L/O to a pre-foreclosure
Hi all,
I don't post much, but here's my situation.
I have come across a pre-foreclosure that will go tosale in July.
Owner called me and says he wants to stay in the property and lower his monthly payments. Currently $820 mo.
Here is what we were thinking......
We purchase the house outright for $78K, this is what he owes. Then L/O it back to the owner, with the option to purchase it back from us in 2 years. Our mo. pmt would be $450/mo, we would charge him $650/mo. He gets a lower payment, we make $200/mo. He can purchase it for $95K in 2 years.
The house is worth $150 to $160. Sooo, if he doesn't make his payments, we outright own the property and could evict under the rental agreement and have a $150K house for $78K.
Any suggestions? Would you do this?
By the way, we have the cash to purchase the house.
Kristy-AZ
Kristy,
Great to see you posting again here on TCI.
You must own just about all of Arizona by now. Just one more great deal you have encountered, so don't give me the Albatross story later one.
Talk soon,
John $Cash$ Locke
Com'on guys, 22 people have viewed this message and only one reply???
By the way, thanks $CASH$ I can always count on your support.
Naw, AZ is terrible, not a deal to be found! Except this one of course.
Kristy-AZ
Hi Kristy,
In most situations, it doesn't make sense to rent back to a homeowner who wasn't paying there lender . . . . however,
From the numbers that you provided, there appears to be a very nice profit to be made. I would make it very clean with the homeowner in advance, that if he stops paying rent, that you WILL have to evict them.
As long as you foresee the possiblity of evicting them and missing a few months on property income, if this was the only way he would sell you the property right now, I myself would move forward with it. However, I would charge him closer to market rate if I were to sell it back to them in the future. Best of Success!
BAMZ
Hey Kristy,
This is the same situation I am describing on my earlier post "Short Sale Approach Question". I too see about $200 a month profit after all my expenses are covered renting back to the current pre-foreclosure homeowner (at less than their current mortgage payment). Kristy, all the numbers look good to me on your deal and the one I am in from a rental or lease option standpoint. The only difference so far is that I also want to find some room by using a short sale so that the lease option back to the owner is better (and there is some flip value in addition to the rental value).
Good luck and go for it (with your eyes open on what rental experience to expect).
Kristy,
I would be a little hesistant to lease option the place back to the owner. Also, you may want to check into the laws concerning this method. It is illegal in some states. I know it is not permitted in California. Keep us posted on your progress.
My main question in this situation is; Why would the owner of the house pay you if they would not pay the mortgage company? The payment was to high, the would not work with us, lost my job now I have a new one, if this were the case why would they not just have worked something out with the mortgage comp. It is our "company policy" that we can't rent to the former owner. Leagal or not you could be headed for an eviction head ache.
Just a thought,
Sire
Enigma could you explain what is illegal about it? I am very new to this and would like to avoid doing anything illegal
Thanks
Gary
I am not a legal pro but if the house is purchased out right, and then lease to the previous owner it would be different than a "sale/leaseback" which is illegal. If you want to know the best way to do this read
http://www.legalwiz.com/articles/foreclosure-crim.htm
Sire
Kristy,
Sounds like you have a great deal. Something you might consider is to offer the owner something like $88K for his home, with $10K being held as a NON-REFUNDABLE OPTION CONSIDERATION. That means $78K to the lender, $10K for owner (which he won't actually get, but will be realized when he exercises his option to purchase). I would also recommend you raise the buy-back price to $105K to offset the $10K you're holding for the pre-foreclosure owner.
At least this way, he'll have $10K at risk should he default on the lease. Talk about motivation!
Hopefully, I adequately explained another technique for you. Keep us posted on how it turns out. Good luck!
[addsig]
Hi Sire,
The suggestion that you mentioned about a possible eviction headache is what makes this deal so exciting. In most situations, I would agree with you about not renting back to the former owner, however . . . . If the only way that Kitty can make this deal happen is if she rents it back at a lower rate, it would make great sense to do becasue of the profit spread.
She will probably go into this deal with the thought that she will have to evict this guy very soon (it takes 30 days in my state), and as soon as the Sherriff removes the tenant, the large cash of equity is all hers, and available to use on another business deal. If the lease is written correctly, she could hand the eviction process over to an attorney (for a few hundred bucks) and not have to be involved at all.
It sounds like Kitty has the resources to sit on a non-producing property for a month or two (while the eviction takes place).
It is a good point brought up about the legality of lease optioning back to the owner in foreclosure, Kitty might run this past her attourney to make sure this wont bite her later. If at the very least, she could simply write up a regular lease with him. He would still win by lowering his monthly payments. Another option is to just give him a slightly higher price for the property right now, so that he has no equitable interest later. Best of Success!
BAMZ
I have read that you can get into trouble if the owner goes crying to a lawyer that the buy & L O were just a "loan" to them as they understood it and the judge might agree with them and say the loan was a usary loan. See Bill Bronchick's site. Joe Kaiser had an interesting take on situations like this. He has formed a partnership with the owner, having a Trust own the house with each owning a 1/2 interest. They pay you monthly.
At some point you can sell your 1/2 interest back, sell property if they can't buy in 1 -2 yrs and they get 1/2 of profits, or they refinance in 1-2 yrs. If they default, you get property & just cause you are a nice guy you give them their 1/2 worth of interest anyway especially if the house had alot of equity. Big hammer to keep them paying. Win/Win any way you slice it!
Hi all,
I checked with one of my attornies. He was not to hip on the idea, since buying the property, then doing a L/O back to the home owner could fall under the preditory lending laws.
He told me to be prepared to have my $25K retainer ready for when the owner cries fowl!!
OK, next?????
Kristy,
Would the owner consider a cashout now at a discount without the L/O?
If he is going to lose the property, then he is going to lose the property. Do you think you could buy it outright, or at the very least, allow him to stay in the property as a Renter, with no L/O?
Not ususally a great idea, but in this circumstance, I would consider it? Let me know your thoughts!
BAMZ
Kristy:
Here is the risk with the facts of your deal. An owner may allege (and a court will likely agree) that your sale/leaseback is, in substance, a loan (not a sale). Thus, the court would disregard the form you took (i.e., you getting a deed) and use its equitable powers to reconvey the property back to the owner and consider your participation as a long. Now you might be thinking that will not be bad because you will get your profit when they refinance your "loan."
The problem is that the court will also likely hold that your "loan" is usurious, because the profit you are getting is really "points" once the court has rules it is a loan. Unless you are a licensed broker, or lender who is exempt from the usury laws, you have the risk that the court will tell the owner that they only have to pay back your principal (i.e., since you have nothing in the deal, they have to pay you nothing and they take over your refinanced loan). How likely is this to happen? It depends on a number of factors such as whether your state has caselaw on this issue, the amount of equity that is in the deal and the profit you are making (remember, the court is using its equitable powers so it will be looking to determine if what you did was "fair"; the court's concept of fair will be much more conservative than your's especially if your judges are elected rather than appointed -- it makes bad press for them to "allow" a person to "steal" a house from a person that is down on their luck).
I wrote about this problem in another post and gave a couple of ideas to deal with the issue. You may want to search some of my other posts in the L/O forum.
Taxjunkie[ Edited by taxjunkie on Date 04/12/2003 ]
Kristy,
The use of a NARS PACTrust or EHTrust would be a big help here. An Equity Holding Trust (EHT) will allow you to create a deal with some nice $$ in it for you while still protecting the current owner's equity (and your back-side). Derrick Ali is a real pro at these. You might want to contact him about how to use/form one.
[addsig]