The Secret To Judgment Options

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Would you like a way to be able to create a significant income stream with part time effort from real estate and not have to invest a significant amount of time, energy or money to do so? If you would, one area that you absolutely want to consider is judgment options.

To understand what judgment options are, you must first understand the judgment process. When you understand how this process works, not only will you see the income opportunity but in particular, you will understand why it’s such a powerful prospect during this current economic downturn.

In any economy, you have people that don’t pay their bills or meet their financial obligations for a wide variety of reasons. Some of them may have lost a job or fallen into tough times. Others are simply deadbeats and have no intention on paying their obligations.

When someone (the debtor) fails to meet their financial obligation, the person they owe money to can take them to court. If the court rules in their favor and determines that the debtor owes the money, a judgment is filed against the debtor.

So what is a judgment? It is simply a legal document stating that the debtor owes such person (that owns the debt) the money; it authorizes such person to take necessary action to collect the debt as allowed by law.

However, when you win a judgment, it does not mean the debtor will suddenly pay you the debt. You still may have to take additional steps to collect the money that is due you.

If the debtor owns property, one step you can take to collect the debt is to file what is called a ‘lien against the property.’ A lien is a hold against the property in question and states a person cannot sell or refinance the property without the lien holder being paid first on their debt.

When you take a judgment and file a lien against the property, it becomes known as a ‘judgment lien.’ This is an excellent way to ensure that you get paid the amount you are owed because you now tie the debt to a secured asset that has value. With a judgment lien, you have a claim against the property without having ownership of it and without having to foreclose on it.

Most problems judgment holders have is that they don’t know how to collect on the judgment. They are inexperienced in collections and have no idea of the laws under the Fair Debt and Collection Act. Additionally, legal advice is expensive and they may not be willing or able to hire an attorney to get the advice they need. As such, there are many judgment holders willing to sell their judgments for pennies on the dollar. They understand that it’s better to get some of their money returned rather than to receive nothing at all.

If you have the money to spend, most certainly buy judgments for yourself! It can be a very worthwhile investment and one in which you can make a significant return on your money.

As an example, suppose you find a judgment for $10,000. You negotiate to purchase that judgment for $1,000. By doing a little research, you discover that the debtor owns a house. You take that judgment and file a lien against the house. 6 months later, the debtor refinances the house. Out of their proceeds from refinancing, the lien will be paid first before they receive any money from the refinancing. You’ll receive your $10,000, thus making $9,000 in profit from the $1,000 investment.

While this is a great strategy, many people simply do not have an extra $1,000 to purchase a judgment(s). There is still a way you can make money from judgments without having to invest any money in them. It is by utilizing a technique known as a ‘judgment option.’

In the previous article, I explained what an option is. I also mentioned that options can be used on many different items and not just on real estate property. The good news is you can utilize an option on a judgment as well!

By utilizing the strategy of an option, you can make money from judgments without putting any money down towards the purchase of the judgment. By utilizing the judgment option, you can collect on the judgment, making your money first from the judgment and then use the proceeds to pay for the judgment.

How do judgment options work?

Using the same example as before, you find a $10,000 judgment and the judgment holder wants $1,000 for the judgment. You agree to purchase the judgment from the judgment holder for $1,000. However, you let the creditor know that before you pay for the judgment you will need time to do your due diligence to make sure everything is in order. At this point, you are tying up your purchase by optioning for time (to do a due diligence).

By tying up your purchase, you created a judgment option between you and the judgment holder. In this example, the agreement with the judgment holder is, anytime within the next 4 months you have the option to buy this judgment. In return for this option, you agree to pay an option consideration of $1.

Now that you have the option tied up, you research the judgment. As in the above example, you discover the debtor owns a house. You also discover that the homeowner is going to be refinancing their mortgage. When refinancing is complete, you will instruct the new lending company to make payable (1) $1,000 to the original judgment holder and (2) $9,000 to you. This technique allows you to exercise your option to purchase the judgment. The lending company is paying you the difference between your purchase of the judgment ($1,000)and the original judgment amount ($10,000).

What is an option? An option is an agreement between you and the owner of the item you’re looking to purchase and it gives you, as the holder, the right to purchase that item within a specified period of time.

You can create an option on a number of different items. However, the purpose of this article is to teach you how options work in the area of real estate, particularly properties with a structure (or, house) on them as well as vacant land.

So how does a real estate option work?

When you purchase a real estate option, you are creating an agreement between yourself and the property owner to purchase the property. Under the option you both have agreed to the terms and purchase price of the property. Note that the property owner still owns the property and as such, is responsible for meeting all necessary obligations on the property during the option period. This includes paying the mortgage, taxes, insurance, making the necessary repairs and so on.

Under the option, you have the ability to decide at any point within the time frame agreed upon to purchase the property or, walk away from the deal and not purchase the property.

Case in point: let’s say you find a 3 bedroom 2 bathroom house. You agree to buy the house from the homeowner for $100,000 within the next 12 months with a $10,000 down payment.

An option gives you flexibility and “options.” Under an option, you can choose to purchase the property at the terms agreed. You can also choose not to purchase the property. If the owner agrees you can also choose to extend the option period.

How do you make money when you purchase a real estate option?

There are several strategies you can use to profit from options without ever having to own the property.

The first strategy is to sell the property. With an option, you have exclusive rights to buy the property from the owner within the time period specified in your option. If you find someone who wants to purchase the property, you can sell them the property as long as it is within the time frame specified in the option.

Once you find a buyer and have an agreement to the terms of the sale, you will need to complete two additional transactions. The first transaction is going to be with the owner of the property for sale. In this transaction, you will buy the property from the property owner under the terms of the option. This is called “exercising the option”.

The second transaction is going to be with the purchaser of the property. In this transaction, you will sell the property to the purchaser under the terms that the two of you agreed to.

If the purchase price the new owner pays to you is greater than the price you paid the previous owner, you profit on the transaction. The difference you pay for the property and what you receive for the sale of the property will result in profit.

The second strategy is to sell the option-just the option! As long as this is not forbidden in the terms of the option, you can actually sell the option to a third party. The third party has the option to close on the property if he or she chooses to do so.

When you sell only the option, you are not selling the property. What you are selling is the exclusive right to purchase the property. You can sell the option for whatever price you decide.

The third strategy is to lease the property with the option to buy. With this strategy, you agree to lease the property from the owner for a certain period of time. You also have the option to purchase the property from the owner at any time within the option period for purchase price you agreed to.

Leasing the property gives you control over the property. This gives you the ability to sub-lease the property to a third party.

Ideally, you should be charging your sub-leaser an amount greater than the amount you’re leasing the property for. The difference will be profit you will be earning monthly from one transaction!!

If you decide during the terms of the lease period that this is a good deal and you want to purchase the property now, you have the ability to do so. Simply exercise the option, buy the property and become the new property owner.

What is the benefit of using an option on a real estate transaction?

One of the biggest hindrances newcomers to real estate report as to why they aren’t getting started is because of lack of money and/or credit. Many newcomers falsely assume you need money and/or credit to buy real estate.

That may be true in some cases. However, you don’t need money or credit to profit from real estate. If you control the property using lease options, credit is not required; the only money that may be required is whatever you agree as to the price of the option, known as the “option consideration”.

How much does it cost to buy an option? It costs whatever you and the seller agree to as its cost. You typically have to pay the owner at least $1.00 to make the real estate option valid and legal. Anything above and beyond $1.00 is up to you and the seller. Options are a very powerful tool in the arsenal of the real estate investor. See how you can use it in your existing real estate investing business or your new business if you’re just getting started.

Best of all, in many cases you won’t have to pay the $1. If the original creditor asks about the $1, you can tell them that you had to include an amount in the option consideration only to make it legal and you didn’t intend to pay the actual $1. For most creditors, they don’t care about the $1. They just want someone to buy the judgment from them.

So now that you understand how judgment options work and how you can make money from them, the next question is, “How do I find these judgments so I can start making money from them?”

The first step is to search for judgments. This can be done on-line by finding public records on-line within your county court house. First find the county you are most interested in working judgments; locate the county clerk’s office and from there locate public records on-line. Many counties’ court records have online applications you can use to do judgment searches. Judgments are public records.

For the counties that don’t have their information online, you can visit the county court house and obtain the records. Once you find the judgments, you can work from the courthouse or record the information you find and work from home as your next step is to contact the owner of the judgment.

You will want to contact the owner of the judgments either by phone or by mail. The most effective use of your time is to mail out a letter to the judgment holder. You may want to call the judgment holder but I don’t recommend using your time in this way. Soliciting your business over the phone may not receive a receptive response as unsolicited phone calls can be blocked. I find that this is not the most effective use of your time.

Mailing letters out instead of phone solicitations will give the client the opportunity to seek you out. Clients that take time out to request your help are more serious about collecting on the judgment and getting their money back.

Another method you can use for obtaining judgments is to purchase judgment recovery leads. Many companies are marketing online for clients who need help in collecting judgments. The clients fill out basic information about their case and their judgment; their information is then sold to investors and others looking to make money from helping people collect on their judgments.

Once you have a potential client, the next step is to prepare the form to create the judgment option. This form simply states that you have the right to purchase the judgment from the client within a certain time period.

Now, even though you haven’t purchased the judgment yet, you aren’t going to be able to collect on it unless you own the judgment. Therefore, the original judgment holder will have to sign over rights to the judgment to you anyway. This is so you have the legal right to collect the judgment. Otherwise, you would have to become licensed as an attorney or debt collection company. This is done by filing an assignment of judgment and a notice of assignment of judgment with the court.

Keep in mind, not all judgments are created equal. Therefore, it is important that you do the necessary research to make sure this judgment is worth your while. This is why you use the judgment option; so if the judgment turns out to be a bad one; you are under no obligation to buy it.

The key to whether you have a good judgment or not is to research the debtor.

1. Does the debtor have a job in a state that allows for the garnishment of wages?
2. Does the debtor have bank accounts that you can levy to collect payment?
3. Does the debtor own real estate to attach a lien for payment collection?

If the debtor has none of the above, you’re almost never going to be able to collect on the judgment. Judgment options are an excellent way to make additional income for your business. You can make thousands of dollars a month on top of what you already make with these strategies.

by: Mike Warren

Multiple Income Streams University is an online site which will teach you on how to get money in 24 hours and never worry about losing any deal again. Visit www.misuniversity.com and know the secrets of building your real state fortune.