebuyer with marginal credit and lacking a down payment say to paying you a bit more than Fair Market Rent in exchange for 100% the income tax write-off for property tax and mortgage interest, along with all (100%) of the benefits inherent in Fee Simple real estate ownership?
    1. Think about it… ‘for someone in a one-third tax bracket, the after-tax cost of renting for $1,700 per-month is actually $2,550 per month (i.e., ‘after earning that amount and giving 1/3rd of the earnings to the government for taxes, 2/3rds of the $2,550 is left over for rent ($1,700).  This then, quite obviously, means that the actual after-tax cost of renting in this case is really $850 per-month more than the $1,700 rent.
    2. Question:  Which is less expensive — the after-tax cost of $1,700 per-month rent, or an aggregate mortgage payment of $2,200 per-month?
    3. Answer:  Because of the tax deduction benefit, the $2,200 house payment turns out to be $450 per-month less expensive than renting the same house for $1,700 per month.
  5. Now, stop a moment and seriously consider how much a tenant-buyer might pay you upfront (or per-month over and above the “mortgage” payment) for your putting him/her into real home ownership without a down payment or any more credit-qualifying than you, yourself, might require.   With $500 from the seller and $2,200 from the buyer per month, you have a positive cash-flow, in addition to the upfront money (or the no-interest monthly installments paid to you for it).
  6. Also note that in any such arrangement, your “seller,” your “buyer” and you are well-shielded against threatened litigation involving the property by virtue of the Open Door Wealth Management Equity Holding Trust Transfer® in whose bonded, licensed, non-profit corporate trustee the property’s legal and equitable title is vested for the term of the agreement for ease of transfer, “escrow” safety and asset-protection purposes.
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