Posted by Brent_IL on April 18, 2002 at 17:27:49:
Definitely the right approach. There are enough challenges with deals that were supposed to be slam-dunks. There’s no need to seek the problematic ones.
L/O Deal - Need Opinions/Ideas - Posted by Phil (CO)
Posted by Phil (CO) on April 18, 2002 at 10:23:47:
I posted on this deal about a month ago - most thought I should let it go. However, the Seller just called me and asked if I was still interested. Here’s the deal.
Recent appraisal $210k
True FMV $200k
1st Mortgage $182k
2nd Mortgage $20k
PITI on 1st $1600
When I first talked to this guy, he was facing foreclosure on the house. He ended up buying a condo that he could afford, but did so by taking the 2nd for $20k on his house to use for the down payment. (BTW, how he managed this whole transaction is beyond me!) His plan the whole time was to let the bank take the house back. I think he overlooked the fact that the 2nd is on the house, not the condo.
This guy is either really stupid or really smart, but he couldn’t care less about his credit - thus his plan to let the bank foreclose.
Anyway, he has already agreed to let me L/O the house, 3-year term, $1600/mo, $182k sales price. At first I thought "Great, I’ll just structure so that we both make our payments through a third party (me on the first, him on the 2nd). Then I realized that when it comes time for me to exercise my option to buy that there is no way he is going to be able to come up with the $20k to bring to closing. So despite the fact that I have the right to buy, it probably couldn’t happen.
My only thought is to have him talk with the mortgage company on the 2nd to see if they will do a substitution of collateral - transfer the 2nd from the house to the condo. Don’t know how practical that is.
Any comments or ideas?
Phil
Re: L/O Deal - Need Opinions/Ideas - Posted by Martin Greenberg
Posted by Martin Greenberg on April 18, 2002 at 11:27:04:
Dear Phil:
There is no equity in the house. I know you are supose to add to the price because you are L/Oing the property but one month’s vacancy would be an owy to me.
If you have a funding source you may want to consider doing a short sale with the bank (discount the first) and see if you can discount the second. Good luck.
Re: L/O Deal - Need Opinions/Ideas - Posted by Cire
Posted by Cire on April 18, 2002 at 11:19:47:
If the foreclosure process hast started, get the deed and take the property subject to the existing mortgage. After getting the deed, go to the note holder of the second and negotiate a short sale (10% of balance). Use the foreclosure as leverage as they will get wiped away. Now you own the house and this guy owes you $20K, which you may never get but can try to get payments. Resell the house w/ L/O or CFD for $210,000. You now only have to worry about the 1st mortage as you are the 2nd note holder. If you can’t negotiate with the second, oh well he gets foreclosed.
Disclaimer: Only applying learned but never applied knowledge. YMMV
Re: L/O Deal - Need Opinions/Ideas - Posted by Phil (CO)
Posted by Phil (CO) on April 18, 2002 at 13:08:47:
Martin,
Actually there is equity in the house because he is willing to sell to me for $182k. The problem is that rather than taking a 2nd mortgage on his new condo, he elected to take it on the house instead. I think he did this because it was easier. His plan all along was to default on the 1st mortgage on the house. I don’t think he realized that this is going to cause a huge problem with the holder of the 2nd mortgage. In my opinion, he committed fraud when he got the 2nd because his full intent was to default on the 1st.
The other factor is that the 1st is only a year old, and the 2nd is only 1 month old, so the likelihood that either lender will go for a short sale is very low.
What I’d really like to know is what people think about the substitution of collateral idea. It would solve all of the problems, but I just don’t know how likely it is that the lender will go for it. Of course, when the lender on the 1st starts to foreclose, they might have a different viewpoint. At this point he’s only 1 month behind on payments on the 1st, so it will be a while before anything happens.
Thanks,
Phil
Re: L/O Deal - Need Opinions/Ideas - Posted by Phil (CO)
Posted by Phil (CO) on April 18, 2002 at 12:59:42:
Cire,
Thanks for the idea. Unfortunately, I don’t think it will work under these circumstances. Reason is that the 2nd mortgage is only 1 month old. I doubt that the lender would be willing to take that big of a hit so soon.
I did, however, think about raising the price I pay to $202k, having him give me a note for $20k with a mortgage on his condo. My net would be the same, but now I at least would have some security with a mortgage on his condo.
Problem with that scenario is that this guy isn’t trustworthy enough for me to take a note from him, even if it is secured.
Thanks for the idea,
Phil
I give up. What’s “YMMV”? NTXT - Posted by Brent_IL
Posted by Brent_IL on April 18, 2002 at 11:44:03:
nt
Re: L/O Deal - Need Opinions/Ideas - Posted by Ralph Taylor
Posted by Ralph Taylor on April 18, 2002 at 21:44:00:
The object is not to do deals. The object is to make a profit. There is no profit here. YOU are ignoring the fact that the second mortgage is on the house, not the condo.
Equity equals value minus loans ( all loans ). In this case $200,000 (FMV) minus $182,000 (1st mortgage) minus $20,000 (2nd mortgage) equals - $2,000. There is no equity. Your lease option scenario addresses the first mortgage, but if your seller does not pay the second, then the second mortgagee forecloses on the HOUSE.
As for substitution of collateral, if the $20,000 was used as the down payment on the condo, then there is a first mortgage already in existence. There is not much incentive to trade one second position for another.
Go find a real deal.
Re: L/O Deal - Need Opinions/Ideas - Posted by Brent_IL
Posted by Brent_IL on April 18, 2002 at 16:33:46:
The holder of the second will jump at the chance to be a first. The default on the first that will wipe them out is their problem, not his. Why would your seller agree to move the mortgage if he has already received and spent the money from the loan?
I don’t believe the seller was oblivious to the effect of his actions.
Re: I think it’s Your Mileage May Vary - Posted by Stacy (AZ)
Posted by Stacy (AZ) on April 18, 2002 at 12:00:09:
.
Re: L/O Deal - Need Opinions/Ideas - Posted by Phil (CO)
Posted by Phil (CO) on April 19, 2002 at 10:33:32:
Ralph,
I appreciate your advice, but don’t appreciate the tone of your response. If you had read this entire thread you would have realized that I understand this situation completely. You would also have realized that my focus is completely on the fact that the second is on the house and not the condo.
In fact, my whole point is that there is about $28k in profit if I can find a way to deal with this second, and I was looking for creative options to do that. I gather from your post that you don’t have any ideas.
You did, however, answer one of my most important questions regarding the substitution of collateral - thanks.
By the way, if you had read this entire thread before you posted you would have realized that I decided that this deal wasn’t worth pursuing.
Phil
Re: L/O Deal - Need Opinions/Ideas - Posted by Phil (CO)
Posted by Phil (CO) on April 18, 2002 at 16:43:16:
My thought was that my seller might be facing criminal charges (fraud) if the foreclosure happens. If I held the second, I’d be pretty suspicious of the situation, and would probably investigate further. If I convinced him of this, he might be motivated to “help himself”.
You’re probably right about the seller knowing what was going on. He seems pretty stupid, but it may be the exact opposite. It’s not worth taking the risk that he could stick me on this one, especially since it’s one of my first deals.
Thanks,
Phil
Right - Posted by Cire
Posted by Cire on April 18, 2002 at 12:06:00:
Your Mileage May Vary
Sorry the internet geek came out of me.
Re: L/O Deal - Need Opinions/Ideas - Posted by Ralph Taylor
Posted by Ralph Taylor on April 22, 2002 at 12:45:42:
I apologize for my tone. I didn’t mean to give offense. However, I did read the entire thread and it appeared to me that you were trying to pursue this deal.
My reply was to your statement that there is equity in the house because the seller is willing to sell to you for $182k ( the first mortgage balance). I repeat, there is no equity, because there is a second mortgage in place.