High end deal but with negative equity - Posted by Scott (ATL)

Posted by Scott (ATL) on October 28, 2003 at 07:15:03:

True…but I’d keep the financing under her name so if she stopped paying the underlying mortgage would need to be foreclosed. Of course if I offered owner financing or L/O terms and I couldn’t offer clear title that wouldn’t be good. Maybe a possible short sale if that happened?

This isn’t a sweethart of a deal but I feel like there is something here.


High end deal but with negative equity - Posted by Scott (ATL)

Posted by Scott (ATL) on October 25, 2003 at 21:25:52:

I have a seller that I spoke with back in February that was trying to sell an ?overleveraged? home. Here are the numbers?

4/4.5 with separate kitchens as the ground floor is used for her practice
1st mortgage around 600k
1st Mortgage Monthly payments aprox $3,812 interest only
Was willing to give up 2nd of 45-50k (She would make these payments)
2nd Mortgage Monthly payments aprox $500
Taxes about $4,400 annual $367/mo
Insurance about $1,800 annual $150/mo

She had the place with a realtor but never sold. She has put it back up with a Realtor (I haven?t followed up?not good I know) for $550K Homes above 300K are selling very slowly here in Atlanta right now - 190+ days easily.

Obviously, with her new asking price she?s planning on paying even more of the monthly obligation. I just noticed the home was up for sale again today so I?ll call her tomorrow to find out more.

However, my question… is there a way to make this deal work? Since the payments are interest only there is no equity pay down. The home is overvalued even at $550K as it is off a main street and across the entrance to an upscale apartment complex (not kid friendly). The home is ?overbuilt? (she expanded a 1970s home) and overpriced as brand new homes in subdivisions right down the street are selling for 500K-1 million.

My thoughts are try to get her to accept the lowest monthly payments possible, she would pick up the remainder, have a buyer (via wrap or ILC) or T/B pay for the payment I secured plus fees, a bit of cash flow and some equity pay down?

I may have a potential buyer but I would still need to find others and maybe get a 90 option from her that way she could still try to sell with a Realtor? I?m not sure the option would work unless I agreed to release it if the Realtor found a buyer?

Thoughts, suggestions, help?


Re: High end deal but with negative equity - Posted by Dimpil

Posted by Dimpil on October 26, 2003 at 06:37:43:

GA right now is very tight because a lot of alternate lenders have closed up and went home. They capped all mortgage fees at 3% which hurts the broker and alternate lenders. Only bank qualified people have buying power in GA right now.

That said, it’s a tight deal. Too many if’s for me. it’s not a perfect deal, but life isn’t perfect. My only deciding question is, do you have the money to pay the payments if the T/B misses a few, defaluts or walks?

However it’s your decision.

Re: High end deal but with negative equity - Posted by Brent_IL

Posted by Brent_IL on October 26, 2003 at 01:38:50:

The challenge that I see is not in making a deal, but what to do with the place once you get it.

Sans default, she?s stuck no matter what. Whether you get stuck, or not, depends a lot on what is going to happen to the property once you take over. If you can?t count on increasing prices, and with 190+ DOM, you can?t, you?ll have to have a good cash flow and a great plan to utilize the cash flow to make money.

You may have to wait out the new listing period. Here?s why. She owes $650K ($600K first + $50K second). If she sells at listing price, and pays a 6% real estate brokerage commission, she has a shortfall of $133,000 + closing costs at settlement. That?s about 2.5 years of payments on the first and second loans.

You could offer her an alternative that will allow her to pay the $133,000 in installments. You could offer to make the payment on the 2nd, taxes, and insurance, for a total monthly of $1,017. She would continue to make payments on the first for 36 months. That?s the equivalent to financing the $133,000 that she would owe at closing at an APR that?s fractionally over 2%.

Additionally, when she sells, she has to rent a space to practice that further reduces her net income. You might offer to rent her the first floor for $1,017 plus a percentage of the utilities. This may or may not be cheaper than she could lease comparable space for elsewhere, but she wouldn?t have to move.

These are her problems, and they will be there with, or without, you. You are just trying to minimize her pain.

The big questions are will three years of price movement bail you out and when is the interest-only loan due? Can you bluff the second lien holder into discounting because of his precarious position? If you set it up as an EHTrust® or a L/O, subject-to, and rent out the rest of the building, can you do something with the 36 months of cash flow that will allow you to pick up all of the payments afterward. Even with a three-year head start, I think it would be difficult to pay off the loans at that point.

Like playing for the stalemate, the best bet might be to work toward a break-even cash flow and wait for appreciation to catch-up.

Re: High end deal but with negative equity - Posted by Tom PA

Posted by Tom PA on October 25, 2003 at 23:34:59:

What are you going to do when she can no longer pay her part? That could hurt really bad.

Re: High end deal but with negative equity - Posted by Lloyd W.

Posted by Lloyd W. on October 25, 2003 at 22:46:02:

If it were me… I’d spend my time looking for a better deal.

Re: High end deal but with negative equity - Posted by Scott (ATL)

Posted by Scott (ATL) on October 26, 2003 at 11:34:37:

Thanks for the response!!
Actually, she currently has listed it for $550K so unlike when I talked to her in February she must be willing to put more money into the equation. I?m not sure if she would bring cash to closing or if she would need payments. Ideally, she could just provide the difference in cash.
So, if I could find out what her rock bottom number is then subtract the Realtors commission, holding costs, and selling cost I?d have a great number to work with. Let?s suppose she feels she has to get a full price offer of 550K that means she?ll only gain about 500K credit towards the existing loans (actually more like 495K). Add in another 6 months of holding costs ($3182I1st + 500PI2nd + 367T +150Ins) $25,194 and now we?re down to $469,806. That means she would need to cover an overage of about $180K.
Let?s go with that number?If she could bring in cash I could simply pay down a good chunk of the mortgages to make the monthly payment more reasonable or maybe I can find a T/B that would pay the $4199 monthly obligation? Of course, I wouldn?t start making payments until I found a T/B that way I?m not out of pocket. And I would require upfront payment from my T/B to cover vacancies etc. I could also wrap the mortgage but if I sell it on terms I more than likely have to make the payments more palatable to a T/B.
I believe she has left the home but I had to leave her a message so I?m not sure. It can?t be zoned commercial according to her so the layout might be strange for a family (I haven?t seen the inside). At any rate while this is an odd one I feel like there is something here?
As soon as I get a better idea of what her true max number is I?ll work from there and keep you guys posted.