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Deal or no deal?

I met again with my pre-foreclosure folks today and the bank is not willing to do a loan modification. It seems, since he is working on his disability, a modification is just going to delay the fact that he still may not be able to make payments. So, this opens the door to an investment opportunity. The situation is, he owes approximately $170,000 on a house valued at $245,000 and really would like to stay in the house if possible.

My idea, this morning, was to possibly work out an equity partnership. This would work as follows. Find an Investor, me maybe, that is willing to payoff the mortgage and assume ownership of the house. Give the Seller a note for part of his equity, say $40,000. This would be a no interest no payment note to be redeemed when the property is sold, some time in the future. The current Owner would become a tenant with a vested interest (his note) to maintain the property. The rent would cover the payment on the new financing of $170,000. As long as he continued to make the rent payment, he could stay in the house. If for some reason he could not make the payments, he would be evicted, as would any other tenant. The only difference is, he would still own the note for $40,000.

If my thinking is correct, this would give me (or another investor) an immediate $35,000 equity position and of course any future appreciation and tax benefits. The Seller would get to stay in his house and would save his equity from foreclosure.

Now my question is. Can this scenario be achieved with no money out of my pocket? I figure with all the L.O.s and investors on ActiveRain, someone may be able to help me with some ideas. Also, it will be a good learning exercise for any members that are interested in this type of stuff.

So what say you? Deal or no deal?

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 11/09/2006 12:31 PM

Comments (36)

preforeclosure, investment opportunity, educational, real life

36 Comments on Deal or no deal?

NOV

2006

Bryant, sounds like a reasonable plan. No doubt some of our illustrious lender members will be able to offer up some wise counsel....

2 questions:

Will they be able to pay you?

and

You seem to have some empathy toward them,

will you be OK with evicting if they stop paying?

...............................................

"The Lovely Wife Here"

This should be interesting...Can't wait to hear the answers to this one.

Hmmm?...You said tenant...Hmmm?

TLW "The Lovely Wife"...Waiting To Learn On This One...ROAR!

Absolutely!

And this sounds like a win-win-win. I'll get right back to you with suggestions and points to ponder....

First question: If the lender has assessed that the client is unable to maintain the payment, why do you think he can? Are they planning on raising his current payment to re-capture the amount in arrears?

100% financing for investment property is available. Typically, these are Combo Loans (80/20 or 75/25). You should plan on paying a premium and of course good credit and the ability to pay are mandatory. I would take a look at Flagstar's 80/20. The blended rate should be attractive. The minimum credit score I estimated is 680. Financing is available for lower scores, but rates rise as scores fall.

Okay, I just took a look at Flagstar (many lenders will have programs for this scenario, Flagstar is one of my favorites and I have their program matix in front of me). Expect to pay about 6.55% on the first mortgage and 10.45% on the second. There would be a pre-payment for 3 years (you can buy that down).

Now for some thoughts. As the investor, you would be taking the risks and it is customary for the risk-taker to benefit the most. I think it is admirable that you would offer the current owner $40,000, but I wonder if it is fair to you. As you well know, many things could go wrong. They probably won't, but you should look to your own family's protection first.

At this point, the seller stand to lose everything. I don't believe you should take advantage of his dillema, but I think you need a bit more margin for the unexpected.

Yes sounds like a good concept- now lets see what stipulations are put against you..when the lenders reply.

Interesting position but will you have the nerve to boot him when he defaults and secondly will you be able to handle the liabliity when it is just yours? IF you can be the snidley whiplash when he defaults and if you are in a position to assume the liability singularly it might be a good thing.

Good comments so far. The issue of being able to make payments is definitely the biggest concern. He is currently financed at 9.5%. This is the reason I m not so sure about bringing his current mortgage up to date and continuing with PI payments of $1,456. It's too high. If I placed a new mortgage on it I could get it down a few hundred bucks, maybe less if I did an ARM.. BUT I would then incur closing costs that would have to be figured into the equation. OR I could do as Tommie suggested and just plan on a short term turn around where I will be getting the house back. OR in lieu of giving him a note, let him stay in the house for 24 months with no payment and then turn around and sell it. Granted I would have to chip in about $28,000 in mortgage payments but I would be getting an additional $40,000 in equity and could offset quite a bit with tax benefits, that I need. Or maybe a combination of the last 2, set a payment that I know they can afford and offset the rest by a reduced note.

I am looking forward to a good discussion here. Thanks.

As long as you are willing and able, I don't see a problem. The other key factor here is the market and if you believe that the equity will remain as such.

As long as you don't ask all the rest of us to pitch in...I can only handle one of your deals at a time!

I hate Lychee

"Bryant the broker, can he fix it? Bryant the broker, Yes he can!"....la la la (Tune from Bob the Builder)

Mark pretty much covered the details on how you can do it.

However, it is risky. I would look at all his financials, and be 125% sure he can pay. If not, you have yourself another rental. Come to think of it, you do have a quick turn around time with you listings. Will your heart allow you to act as a businessman? You can always send TLW out there to explain things, if need be LOL.

Life is a game of risk. That's how a lot of millionaires are made. I say, as long as you can evict them assuming that you would need to, I say go for it.

Bryant, at first glance this might sound good, but I am not sure it can be done in the coventional world. I have a ton of questions, but I will start off by asking this one first. By equity partnership, are you suggesting that he would quick claim you onto the title with him, refinance the house to get a cheaper rate and give him $40,000 out of the refinance or out of pocket? I will start there, because how you answer that, a lot of things will be clearer in my mind.

I have 74 other things in my head right now, but why not refinance him with you co-signing and have him QC you his interest?

I will think more.

I have heard of this being done before ((..reaching for details.... ah... almost there...)) If I remember right- it takes a lot of work up front, but can have great outcomes. I will leave the details for the finance-AR's.

George, what I am thinking is financing the house in my name completely for enough to pay off the existing mortgage and giving him a no payment no interest note for part of his equity, maybe 40k. The house would be mine 100%. He would be a tenant and would pay me rent to cover the PITI. When I decided to sell at a later date I would pay him his note and pay off my financing. All profit at that time would be mine. Obviously there would have to be a time frame for liquidation. I'm still slapping this around in my head.

Bryant, I should have been more specific. The only two ways I know of getting him off the existing mortgage and just having it in your name is by you Refinancing the house in your name only (he can be on title) or through a purchase just in your name with him on title also. In any case if this is the direction, the Refinance would make more since, but there is a big problem. Fannie Mae and Freddie Mac have this little rule that you can't Refinance a house that has been on the market in the last six months. I have run into that more than once. It is hard doing this through a blog like this, I couldn't do it simply because we are not licensed in Florida. How ever I would think that Ron would be familiar with all this and a phone conversation with him would go a loooong way.

But even if you did this, as you mentioned above, once you add the closing costs into this, I would think that the new monthly payments plus the closing cost would end up costing you more than the existing monthly payments over the same length of time since this is meant to be short term.

I probably confused things more, but that is my niche in life, confusion.

guys- this is why I joined...I wanted to have live situations like this to have us brainstorm and think out of the box...

Real Estate and Lending are hand in hand- and we all know there are many facets to every situation..LOVE this post- keep em goin!

Creativeness = Success

Ann...Thank you, I also see the risk. And I don't like that idea that we will in fact technically have just another renter...We just had one of our rental homes trashed by a renter...I keep seeing the renter in lieu of the big picture...I am working on that...TLW...ROAR!

George, I do not want him on the title at all. He will be a tenant with a 2nd lien position for his equity. Does this help

Michele, the purpose of this post is to get the created juices flowing. Glad you like it.

I don't know Bryant, but I will be seeing my Underwriter in the morning and I will ask if it changes that rule with the complete change in ownership. If you have any questions to you would like to add for me to ask her, just list them down, and I will ask.

Maybe what we need is for Underwriters to become part of ARl

George, I think what I would be doing is looking for an 80% 1st based on a PURCHASE price of $210,000 that would allow me to have a 20% seller held 2nd with no payments or interest. OR maybe I could get a quit claim deed and then handle it as a refinance

Bryant, initially quit claim and refinance was what was running through my brain, if it can be done, see that the house is on the market. It is easy, no money out of pocket, and less costs invoved. But I will run both ways by her.

NOV

2006

Bryant I think its cool that even with all your success, that you still will seek outside advice. I know to many "established" brokers, who would never ask a question in a public forum such as this one. Good for you!

interesting , I'd be curious to hear the outcome. this is a creative solution to be sure!

This may be a creative solution, but I have a bad feeling about it. That whole turning the seller into a "renter" is just not working for me...I understand contractual agreements can be made to protect us. However, a contract, in reality, is only worth the paper it is written on...I don't know what it is that's buggin' me on this...Just can't get my head around it...TLW...ROAR!

Hi Jennifer, I always seek advice. I will be the first to admit there are a lot of things I just don't know. Since joining AR it has really made me realize just how much I don't know. This site will humble a person real quick.

The current owners can't afford the house now and are living above their means. They should Sell the house take whats left and put it in the bank and find a apartment to rent using no more than 25-30% of their monthly income toward housing.

BB's solution is very interesting --- I guess on a worst case basis, the 'renter' defaults and get's booted and BB gets to list this house and take the profit after the $40K is paid --- sounds like it's a Deal for BB no matter what happens. And...if it does really work out for the 'renter' and he can make those payments it's a win-win (that's the way I like it!) Keep us posted.

And yes...this is why I LOVE AR!

I would hate to state the obvious, but if he cannot currently afford the mortgage on the current $170,000, how will he be able to afford the new mortgage of $170,000. Unless there is a significant difference in interest rates, he will still struggle to make the payments. Now, if there was a difference and he could afford the "rent", I would suggest that the $40,000 figure be placed in an investment that cannot be touched until the property is sold to allow his "equity" to still grow (it would require you, him and a POA to close the account), or even allow his $40,000 to grow equally in proportion to the appreciation/depreciation of the house. (IE. His $40,000 is equal to ~16% of the current value of $245,000. If the property is sold at, let's say, $500,000, he gets ~16% value, or ~$80,000. But if the property is sold for $200,000, he still gets ~16% of the value, or ~$32,000.) This would be fair to him as when the property is sold his $40,000 in equity has moved with the market to help with his next home (should he be able to afford one when that time comes).

NOV

2006

Bryant:

You can loan him the money in a second position loan; enough to cover the deficiency and keep the home. A few words of caution:

1- You must determine what his income is. You can be flexible in the documentation but you HAVE to verify an ability to repay. In your position (as licensee) you must be careful of the appearance of an impropriety.

2- I wouldn't loan over 70% of the value of the home (including the first mortgage). There is a reason that we hard money lender use that number. He is currently at 70% LTV. You could loan him about $1500 at 70LTV and 12K at 75%LTV.

If you really want to do this, call me or e-mail me and I'll coach you through the process.

Thanks, for all the helpful advice. I've got a few days to get my head around this and will let you know how it turns out.

BB,

It never ceases to amaze me how are able to keep such an ongoing stir on AR. There are a lot of good comments and ideas here. I'm certain they will contribute immeasurably to your final decision. Keepem coming BB -"The Rock" of AR!

My advice would be to have the seller/owner write you a hand written letter testimonial saying how much he appreciates you helping him out and that he understands what is going on. You do not want to end up in court being the guy to evict the handicapped guy and him telling the judge he didn't know what he was doing

Ray, that is an excellent idea! Hard to argue a hand written letter. Very good.

Ron, I will be calling you on Monday to discuss options.

NOV

2006

As an update: Today 11/14 I listed this property. The numbers just didnt work out for me and I decided to try and get these folks as much of their equity as I can before it is foreclosed on. They haven't made any payments in 5 months but the lender has not filed a lis pendens yet so I figure we have a good 3-4 months to get it sold. We listed $10,000 below market and will adjust downward by another 10 in 30 days if need be. They should be able to get out of it with $40,000 to $50,000. This will give them enough to get a rental and hold them over until his disability goes through.

Thanks for all the comments and ideas.

Trump...If the guy has not made mortgage payments would he really make a good tenant? Glad to see I won't have to listen to "well my disability has not come through, can I pay the rent in six months"...Why no you can't...You won't be living here past the next 45 days. That's how long it will take me to get you out of the house...TLW...ROAR!

NOV

2006

BB,

How come someone didn`t assume the mortgage for the seller? charge the person rent and charge the person the rent.

I assume, this person hasn`t got served yet.

DEC

2006

Bryant,

Very admirable of you and I too would and have tried to help out people less fortunate. That said I would recommend selling his house for the 245000, paying off his debt and taking the equity and buying something else that was more affordable.

Your risk or the investors risk is to great, for the 35k your talking about. Is the tenant going to pay, (fortunately for you the eviction process is a lot better in FL than here in MA) what damage may be done to the property, interest rates go up (you've been selling the past 12 years (the good time), rates at 10% cut values in almost 1/2), does the market continue to decline.

I should of read further down the comments.

Sorry I see you followed my thoughts. I am enjoying your blog and the comments by others.

Louis

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