Options are the secret weaponReading Time: 4 minutes
In my post last week, I gave you the basics of Judgment Liens. I learned about them from Mike Warren, who is the country’s foremost expert on judgments and liens. In my post I tried to explain what a Judgment Lien was and how it relates to real estate investing, but I caused some confusion in the process… After checking with Mike (remember, all this stuff is new to me, too!), he brought to my attention that the simplified story I used in my post to illustrate Judgment Liens was not very clear. It made the assumption that the auction price was high enough to cover all the senior liens on the property that went to auction, so that the junior liens (including your Judgment Lien) are also paid. That’s not always the case…
… That’s why Mike has developed a system that allows you to use an Option to purchase a Judgment Lien. An Option gives you the right or the privilege, but not the requirement, to buy or sell something during a specific period of time. Using this Option system, you have absolutely no obligation to purchase the Judgment Lien, so even if the junior liens get wiped out because the house did not sell for enough to cover the senior liens, you don’t lose ANY of your own money. I also found it fascinating how Mike makes money from judgments that have nothing at all to do with foreclosures. He’ll share more of that with you on the webinar with Doug tomorrow.
Mike will also further discuss Options tomorrow, but here are some tips Mike has for how to protect yourself when purchasing a Judgment Lien if you chose not to use his Options system:
1 – You should always evaluate the debtor’s property before you purchase a Judgment Lien. Therefore, it is important to determine the amount of equity in a property. The more equity in a property, the more you can afford to pay for the Judgment Lien. With more equity, you have extra protection (insurance) that the debtor will continue to make his mortgage payments rather than let his home go into foreclosure in an effort to avoid paying off your Judgment Lien. A property with substantial equity is also likely to sell for more than the loan balance at an auction if foreclosure does happen, increasing the likelihood that your lien will be paid.
2 – To determine the equity in a property, you first add up all of the debts the debtor owes. This includes a first mortgage, possible second and third mortgages, and all other liens listed against the property. This also includes the lien you are considering for purchase. (You can ask the court clerk in the records area of your courthouse for assistance in determining the debts attached to the property.) You then determine the fair market value (FMV) of the property. Determining the FMV is as simple as calling a local real estate agent and asking them at what dollar amount the homes like your debtor’s are currently selling for (comps).
3 – These numbers will provide you with enough information to calculate the debt-to-value (DTV) ratio on the property.
The formula looks like this: DTV = Total Debt on Property / Fair Market Value
Mike says he likes to have at least 10% or more equity in the property before he considers purchasing the Judgment Lien. His reasoning is that if the debtor has some of his hard-earned money in the property, the likelihood that the property is being well maintained is higher. Houses that are well kept and offer instant equity typically sell for more, which bodes well for secondary and tertiary lien-holders like us.
I’m not even hosting this webinar… but I’m going to be there so I can watch it. I want to make sure to soak in everything Mike shares with us. If you haven’t registered for the webinar yet, time is a-ticking — go register now before all the spots are taken!
To Fun, Fortune, and Freedom!