Help with Foreclosure, how to purchase. - Posted by Richard

Real Estate Investing Real Estate Law
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Posted by Richard - WA on August 13, 2007 at 19:46:33:

JT,

You are right and in some ways I don’t think I’ve explained things properly.

The buyer is meeting with me at 11:00 with the $60K cashiers check. They are ready to go. I would be using her money to bring the loan current and the $15K to the brother. The rest I would pocket in a bank, just in case payments are made.

The Seller is meeting me anytime between 10 - 12:00.

I haven’t signed anything around because I knew that I’m the only hope and only one they want to deal with at this point. So there is no concern about losing them or someone else stealing the deal…

As for the Refi - what was going through my mind was options if the T/B didn’t perform in a few years or she couldn’t get financing and/or the need arose for whatever reason that I would need to cash the sellers out…I guess because I am new at this I’m trying to prepare myself for the possibility if something were to happen. Obviously I feel that if I’m doing this deal I should follow through and not simply give the house back because it didn’t work out for me. Is this wrong thinking?

Also, can you explain “things done timely and in the proper sequence.” I am doing so much reading up on this that my head is spinning.

I realize that I am new and probably asking to many questions. For that I apologize. I have to jump in there and start at some point and I’m trying to get as much information from those who have done these deals so that I don’t screw it up and have it turn into an ugly picture.

I do appreciate your comments, those setting me straight, and all the help you’ve provided.

Thank you.

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Help with Foreclosure, how to purchase. - Posted by Richard

Posted by Richard on August 11, 2007 at 12:52:34:

I need some help as this is my first time trying to do this:

I have a house that comps are showing at 220 (extreme low) to $240 (most likely)â?¦.

They owe:

Wells Fargo - $157,000,

2nd lien (money brother has loaned her to keep up with the payments): $ 29,000

She is suppose to go to trustee sale on August 18thâ?¦.Bank has notified her that it will take $17, 500 to bring it current and of the sale.

I have somebody who wants to buy this who has $60,000 down payment. She can’t get financing on her own, but is willing to buy the place from me. Iâ??d obviously like to use that $60K to either try to buy the place or work it out somehow.

Anyone have any thoughts on how to go about all of this. I do think I can get qualified at a bank, but Iâ??d like to get a deal if possible after reading about all these short sales, subject 2â??s, etc.

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Re: Help with Foreclosure, how to purchase. - Posted by KN

Posted by KN on August 12, 2007 at 16:24:50:

Simply put subject 2 will work perfectly with a little lease option on the backend with the buyer. Put the property in a trust get the owner out of the house take the 60K pay off the 2nd and reinstate the first. Pocket the difference, lease option the house to the buyer with a purchase price of $240,000 with you crediting some of the payments to purchase price say $400.00 so in the end the buyer has 2 years to straighten out their credit.

Deal would look like this
$240,000 purchase price
$60,000 option
$2300 rent???
Purchase price in 2 years
$240,000- $69,600 (option money and credit)=$170,400
That would mean another $13,000 payday in 2 years and positive cash flow over the 2 years ( I have to assume since you donâ??t tell the payment, taxes, and insurance)

Anyway thatâ??s what I would do but then again thatâ??s just my 2 cents

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Re: Help with Foreclosure, how to purchase. - Posted by Joe Kaiser

Posted by Joe Kaiser on August 12, 2007 at 11:14:10:

Richard,

Let’s break it down. First, a couple assumptions . . .

  1. Total now owed is $157k plus $29k plus $18k (to bring current), for
    a total of $204.00 or thereabouts, and you have a buyer who will pay
    $240k with $60k down.

  2. You intent to take over payments on the first (or let your buyer) and
    that’s a tolerable risk for either of you.

Conceptually, at least, you pay off the $18k arrearage to stop the
foreclosure on the first and take over payments. You also pay off the
second, perhaps at a discount, but for argument’s sake, in full.

End result, you have $60k coming, $47k going out, and net $13k in
cash, less minimal costs. You also owe $157k and have a buyer owing
you $180k, having a paper profit of another $23k.

Traditionally, you’d buy it and double close, using your buyer’s money
to fund your purchase, taking back paper for the balance, and
collecting monthly payments along with your cash profits once things
settle.

That’s a typical “flip” and the way it’s normally done. I suggest that’s
not the way to do this deal.

Deal Flow . . .

Forget cash flow for the moment. Let’s focus on “deal flow.” In this
market, in these times (www.pushedtoshove.com), the last thing you
want are deals flowing “through” you.

Typical flip scenarios force you to be entrenched in the process. You
don’t want that. “Through” = risk and lingering liabilities, of which you
want no part.

Get out of the way and don’t allow yourself to be caught in the middle
of flip type transactions. You want deal so flow “around” you, not
“through” you. That’s the big epiphany. Around keeps you out of
harm’s way.

How?

Meet with the seller, agree to the premise that you’re there to make a
profit and that it is okay with her. Get the property under contract for
what is owed. Secure that contract with a mortgage that puts a
stranglehold on your anticpated profits.

Now, introduce your buyer to the seller, let them do a $240k contract
with $60k down and take over payments on the first.

The easiest way is to write it up between you and the buyer and then
assign that contract to the seller (canceling your original contract and
getting the heck out of the way in the process).

At closing, escrow will use her funds to reinstate the first, pay off the
second, and partially satisfy your third with whatever funds remain.

Once the dust settles, the buyer is making payments on the first, owes
you $26k on your loan (now a second), and you’ve got $13k (less costs)
in your pocket.

You’re doing a deal from the sidelines, allowing all the chain of title
things to happen around and not through you.

Now, if the market tanks and the buyer defaults, it’s between the buyer
and seller and you’re out of the picture completely because you were
never in the picture to begin with.

Joe

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Re: Help with Foreclosure, how to purchase. - Posted by Bill Jacobsen

Posted by Bill Jacobsen on August 12, 2007 at 09:41:28:

The bank probably will not discount the $157K. It is unclear if $17.5K plus the $157K or $174.5 is what is owed. Also, why would the owner sell to you to allow a profit and short her brother? I don’t see it happening.

Her best bet is to put the house on the market for the lowest price that would pay off all loans. Do anything with the bank to postpone the auction. At the lower price she should be able to get a buyer quickly if the property is really worth $220K.

If I were in your situation and thought it was worth $220K, I would be willing to buy at $186K which would pay off brother and $157 to bank. I don’t see much hope in discounting the bank nor the brother.

Bill

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17,500 vs. 157,000… - Posted by JT-IN

Posted by JT-IN on August 12, 2007 at 08:31:57:

Richard:

You seem to offer several numbers here and often when folks talk about what it owed, as in the 157,000, they tend to leave out the arrearage, including fees for foreclosure and back interest. Then you mention the 17,500 which is what the lender would accept to reinstate the loan… Is that number inclusive of the 157K, or in addition…? This makes a big difference in the deal or no deal analysis here.

The facts of this case are, if what is owed by the 1st mtg is 157K and the value is between 220K to 240K, then the lender is at a 65 to 70% LTV. It is unlikely that with that equity or low risk position that the 1st lender will discount at all… unless condition were a factor, which would impact the value numbers. An appraisal should bear this out, but that would be at the lenders doings, with access from the owner/debtor.

The party who is likely to discount here is the one who is most at risk, the brother who is owed 29K. Maybe he would release his lien, but maybe not. When dealing with family members, strange things are systemic.

Depending on the interest rate on the loan, and whether the brother will play ball here, you could have the seller deed property to you or your entity. Then use part of the 60K to reinstate the loan, (17,500), give some nominal cash to both seller and brother. (again, the numbers greatly depends on whether debt is 157k or 157K + 17.5K= 174.5K). Net result is a reinstated 1st loan, no jr lien, hopefully good interest rate, some spread on the mtg payment due monthly and 20-30K in pocket… All depends on how good of a negotiator you are. Make sure you understand ALL details and nuances, since this your first deal of this type. Due diligence is the order of the day/week.

JT-IN

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Does anyone have any suggestions? - Posted by Richard

Posted by Richard on August 12, 2007 at 07:55:57:

I would really appreciate some help.

Thank you.

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Re: Help with Foreclosure, how to purchase. - Posted by Joe Kaiser

Posted by Joe Kaiser on August 12, 2007 at 16:42:35:

Great plan as long as nothing goes wrong.

Market tanks or buyer balks and everything you own becomes at risk.
Trust me.

Joe

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deal flowing and blue penning - Posted by Kristine-CA

Posted by Kristine-CA on August 13, 2007 at 08:58:46:

Joe: I like all the things you suggest regarding staying out of the
liability’s way. I’m wondering about this “introducing the buyer and
seller” though. How many times can one go into contract, create a
committment from the seller, find a buyer and then cancel the contract
before that will be considered acting as an agent?

Even though we are acting as principals, it’s clear that our intent is to
do exactly that which state depts. of RE probhit: bringing buyers and
sellers together for a fee without a license. Since intent is part of the
legal equation, I think it needs to be considered thoroughly as to how
it fits in the deal flowing formula. Kristine

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Alright Now Joe… - Posted by David Alexander

Posted by David Alexander on August 13, 2007 at 01:53:13:

Alright now, Joe… Gonna wash your mouth out with soap…

Your gonna give away all our secrets away that we had to learn the hard way…

Takes a long time to learn not only not to invest cash, but you got figure out a way to mitigate ongoing liabilities and ongoing risks as well…

Ask Donald Trump… From what I understand even he finally figured that out and quit owning real estate that tied him with risk and borrowing money with his signature…

Instead, a savy investor takes the piece out without the risk and liability and moves on to reinvest another day…

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Re: Help with Foreclosure, how to purchase. - Posted by Mary (CA)

Posted by Mary (CA) on August 12, 2007 at 15:24:01:

Joe, you wrote:

> Get the property under contract for
> what is owed. Secure that contract with a
> mortgage that puts a stranglehold on your
> anticpated profits.

Is this note/mortgage from seller to you? Or from buyer to you?

Maybe I’m not the only one confused by this.

Mary

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Re: Help with Foreclosure, how to purchase. - Posted by Richard

Posted by Richard on August 12, 2007 at 14:04:02:

Hi Joe,

I’m in WA also. I can see where you’re coming from on this deal and it makes lots of sense. The only problem is that the new buyer can’t get financing right now. Maybe in a few years, but she’s fresh out of a divorce and couldn’t qualify for financing.

Besides which, interestingly enough the woman with the $60 is the one who introduced me to the lady selling. She’d like to have her house, just doesn’t know how to make it work.

Maybe I should just charge her to do the paperwork to get put the deed into her name?

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Also, when a deed is transfered… - Posted by Richard

Posted by Richard on August 12, 2007 at 14:09:11:

Is the deed transfer something that has to be done through an attorney?

Can a property be “refinanced” in a year if I just transfer the deed into my entity even though the loan isn’t in my name?

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Re: 17,500 vs. 157,000… - Posted by Richard

Posted by Richard on August 12, 2007 at 14:07:30:

Thank you for answering JT. Your scenario makes sense. I was going to try for a discount from Wells Fargo, but after reading your post I can see why they wouldn’t want to discount.

So if this goes to foreclosure sale what would happen to the 2nd lien, the brother? Would he get paid?

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Update after talking to seller - Posted by Richard

Posted by Richard on August 12, 2007 at 19:23:56:

Hi Everyone,

Thank you for all your responses. Here is the update after talking with the sellers and my buyer.

The sellers were wonderful to deal with. The brother with the $29K lien as there. He is willing to take $ 15K and release the lien as paid in full.

As for the loan, it is $157 + $17,599 to bring it current. They are willing to allow the loan to stay in there name and my deed it to a company…They have an interest rate of 6.25%, payments of $1321 with taxes and insurance.

I also talked to the buyer on the way home. She is willing to meet with a $60K cashier’s check in hand tomorrow morning. She would be buying it for $275K…

Joe, it sounds like you’ve been in the position where you’ve had a deal gone bad. Are there any procautions that I should be taking.

Also, this property is in the neighborhood of $600K houses all the way around it. The tax assessed value is $223,900 (I know that doesn’t mean much with today’s market).

I called an appraiser friend of mine and he said if I spent 12K and added a garage he would appraise it around $250,000 easily, as it sits right now $225,000…

I’m a little concerned about what to do here…

Option 1: Take the $60K and use it as a down payment to get the loan into my own name, then continue to lease with option to my buyer or;

  1. Take it subject 2 their financing…

Thank you for all of your help.

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Re: Help with Foreclosure, how to purchase. - Posted by Kn

Posted by Kn on August 12, 2007 at 18:22:30:

Joe

Ummmâ?¦ the buyer is putting 60k down. Iâ??m pretty sure they will be busting their hump fixing their credit to purchase the property in 2 years. Especially since that 60k is non-refundable. As for everything you own â??becomes a riskâ?? his risk in this deal is virtually zero, he has no money invested in the property. What risk does he have?

Every deal has multiple ways of working out. I like the idea of your â??Blue Pen Flipâ?? however in this situation itâ??s a perfect subject 2., with a lease option. Iâ??d love to be in his position if the buyer balked at the end of lease option he has a property at 65-70%. Even if the market tanks in 2 years he has 35% equity to cushion the dooms day spiral to which you are alluding. With lenders getting stricter more people will be renting so he could still rent it out and be fine (once again I donâ??t know the payment). Or even better yet he could do another lease option.

To wrap this up in one sentenceâ?¦â?¦I would pitch my idea first and if the buyer balks I would then pitch yours. Then again thatâ??s just my 2 cents.
KN

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Re: Alright Now Joe… - Posted by Bob Smith

Posted by Bob Smith on August 13, 2007 at 14:49:01:

It didn’t exactly work out all that well for Trump. While his casino did float some Wall Street bonds to take out his personally guaranteed debt, the interest rate was on the order of 3-4 points higher. When his casino started to have cash flow problems (because he divorced his wife, who managed it, and replaced her with new management) the higher interest rate meant he couldn’t service the debt. As I recall the bondholders removed him as President (along with his ~$1M salary) and diluted his shares something fierce, 50-75%. Not quite a total loss, but that had to hurt.

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Re: Help with Foreclosure, how to purchase. - Posted by Joe Kaiser

Posted by Joe Kaiser on August 12, 2007 at 16:35:42:

From the seller to you.

Joe

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Re: Help with Foreclosure, how to purchase. - Posted by Kristine-CA

Posted by Kristine-CA on August 12, 2007 at 21:03:56:

Richard: My understanding of Joe’s idea is that the new buyer isn’t
getting a bank loan. She’s taking over the payments on the first. Your
contract with sellers would state subject-2. When you “introduce your
seller and buyer” your buyer is taking over that term of the contract.

At least that’s my understanding. Kristine

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2nd lien getting paid… - Posted by JT-IN

Posted by JT-IN on August 12, 2007 at 14:30:35:

Richard:

If the property goes to sale… (and that isn’t the preferred scenario here, since you have the makings of a very workable deal), the order and priority of who and how much they would get paid is based on what it sells for…

The order for payment would be 1) Any property taxes owed to the county, 2) Administrative cost of holding the sale, 3) payoff of the 1st lien and arrearages, including the legal fees to hold the sale, and so on, until the money runs out. If there are still funds remaining after the 1st lien is satisfied, then the 2nd would be paid up to the amount they are owed, plus interest and fees. The 2nd lien holder is high suspect of getting little to nothing here, so they would be the party to work on for a short sale or discount for a partial payoff. They should be motivated since they are the ones on the bubble.

At least this is how it works in most states that I am familiar with, but your process may vary, so check with someone for certain before relying 100% on the above.

JT-IN