Creating Equity Where There Is None

In this article

We are constantly hearing about homeowners who are upside-down on their homes. The only hope that they seem to have is doing a short-sale, or getting the bank to agree to take less than the amount owed. Frequently no buyer can be found and the home winds up in foreclosure. That is especially true here in Las Vegas where we have been at or near the top of the foreclosure statistics for a long time.

With so many homes having negative equity it would seem to be enormously difficult for a real estate investor to have success here. At real estate club meetings I constantly hear investors talking about the difficulty of just finding a deal, let alone closing one. The strategy for most is to let the properties become bank-owned and them try to buy them. That’s the strategy for most, but not all.

A Different Approach

Brian is a Las Vegas real estate investor that I have come to know over the last couple of years. While many complain about the inability to find deals or raise funds when they do, Brian is absolutely thriving. He doesn’t complain about funding because he uses very little of his own money. Instead of complaining about the lack of equity he creates it. Huh?

Brian has been specializing in pre-foreclosures since the Las Vegas market was hotter than a two-dollar pistol. He had a much harder time then than he does now. Back then homes typically had equity and were easy to sell. Today when a homeowner winds up on a Notice of Default (NOD) list he will be inundated with calls offering various forms of assistance. However most of the callers will wind up telling the homeowner that they can’t help him because there is no equity. But that’s the kind of homeowner that Brian loves.

That’s not to say that every upside-down homeowner can be helped because many cannot be. However many people are in that situation because they have a second or even third mortgage in addition to the first. That is Brian’s bread and butter.

Pulling A Rabbit Out of the Hat

The first step is to find a property where the first mortgage is low enough that there would be plenty of equity if not for the second and/or third mortgage. At this point you work to strike a deal with the homeowner to purchase the home subject-to the first mortgage. (For more on subject-to investing search Jason Hanson’s posts) The key here is to make that deal contingent upon being able to purchase the second and/or third note on favorable terms. At this point the homeowner has generally resigned himself to the fact that he is going to lose the home and is willing to take any deal.

Once he has the home locked up, Brian contacts the junior lien holders (2^nd and/or 3^rd mortgage) and offers to buy the notes. The junior lien holders are aware of the fact that the home is in foreclosure and they know that when the sale takes place they will lose everything. When Brian calls to offer pennies on the dollar they are frequently willing to take the deal. After all, something is better than nothing. Are all lenders willing to settle? Surprisingly no, many will let the foreclosure happen and wind up with nothing.

The end result is that equity has been created in a property that once had none. The house can now be sold at a profit or held as a rental.

The Cat’s Out of the Bag

You might think that Brian would be upset with be for sharing his secret. The truth is that Brian shares his techniques willingly. He has created a real estate club in Las Vegas that holds a monthly meeting at his office. The club charges no membership fees, has no dues nor do they sell anything or promote gurus. By sharing his method he has created an army of bird dogs who are out hunting for deals. Quite often some the novice investors will bring a potential deal to him and they work out a split arrangement. It’s a case where everybody wins.

So the next time that you find yourself complaining about how tough things are or how it’s impossible to do a deal, ask yourself a question instead. What could I do differently or what is it that nobody else is doing? Get creative!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.