Luxury Living on the Cheap, Part 1.5

After an interesting comment was posted in response to my “Luxury Living on the Cheap” entry, I mentioned that I would spend some time going into specifics on how to put things into motion and accomplish it for yourself. This is not quite Part 2 of the post, but I feel Neuromancerr’s second comment brought up a good issue and I want to respond with my thoughts on home foreclosures and the basic mortgage meltdown that we are experiencing here in the US.

…I want a permanent place in Dallas. I am targeting mid november for that. With the big mortgage companies filing bankruptcy It is opening up some big foreclosures around here. I need some hard facts and good ideas to work with as I try to get a house for half as much as it’s worth. (Neuromancer, seductiveman.com)

You’ll probably meet up with quite a bit of competition for foreclosures in Dallas’ nicer neighborhoods. Most lenders, even ones heading for bankruptcy, will want to get as much of their investment out of a foreclosure property as they can.

Typically, lenders lose approximately $40-$60k whenever they end up making an REO out of a property.

I’d advise you seek out a homeowner who might be “in trouble” with their payments, but not yet in a foreclosure situation with their bank. Let’s say an example homeowner lost their job or has decided they want to move to Argentina and live entirely off one of their muses — but can’t sell their Dallas home quick enough (because of current market conditions & listing saturation, etc). Using some skillful negotiation and a good knowledge of the real estate market in your area — you will be able to get a property for considerably less than what it may currently appraise for (or sell for on the open market).

This can be accomplished by either assuming their current mortgage loan, or, depending on how transfer of title works in Texas, by taking over their mortgage payment in exchange for full interest in the property. There are a number of resources online that describe such a process in detail.

But, that could be considered a totally different scenario than what my post on “Luxury Living on the Cheap” was using. We’ll save that for Part 2.

Instead, I’ll describe another method for getting some true luxury accommodations in Dallas, that has nothing to do with foreclosures or pre-foreclosures. (And, again, not a scenario that matches my specific situation.)

First off, you’ll have to make some basic assumptions and hopefully have access to an appraiser or Realtor with the ability to check Tax Records. Also, keep in mind that statistics show the majority of homes purchased over $1 million dollars are paid with cash (no mortgage loan).

For the sake of this example, let’s say someone owns a property in North Dallas — an exceptional Preston Hollow estate property — and it is worth approximately $2.9 million on the open market.

Given today’s current buyers’ market, they probably won’t get more than $2.5 million, if they are actually lucky enough to get it sold, and may end up waiting a long, long time for that special buyer to come along.

Though the current owner may have initially purchased the property outright a decade ago, folks’ circumstances often change and they may find themselves taking out a mortgage loan on the property to infuse cash into their business or for some other important reason. This, combined with other aspects of the scenario, creates a picture of a possible opportunity for an individual to step forward and make something happen.

We’ll keep it simple as possible, to ensure everyone will understand the basic concept:

In order to get ahold of some cash and liquidate part of their equity in the home, the owners obtained a mortgage loan on the property for approximately 30% LTV (Loan to Value) — in the amount of $900,000.00 — and therefore have a mortgage payment of approximately $5,250 (at 7% interest-only). One of the reasons they may be hoping to sell the property is to cash out their remaining equity, or, perhaps it is to get rid of that pesky $5k payment that they are responsible for each and every month.

Now, you come into the picture and basically offer the owner a monthly payment of $7,000 (covering their mortgage payment, along with part of their property taxes), in exchange for not only taking possession of the property as a rental/tenant (via a formal TIC Agreement or other contractual legal means) — but also with the caveat that a percentage of the amount you pay will yield you an interest in the property itself. This interest in the property will be directly proportionate to a specific agreed upon amount and, upon sale or transfer of the property, will basically be realized in the form of money back into your pocket.

So, you’ve accomplished a few things here.

Firstly, you’ve released the owner from the burden of payment on their loan and a portion of the property taxes.

Secondly, you are allowing the owners to continue to build equity via further appreciation of the estate over time — thereby keeping their large investment intact, instead of their selling it outright.

And, finally, you’ve just secured yourself a luxury accommodation for less than half of what the typical mortgage on such a property would be (approximately $15,000 per month, according to Realtor.com).

Your payment is immediately half the typical mortgage payment, PLUS you are building interest in the property itself as an investment vehicle.

This is just one of probably hundreds of different ways that people have developed as a means to acquiring true luxury accommodations ANYWHERE in the world, in ANY market.

And, wow, Dallas looks quite nice — I usually stick to looking around Austin/Houston. Although, I have been looking as far south in Texas as McAllen! (By the way, have you seen the amount of home you get for your dollar in McAllen? Geez!)