EXPERTS…VERY lucrative idea… - Posted by Frank
Posted by Frank on May 26, 2002 at 14:48:57:
I see this as a way to make some really strong return on your money. Nearly 100% ROI if done correctly.
I really don’t think any judge could possible see this as fraud. I’ll explain why as we go along.
O.K. Here it is, short and sweet. (actually long and complicated)
Let’s have fun with this one guys.
Perhaps it has come up before or is just plain out fraud (but I don’t see how), and haven’t seen much on it here at CREOnline.
I can’t find any posts in the archives about it either.
Here it is:
I guy is in foreclosure. He is only at about 60% LTV and INSISTS! on saving his house. He calls on my ad. Lost his job, got a little behind with everything so now his credit sucks and he can’t refi, thus he’s calling me to solve his problem. There are probably some lender out there who would actually refi this guy but why let them make the spread when you can play the position of the bank at low risk.
Existing conditions:
FMV 100k
1st 60k @ 9% interest
arrears and fees 3k
No 2nd
Mind you, I haven’t studied an all out sub2 course, maybe this is already in there.
Here’s the story…Can I buy this property Sub2 from him, pay his reinstatement amount of 3k, put 1k in his pocket help him out and then…
Immediately (i.e. simoultaneously) sign a land contract with him to buy the property back from me at 64k. What?! That’s the same price as you bought it from me for! Sign me up, he says, right?.
Land contract would be something like 14.9% (usury law in Ohio is 25%, I think)interest only for 5 years with a balloon of 64k at the end of 5 years. No prepayment penalty at all because my aquisition costs are built into the purchase price, 60k + 3k + 1k = 64k. Doesn’t that sound tasty to a homeowner in default? It should because it is. He can’t see it as nothing but a refinance and that’s essentially what it is. I’m the bank, and I’m making the spread though. What’s at risk though?..
Now let’s look at the guts… risk/reward
I’m putting up 4k to own this house for 64k… great target LTV to buy at, no?
I’m making the spread between 14.9% and 9% on 65k which is great cashflow.
60k @ 9% = $483/month
64k @ 14.9% interst only = $794
Spread per month = $311
That is almost 8% ROI per month! not per year!
I’ll take this as long as I can get it.
I would think the homeowner would be smart enough to refi as soon as he gets his act together though as there is no prepayment penalty by me at all. (should there be maybe a small one? what do you think?)
I’m selling the house to the original homeowner for exactly what I bought it for. I’m just charging a higher interest rate. That’s totally fine with him as he is saving his beloved house.
What do I have at risk? 4k I can’t see how I have more than that at risk.
What if the homeowner gets cute and wants to call the note due? GO ahead… shoot yourself in the foot! They are going to foreclose on YOUR! loan and the property that you live in, and all your equity stands to be lost.
Do I want to take the chance that the homeowner will try to get savvy and have his own note called due… NO WAY! Or do I want to take the chance that he will stop paying me and leave me with 4k out of pocket and not even make me one mortgage payment. NO WAY!
Therefore, this will be a strict loan. One day late and the foreclosure proceedings begin by me. Seriuosly, don’t fool around… try me!!
The real kicker is I will have a performance mortgage recorded after I take ownership right behind the existing 1st mortgage. Grantor, me. Grantee, me. (Experts, can I do this??) The performance mortgage will be for the amount of equity in the property, about 36k. The performance mortgage will basically say that if the land contract dated mm/dd/yy (same day as closing of everything else) is satisfied, this mortgage shall be released in full. The performance mortgage would get recorded right after the quit claim and right before the land contract. IF the land contract is breached, the mortgage does not get released. Remember, it’s in front of the LC on the records so it is essentially in 2nd lien postition.
Are you still with me here? Has anyone thought of this already? If so tell me my error in thinking.
He stops paying me… I stop paying the bank. I stop paying the bank… they take “my” house with the loan in his name, (which means the foreclosure is against him!)the 1st mortgagee will hopefully clear everything they are owed (if the house was only at 60% LTV), and I sit back and collect everything beyond that on my performance mortgage. And the homeowner gets foreclosed on for being trying to play hardball with me. Of course he and could agree to release the contract and I would more than likely pick up his payments again for him at that point. Now he’s definately going to call the note due to screw me (and himself) right. Maybe I’ll entice him by saying when I sell, I will pitch 5k his way.
If the bank finds out about the transfer by way of an honest bust and calls the note due, I think I need to step up and pay the note off in full. One would need to be backing some cash (64k) to do this unless they know a lender or note buyer that will step into that 1st lien postion. Really not much for them to lose at 60% LTV, but the deal is pretty complicated. Worst case scenario, if its an honest bust, you have hopefully built a good relationship with the homeowner and he trusts you to release his LC at this point, so you can refi, then just record a new one after the loan closes. He should be even happier… the loan is now out of his name! One needs to build a relationship of trust and confidence with the homeowner to do this type of deal.
Again though, if he doesn’t pay me, I don’t pay the bank. Or if he purposely leaks and they call the note due…
It’s foreclosure city! … on him, not me.
Again, what’s the homeowner thinking?..Big deal, my interest rate goes up. That’s a small price for a homeowner to pay for essentially a refinance but gets to save his house if he is that adament about saving his house. He can always refi with no prepayment penalty. In the meantime, I will be collected serious ROI.
Those who say, nah… too complicated!
You guys talk about doing the same thing (collecting a spread) except with “new” tenant buyers who have no regard for you or your loan except their own LC downpayment. So why not deal with someone who does have regard for all this.
Why not use Joe’s Helping Hand? (sale/leaseback) I don’t think that stands a chance in court when someone takes a 40% equity hit from some savvy investor. NO chance judge will grant in your favor. (S)he’ll call it a loan and see you are making ridiculous returns and call it a violation of usury law. Case over.
Not to mention an even bigger aspect!! KNOWING THAT THE DEFAULT HOMEOWNER WHO SELLS YOU THERE PROPERTY HAS ALMOST NO CHANCE OF COMING UP WITH ALL THE CASH REQUIRED IN YOUR OPTION AGREEMENT/PRICE.
Knowing that going IN is JUST PLAIN OUT SHADY.
Why not instead get into the used car sales business and sell cars for a small down, with high payments you know the buyer can’t make, send your repo guy out to repo the car after a few missed payments and sell it again 4 or 5 times like that. Then sell it on fair terms the last time to see it go bye bye for good after you made tons of unfair money on it. NO THANKS PERIOD. SHADY SHADY SHADY!! Joe Kaiser is quite a thinker but that borders on BAD BAD vibes with me. To each his own. Just think of what you’ll say at the pearly gates for making a million on someone else’s hard luck and by using a pretty slick savvy technique.
Why not do it the way I mentioned instead and make great rates of return for stepping in, helping someone out, and knowing that they are not going to sue you for your new claimed equity that doesn’t belong to you. They will probably love you for what you did for them, pay you your spread and refi out as soon as they are able…
meantime, send the payments to me.
Only iffy is how to get the taxes paid and not to show in the new homeowners name. Not sure here. They go to me, then back to homeowner/buyer after the LC is recorded? Maybe nothing to think about there huh??
If you guys have comments… I would love to hear them.