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.