Are My Ducks In Order? - Posted by Ron

Posted by JohnBoy on February 24, 2002 at 18:32:38:

“”“The reason behind this type of transaction is I’m trying to put together a solution for a homeowner in foreclosure, with lots of equity, who wants to stay in home.”“”

This is exactly why you don’t want to get involved with properties where the seller wants to remain in the home!

You can sign all the documents you want and put them in all the escrows accounts you choose to hold them. The bottom line is that when the time comes and those owners still want to remain living in their home that has lots of equity to boot, that’s when it’s going to get costly to defend all those docs held in escrow! Anyone can sue anyone for anything. If these people decide they still want to keep their home then what makes you think they won’t want to keep it later?

It’s one thing when you are buying where the sellers want to sell or need to sell and willing to move on. It’s one thing when dealing with a buyer you sell a property to and later have to get them out for default. It’s a whole other ball game when it comes to trying to force a homeowner out of their home when they don’t want to leave and refuse to do so!

Judges can see through all the mirrors. That ain’t gonna help you. It’s going to help the homeowner making you look like the big bad criminal trying to steal their home out from under them!

They may have a lot of equity at the moment, but if they don’t cure the default or sell the property before it goes to sale they won’t have squat left for equity!

Also, buying an option for the right to buy for $270k and then getting that option reduced to $220k IF they default on their loan again doesn’t seem like something that would hold water to any Judge if this went to court! My guess is a Judge would over turn your option and classify it as a loan to the sellers because of the way you tried to structure it.

The problem is if the seller decides they still want to keep their house you will end up in court fighting over this! All the odds are stacked against you when you’re dealing with a seller that has possession of their home and they don’t want to lose it!

You still didn’t say what the property is worth today? The more equity involved that the seller is having to give up to you for bailing them out, the more the cards are stacked against you when the seller decides to keep their home and not perform on their end of the deal! Right now you would be their knight in shinning armour. Tomorrow when they fall on their face again you will be their biggest enemy trying to take advantage of them by trying to rip them off!!!

The best chance for you to make this stick as far as getting an option would be if the option price you agree to is near the FMV of the property. If the option price is below FMV where you stand to get a lot of equity then chances are high that in the end you’ll lose if the seller cries foul!

If they won’t leave the property then don’t get involved with it unless you are willing to just make a loan to them to help them save the property. Otherwise don’t even bother!

Perhaps you could make the $10k a loan and secured that against the property as a second mortgage. Then do a separate option for the $270k by paying them something extra for the option. Then if they default on the loan you could forclose on the second. Then you don’t need to mess with setting lower option prices if they defaulted on the first! You would have a valid second that you can foreclose on!

Record the option with a performance mortgage for the amount between the balance owed on the first and second, from the $270k option price. Record this behind your $10k second mortgage. That way the sellers couldn’t over encumber the property with more loans later without the lender knowing about your option and performance mortgage that encumbers the property up to $270k!

Doing something along those lines “might” put you in a better position to defend your interest if it came to that!

So assuming they owe $200k on the first, you would record a second lien for the $10k you loan them as a loan, making the total owed on the property $210k. Then record a performance with $60k listed as the amount of your interest in your option. That encumbers the property for a total of $270k. Any other liens after these are recorded would be behind the performance mortgage.

In the end the seller will owe you for the $10k second no matter what. The only issue is the option which if the seller decided to not honor that, you would have to sue the seller for specific performance or foreclose on the performance mortgage to protect your interest. At least the seller couldn’t cry foul since the other $10k was a loan and had nothing to do with getting an option on the property since that is entirely a separate agreement apart from the loan!

I would still run this by a qualified attorney that is well versed in real estate law in your state before doing anything.

Are My Ducks In Order? - Posted by Ron

Posted by Ron on February 23, 2002 at 24:00:39:

I’m putting together a to do list for a transaction and I’m wondering if any of you seasoned vets can answer a question or two for me.

Scenario: Homeowner in foreclosure with a 200K note, 10K in arrears.

I offer to pay 10K arrears to reinstate loan. This 10K is classified as OPTION CONSIDERATION.

Homeowner gives me option to purchase property anytime from 1 to 3 years for 270K. Option has language that states if Homeowner reenters foreclosure, I then have the Option to purchase property for 220K.

Option is secured by performance mortgage and recorded.

If Homeowner defaults, I purchase property for the 220K mentioned in option. If they refuse, I foreclose via my performance mortgage.

My questions are: how should title be held in this sort of arrangement? Should we have preexecuted docs put into escrow? What would be the best way to structure this with escrow?

Thanks in advance.

Ron

Re: Are My Ducks In Order? - Posted by Utah Investor

Posted by Utah Investor on February 23, 2002 at 08:11:42:

What John Boy said is perfect.

If you ever deal with a foreclosure and let the homeowner stay in the house, you will lose 100% of all lawsuits, because you are a “homestealer” of the poor distressed homeowner. They have so many ways to screw you over this way.

I only deal if they move out and move on with their life.

Take heed my freind.

Best Regards,

Utah Investor

Re: Are My Ducks In Order? - Posted by JohnBoy

Posted by JohnBoy on February 23, 2002 at 01:22:27:

What is the property worth?

I would not pay $10k as option money to get an option to buy for $270k in 1 - 3 years when the owner is foreclosure! The only way I would do this deal is by getting the deed and the owners moving on!

Now if the property is worth $350k+ now, then I might consider it. But also remember, if they go into foreclosure again then you may end up having to pay off the first to protect your investment. So make sure you can handle that before risking your money on a deal like this!

The other problem is that the sellers may have a change of heart later and decide they don’t want to sell. Then you’ll have to go to court and sue for specific performance which could get costly. Then you have to deal with the sellers claiming they were under a lot of duress when then gave you an option because they were losing their home at the time. You came in and took advantage of them while they were down and you’re just trying to steal their home from them for a lot less than what it is worth! It could get messy. Something I wouldn’t even want to risk getting involved with.

Re: Are My Ducks In Order? - Posted by Ron

Posted by Ron on February 23, 2002 at 10:55:10:

Thanks for the replies.

Johnboy, two questions.

  1. To prevent a ‘sue for performance on the option contract’ mess, isit possible to have both parties execute documents as if the sale went through and give them to escrow to be held for safekeeping? Then if owners go into default, escrow would consumate the sale.

The reason behind this type of transaction is I’m trying to put together a solution for a homeowner in foreclosure, with lots of equity, who wants to stay in home.

I want this solution to mimic a sale/leaseback with option to purchase but doesn’t have the legal exposure and pitfalls.

I thought going the option route would help circumvent the “disguised loan” problem of the sale/leaseback. The money for the arrearages is option consideration, not a loan.

Perhaps you have a better solution on structuring this sort of transaction?

Thanks

Ron