We lost a close friend recently. A lot of you knew him. He was at all of our seminars until just recently. Yes, the Rule of 172 is dead. Call the obituary editor. Make arrangements at the mortuary. The Rule has breathed his last breath.
For those of you that weren’t aware, The Rule of 172 was a way to quickly spot equity in default deals. A property buyer used The Rule by adding the year of the loan in default to the year the property was purchased by the current owner. If the sum was less than or equal to 172 the deal looked good.
Here is an example. Look at a foreclosure list like Daily Default Infoservice. On the list it will give the date the loan in default was recorded. The date the current owner purchased the property will also be listed. For and example let us say the loan in default was recorded in 1990 and the current owner took deed to the property encumbered by the loan in 1981. To apply The Rule, add 90, for the loan date, to 81, the purchase date, for a sum of 171. 171 is less than 172, therefore this deal is probably worth pursuing.
For many looking for a simple way to cull long lists of foreclosures The Rule was a Godsend. Unfortunately, as time has ticked on, The Rule has become obsolete. Too few properties are found, too many good deals are missed.
This would be a good opportunity to thank The Rule’s father, Al Seastrand, for sharing this simple concept with us. The Rule was born as a method for his wife to help him with his default buying efforts way back in 1992.
The Rule was designed to find two types of opportunities. Old first loans without seconds behind them. And, seconds and thirds deeds of trust ripe for purchase. I need a New Rule. I need a quick and easy method to find possible opportunities.
Is there an heir apparent? Will a sibling or an outsider take The Rule’s place. What can we do to easily find the best deals on a foreclosure list?
The Rule was based on a little known fact, the median price in 1986 was 60% of the median price in 1992Â the year The Rule was conceived. Our goal in 1993 was to buy property for 1986 prices. Hence, The Rule of 172, 2 times 86 equals 172. As the market stayed flat, 1986 prices continued to be the benchmark current purchases could be measured by. The Rule of 172 remained an accurate filter of leads much longer than most expected.
When Mr. Seastrand originally formulated The Rule, he noticed a correlation between when someone bought a property and when the loan was taken out. Experience teaches that a long time property owner with a recent loan in foreclosure often has equity worth purchasing. Visa versa, a recent property buyer who assumes a loan either paid a large down payment or borrowed money with an owner carry back loan. There is equity if there was a large down payment. If the previous owner took a deed of trust rather than cash, this is the most negotiable of loans.
What year’s prices are we looking for now? Current Median prices for Northern California in 1988 are approximately 65% of now. 1987 prices are about 55% of now. The New Rule is 175. Hopefully, she will be with us much shorter than her brother was.
When should we use The Rule of 175? It should be the first screen whenever you are working the default lists. Scan the list quickly. Add the loan date and the deed date if it is less than or equal to 175 star that lead, but don’t cross out all the others.
The chosen accounts most likely will fall into the first two of the three default buying opportunities: Properties with equity. Or, properties with junior notes ripe for purchase. Market the owners of these properties. Talk with the owner about purchase. The owner will tell you which strategy applies to their property.
What do you do with the leads where The New Rule of 175 does not apply? Well, you’ll just have to read next month, or come to Foreclosures.com’s The Six Steps to Mastering Foreclosures.
