myEmpirePROQuestion: “How do you wholesale a deal with a mortgage on the property?”
That’s a good question actually.
If there is a mortgage on the property you are about to wholesale, like most properties in America because this all housing market is built on mortgages, so most houses have mortgages on it…
So most property you’re gonna wholesale will have mortgage on it.
But I guess there are two ways to look at it.
There’s a mortgage that is too much, that the mortgage is bigger than what the property is worth.
In that case, somebody has to pay that mortgage.
Let’s say for example they owe $400,000 on the house.
The property is only worth $250,000 because the market is bad for weird reasons that you may not understand.
So now they owe $400,000 and the property is only worth $250,000.
That means the equity under the property is -$150,000.
In that case you will have to negotiate the short sale with the homeowner as well as with the bank.
Mainly with the bank but the homeowner obviously needs to say it will be open to “You know what I just wanna get rid of the property.”
Then say, “Hey, I wanna negotiate the short sale with the bank. Let’s see how much the bank wants.”
So the bank may say “Hey, you owe us $400,000”.
The bank will send out what they call a broker’s price opinion.
That’s essentially an agent or appraiser that will value the property and say “Okay, you know what the property is only worth $250,000. You can give us $230,000 and we’ll keep it moving.”
So why would you pay $230,000 for a property that is worth $250,000, that’s too close right?
You need to just offer what you math says.
How much they owe in the property is completely irrelevant.
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It’s only relevant when you want to determine if there is a short sale needed or not.
Meaning if they owe too much to the bank or not.
But at the end of the day it comes down to what is the after repair value of the property.
If you don’t know what the after repair value is, check out DealEstimator.com
There is a free calculator that I have there to learn how this works.
So how do you wholesale a deal with a mortgage on the property?
The idea is, after repair value of the property today, not yesterday, not tomorrow.
Today.
Based on 6 to 12 months of data within one mile radius of the property.
We need to know what properties are selling for and that’s how we’re gonna know how much we are going to offer.
We don’t wanna offer more than 65% of what the property is worth.
And if the property needs work, we need to adjust the number for it… but that’s beyond the scope of this lesson.
The point is the same way.
How do you wholesale a deal with a mortgage on the property?
Mortgage has to be paid for but it does get paid for until after closing.
The title company worries about that.
If the property is worth a lot more than what they owe on it, let the title company worry about pulling the payoff.
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The payoff statement is an official document from the bank that says “this is how much they owe us, that we need to collect before we can allow you to close the title” meaning sell the property.
And if the homeowner already disclosed to you like, “this house is only worth $250,000 but I owe $400,000 on it”.
Then you say “Okay. you need your mortgage documents and lets see if we can negotiate a short sale”.
That is what a short sale is.
It’s another word for short payoffs, meaning discounted payoff.
The bank may accept less than what is owed.
For the most part the bank will want to accept because again the bank doesn’t really have a way out.
Especially if they already stopped payment on the mortgage, the bank is kinda stopped.
They are not getting the monthly mortgage and they want as much as they can get out of the house so that they can reinvest that money into other investments.
Does that make sense?
So at the end of the day, money by itself doesn’t make sense… It’s the value behind the money that really makes sense.
If they lend $400,000 to this person and they are making $2,000 (just for the sake of simplicity), and the monthly payment stopped.
There’s $400,000 stuck on the property.
The collateral for the mortgage loan, the house is the only thing that matters.
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What is the value of that collateral, that’s the only thing that matters.
That’s why the $400,000 is not relevant to how much you pay.
What’s relevant is the after repair value of what the property is worth today.
So the same way, if they owe less, let the title company worry about it.
If they owe more, then you have to negotiate the short sale upfront and then after you get that “official short sale approval”
… you give that to the title company as an approval to allow them to sell for less than what they owe.
The bank is basically accepted or agreed to take less than what is owed to them.
So as you can see here we kind of talk about short sale, we talk about mortgage, it’s the same thing essentially.