Buy-back Scenario - Posted by Batman

Posted by Yogi on April 10, 2007 at 11:44:37:

Dave - Can I buy you lunch?


Buy-back Scenario - Posted by Batman

Posted by Batman on April 07, 2007 at 20:30:06:

I have an agent friend who has a friend that has tried to refinance his house to pay off some debt, but he can’t because his credit scores are too low (not sure, but it sounds like high 500’s). The house is worth $525K, with an existing $333K mortgage. The agent proposed this scenario to me because I have good credit:

(1) I buy the house for $425K, with the seller paying all closing costs.
(2) Seller then lease-options the house back from me and gives me a $10K option fee.
(3) Seller buys house back from me in two years for $425K (this is where I started to lose interest) and gives me another $5K.

If the trend continues (who knows what will happen in two years), the house would be worth about $600K. So, if the seller defaulted on lease payments, I could sell the house and move on.

I don’t want to put my good credit at risk if the deal isn’t going to be lucrative or I could have a legal issue with the seller down the road. Based on what I’ve read about buy-backs, this is one deal I’m leaning toward walking away from, but I thought I’d elicit some feedback.


Re: Buy-back Scenario - Posted by Kevin - WA

Posted by Kevin - WA on April 08, 2007 at 11:31:48:

Your instincts are right.

I can top this. 2 weeks ago I got a call from an agent off one of my ads. In a nutshell, her client was trying to exercise an option on a house they lived in. They wanted to cash out $40K in the process, but had crappy credit and no one would do the loan. The agent was antsy to get the deal to close, so she called to see if we can “close in 3 days.” She wanted us to buy the house, then sell it to these people once their financing came through. Their rent payments during the interim would create a negative cashflow situation for me, as they could only make the payment on a neg-am ARM or something like that. In no way could they afford this house.

With the involvement of an agent and a bad credit borrower, I knew that this was a trainwreck. But I was not doing anything at the time so I figured I would explore it and just see what kind of garbage deal they were trying to peddle.

The agent suggested that within 3 days we buy this house, appraised for $340K - for $340K. Then, in a few months once the buyer’s financing comes through, they will buy the house from me for $342K.

Incredulous, I repeated this back to her. “So, let me get this straight. You want us to make a loan to bad credit borrowers equalling nearly $350K, and in return we will make $2,000.” I could not believe this agent. So I said, we are not in business to lose money. If you had $350K, would you loan it out in order to make $2,000? “No,” she says. “Well, I won’t either,” I replied.

She says “Oh, well I saw your ad and thought you were in the business of helping people.” I told her that I am in the business of making money.

I hate to generalize about people, but I have had a disproportionate number of bad experiences with RE agents as compared to other so-called professionals. It seems an awful lot of them lack common sense and basic math skills.


Re: Buy-back Scenario - Posted by michaela-CA

Posted by michaela-CA on April 08, 2007 at 11:02:40:

walk away from this.

Maybe this is a legitimate way of a friend wanting ot help a friend, but it could also be the set-up for a mortgage fraud, where a false appraisal is being presented and a strawbuyer with good credit gets a new mortgage, based on the false appraisal. The new mortgage pays off the old mortgage and the seller takes in the cash difference, claiming ot have a renter for the property. The strawbuyer ends up being stuck with a house not worth the mortgage and the payments and a ruined credit and a potential criminal investigation.


Re: Buy-back Scenario - Posted by dealmaker

Posted by dealmaker on April 08, 2007 at 08:10:12:

Lets see, a borrower with bad credit, that no bank (who make loans to everyone) will lend to. Wow, I can’t wait to lend that person. What could possibly go wrong?

I’d propose the following;

Have them get an appraisal on the house.
Pay the “friend” 65%-70% of the appraisal.
No commissions (I’m guessing the agent sees some advantage to himself in this-need to cut that idea off quickly!) no closing costs.
You’ll notice that my scenario leaves the friend without the house and without the cash. Tough, as an investor we DON’T pay 81% for ppty, particularly to people who are in trouble due to their poor habits.


Re: Buy-back Scenario - Posted by NJD

Posted by NJD on April 08, 2007 at 07:49:06:

Don’t forget about your Uncle.

Re: Buy-back Scenario - Posted by Natalie-VA

Posted by Natalie-VA on April 09, 2007 at 12:29:39:

My settlement expenses on both sides of that would exceed the 2k and put me in the hole.


Re: Buy-back Scenario - Posted by DaveD (WI)

Posted by DaveD (WI) on April 09, 2007 at 08:01:52:

Pretty funny. Her idea of you “helping people” is undoubtably helping her get to her commission, which I’m sure you’ve noticed would have been far greater than your piece of the action here.

Perspective is a funny thing, and it probably never occurred to her this was a really crappy deal for you. They were just trying to salvage the unsalvagable. The basic math skills were never called on.

Re: Buy-back Scenario - Posted by Batman

Posted by Batman on April 08, 2007 at 11:58:47:

My first thought was exactly what you stated - why would I take out a loan for $425K to receive a $10K return?

Secondarily, I asked myself why the agent wasn’t helping his friend out with his own credit instead of relying on a third party. It occurred to me that the agent’s credit situation probably wasn’t so great, either. Therefore, since I usually follow the old wisdom of not listening to people who are worse off than me, I was leary from the beginning, but I thought I’d at least listen.