Distressed Sales
TOPIC: DISTRESSED SALE:
Consider shared appreciation loans. Private lenders can provide shared appreciation loans, where they receive a portion of the property’s future value increase instead of just interest. This appeals to short-term investors or “wheeler-dealers” looking to flip properties. For long-term investors—like those buying rental homes—lenders can offer participation loans, where the lender shares in the property’s ongoing income or profits. Both options involve more risk than traditional loans but offer potentially higher returns. These financing models give lenders a way to profit alongside successful real estate operators.
OPM is not JUST debt. It can be EQUITY in the deal. It can be an Option. It can be a Management Contract. It can be Partnership Interests or Stock. It can be Inventory or personal property, or even toys. Or the USE of something. OPM (Other People’s Money) refers to more than just borrowed funds—it includes any resource someone else provides that you can use to profit. While debt is one form, OPM can also be equity, where someone shares ownership in exchange for funding. It might come in the form of an option agreement, giving you control over a future purchase without upfront cost. A management contract is another method, letting you earn from an asset you don’t own. OPM can also involve receiving partnership interests or stock, or using someone’s inventory or personal property like equipment or vehicles. Even the temporary use of land or a building can be powerful if structured correctly. The key idea is leveraging what others have to create value, income, or control—without using your own capital. It’s a flexible strategy that opens the door to creative deal-making.
Equity = part of the property that generates net income AFTER taxes. While the author once focused solely on appreciation when buying real estate, decades of experience have shown that appreciation is often fleeting and unreliable. Over time, they’ve come to value consistent, after-tax income as a more dependable measure of equity.
Buying the LOAN on distressed property at discount rather than the property itself eliminates most of the competition who are focusing on the foreclosure sale. I know of one retired lady who makes a living buying discounted 2nds and 3rds on distressed properties with large equities. She knows the competitive bidding will result in her loans being paid off at full face value in a short period.
You can secure the Note you offer to a Seller that is leasing back with the Lease itself. For example, If I stop paying you note payments (to supplement your income and make the larger mortgage payment), you get to stop paying me the monthly lease (changes to $0).
If you are buying a distressed property, structure the transaction in such a way that NO payments are due to you. You can achieve this by giving the occupant pre-paid rent as a part of the deal. Never include any Option to buy the property with the lease. This will help avoid imputation by a court that this was a disguised financial transaction in violation of the mortgage lending statutes.
Expand your list of bird dogs. consider including a broader range of professionals and individuals who frequently come across distressed or off-market properties. These can include probate attorneys, funeral directors, and estate sale coordinators, as they often work with families settling real estate assets. You can also build relationships with contractors, roofers, and handymen, who are frequently in homes and may hear when owners are considering selling. Real estate wholesalers, process servers, and even code enforcement officers can also tip you off to motivated sellers. Don’t overlook local utility company employees or vacant property inspectors, who can alert you to abandoned or neglected homes. Lastly, consider developing rapport with bank employees in default or REO departments, title company reps, and even mobile notaries—all of whom may come across motivated sellers before the general market does.
Get payoff information BEFORE you make the offer. First, I’ll reach out directly to the attorney, lender, or small loan office involved in the default to understand exactly what’s required to bring the loan current. If curing the default isn’t an option—for instance, if the borrower is too far behind or the lender has already initiated foreclosure—I’ll explore whether the loan itself can be purchased at a discount. In many cases, especially with older or non-performing loans, the balance is inflated by front-loaded interest, late fees, or penalties that can often be waived or negotiated away in a payoff. This means the actual cash needed to settle the debt may be significantly less than what’s shown on paper. Armed with this information, I can approach the property owner more confidently and structure a creative deal that satisfies all parties.
You can buy loans solely with the intention of getting a Deed In Lieu or letting them get bid at foreclosure. Following this purchase, I bought the first loan at a small discount, then used my position as a defaulted lender to negotiate a wholesale price on the property in return for complete release of liability of the lender. There is nothing wrong with buying loans and letting them go into foreclosure then coming back and re-negotiating.
2nd Lien Foreclosure: If you’re bidding at the auction and it’s caused from the 2ND LIENHOLDER DEFAULT, you can take title SUBJECT TO the first lien, since they are not foreclosing. You just have to out-bid the 2nd LIENHOLDER.
You could also Buy loans with non-assumability clauses and you become the lender who can call the note due.
Look for related parties (like tenants) affected by distress and missed payments to become your lenders. Or to buy the building from me once I've bought it. Or to sign a new lease at higher rates. Or to help me finance the purchase of the building in return for lease concessions. The same thing is true of the original Note Makers who are still liable for the debt. Or for any co-signers or junior lien holders who will be wiped out by the foreclosure. Each of these people has a vested interest in not being held accountable for any unpaid obligations. They're all potential investors in your purchase if you need them. The moral of this story is not to co-sign with anyone nor to sign any debt instruments with full personal recourse. Otherwise, you too might become my investor.
Get the Wrap and hope that there's a default/foreclosure so that you're the only one to bid at the sale (and no one outbids your wrap position. This preforeclosure strategy involves positioning yourself as the second lienholder through a wraparound mortgage, giving you control over the distressed property while still subject to the existing first mortgage. You provide the homeowner with enough funds to cure the default and possibly carry future payments, securing your position with a high-interest wrap loan that includes points and servicing fees. If the borrower defaults, you initiate foreclosure on your second lien. At the foreclosure auction, your goal is to be the winning bidder — ideally without competition — so you acquire the property subject to the first mortgage still in place. This setup allows you to step into ownership without paying off the first lien upfront, giving you access to any equity between the first mortgage balance and the property’s market value. If no one outbids you, you effectively buy the property at a steep discount. Since the wraparound gives you an interest spread, you may have already profited from cash flow before the foreclosure. You can also structure the note with a demand clause, allowing you to call the loan at a time more favorable to you — such as during a lull in investor competition. The risks include being outbid at the sale, or the first lienholder foreclosing before you, which could wipe out your interest. However, if executed carefully, this strategy enables you to gain control of valuable properties with minimal upfront capital.