Preforeclosure-Deal? - Posted by Kristina-KY

Posted by JohnWe (NoCA) on January 21, 2000 at 09:46:22:

What breaks this deal is the debt (isn’t that always the case!). With $295K in underlying debt, I’m guessing her holding costs are more than $2K. That’s a lot of wood to chop if something goes south (And in this deal, you’re just aking for Murphy to step in). It might be worth it if the FMV was more, but here’s it’s not. That’s why I suggested the wrap, because that’s the only way I can think of getting 10% over FMV, while getting a nice chunk of change down.

In the earlier example, keeping their $15K is not fair. You would give it back, but the work they already did is their problem. The option consideration is the $15K plus the fixup to your standards. The lease doesn’t start until the work is done to your satisfaction (that’s why you don’t give him the keys). You can’t be a jerk here either. If the guy does a decent job, but you don’t like the shade of paint he used, you can’t say take a hike – thanks for the work. What you’re trying to protect yourself from is a contractor that says he’s going to fix the place up, then sits on his butt for 6 months doing nothing.

If he doesn’t do the work right, you’ll both know it, and if he still tries to backout, remind him of his signed contract and that he would lose in court, and just cost him unnecessary attorney fees. If he still wants to go to court, try to settle first for a reasonable amount (avoid court as much as possible). If you can’t settle, you’ll have your day in court, and you should win.

Preforeclosure-Deal? - Posted by Kristina-KY

Posted by Kristina-KY on January 20, 2000 at 09:42:50:

I’m just starting in real estate and have posted here a few times. Since November I’ve been going full steam and have yet been able to do a flip. I am 9 months pregnant now, so time is of the essence! I am trying to finish at least one deal here shortly.

I found a house that was being built. However, the builder died in an auto accident before completing it, and it now belongs to his widow (they were divorcing). It is almost complete-- finishing costs estimate 13-18,000. The house appraises (finished quality) at $345,000. It’s a new neighborhood.

There are liens on the home, the bank said totalling about $295,000, not including 4 months of interest, making the grand total somewhere around $307,000.

Well, my question is, could this be a deal for me to assign? And, if so, what are some practical next steps? The widow still owns the home, and from my understanding, it is about to go into foreclosure. She does not live in it, although her deceased husband did, as he was finishing it.

Some advice would be greatly appreciated. I’m trying not to get discouraged… I know deals are out there, and would like for real estate investing to be my “work”, so I am able to have a flexible schedule to be a stay at home mom and wife.

Thanks in advance!


Posted by JohnWe (NoCA) on January 20, 2000 at 18:40:59:

I really don’t mind that Carmen copied in my post from a previous message, but in all honesty, it doesn’t apply here. YOU’RE HEADING FOR TROUBLE IF YOU TRY TO LEASE THIS AS A FIXER!

The major problem here, as you may already know, is that there isn’t enough equity in this deal to work with.

Forget about assigning it. No investor in his right mind would pay for this contract.

Unfortunately, as a newbie, I would walk away from this. It’s too complicated, and even if you had the stomach for this deal, there’s no room for error. I know where you’re at, and the worst mistake you can make is getting so anxious that you feel you have to put a deal through. You have to stay unattached to the outcome, and wait for your ship to come in. I guarantee it will if you hold in there.

But if you stay with this ship – you might sink.

That being said, if you still feel like giving it a go, Michael’s idea sounds the best. You need to build equity in the deal from somewhere.

If you’ve got some cash then I would do this:

Take the new loan subject to the existing financing using a land trust. Be prepared for the bank to call the note due (even though I’ve NEVER heard of this happening, I’d still be prepared by having backup financing in mind).

Looks like you have to cure for about $15K, and fixup for about 20K (it always costs more than you think). So you’re in hard about $35K at this point.

Now sell it on a wrap for $380K with owner financing, 10% down, 11% interest on the balance. Here’s how the numbers work out:

Selling Price: $380K
Down Payment: $38K
Net Cash Position: $3K
Loan Balance: $342K On Owner Carry
Interest: 11%
Term: 30 yrs.
Payment Received: $3,256.95
Underlying Payment: about $2,200.00
Cash Flow: about $1,100.00

Just one way to do it.

Good luck!

What about this angle? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 20, 2000 at 17:22:45:

This deal would make more sense if you could somehow purchase the existing 1st lien construction mortgage that the bank holds at a substantial discount. You then proceed forward to foreclose out all other lienholders or negotiate down their debt with the threat that they will be wiped out IF you do foreclose.

It called a “back door” approach to acquiring the property. It will take a savy investor who understands the risks and has the staying power to make this one come off.

Best of luck

Michael Morrongiello

COPIED THIS POST FROM JOHN WE (Hope you don’t mind, John!) - Posted by Carmen_FL

Posted by Carmen_FL on January 20, 2000 at 15:48:22:

John We had posted this reply below to Chenel Moore’s post - but it seems to fit what you are trying to do very well, so I took the liberty of re-copying it here, in case you missed it - just plug in your own numbers

"Run this ad in the paper:

15K DOWN, $2K / MONTH - (Put your own numbers in)

Don’t use your home phone because you’ll never get to sleep. Here’s the rest of the details that you negotiate with the potential lessor:

  1. Option price at the end of 1 year is 200K. (in your case $340K?)

  2. Rent credit per month, maybe $300-$400.

  3. Make sure your tenant is a qualified contractor, and not some wannabe that’s going to end up doing more damage.


  5. Fixups are done at his expense, and will be credited to the final purchase price at the end of one year. Have him submit his receipts for materials for verification.

With this deal, you’ll get 15K upfront to cover your costs of pulling it out of foreclosure, plus some. At the end of 1 year, he’ll have say $4800 rent credit plus $11,000 for repairs for a total of $15,800. If he can produce $4,200 at this time, then he’ll have a total down payment of $20,000, and you can carry him on a 90% loan for $200,000. If you need the cash flow, great. If not, cash out with notebuyer.

Hey, you’re getting me excited with this deal!

Good Luck!

NOTE FROM CARMEN - This post was taken in its entirety from a previously posted reply. The only thing I can add is, make sure you have the right documentation so that, in case they “change their minds” after putting money in the home you (or the seller) won’t get burned, or end up getting sued for $20K of “labor and material” costs. Maybe John or someone can suggest a solution to this scenario?

Re: Preforeclosure-Deal? - Posted by Todd (St.L.)

Posted by Todd (St.L.) on January 20, 2000 at 14:31:37:

Hi Kristina!

It sounds like the numbers may be a bit tight. If there is $307,000 owed now, and it will take $13,000-$18,000 to finish (and maybe more?), you are already into the property for $320,000-$325,000. During which time you can add on several more thousands for interest during this period. Persuming you or an investor isn’t using a realtor to sell the property (which would cost thousands more), you are looking at about a $10,000-$15,000 profit IF you get the appraised value for it. That’s not much of a profit for a $300,000+ deal.

These are things that an investor will take into consideration if you try to flip this deal. Now an experienced investor may be able to discount some of the liens depending on the nature of them. But for a newbie it may be a very risky deal.

The deals are definitely out there - just persist and you will find them. I’ve done quite a few deals in KY. E-mail me and let me know what part of KY you’re in and I might be able to tell you where the money is.

Good luck with the baby.


NOT to an investor, but to an owner occupant? - Posted by Carmen_FL

Posted by Carmen_FL on January 20, 2000 at 22:23:43:

Granted, it’s a “skinnier” deal, and homes at that price range are harder to sell … but if you don’t get yourself tied “into” the home, it should still work, no? All you’d have into it is a couple bucks for advertising at this point. At worst, you could “assign” the option to purchase … for someone who wants to live in it, but whose credit may be shaky or who may be self-employed, but has the cash and monthly income, it may be the perfect deal.

In your earlier example, though, how WOULD you protect yourself if during/after the fixup they tried to back out and get their money back? Or are you counting on the fact that since they have $15K in the deal (non-refundable, I assume), they won’t back out?