Lease Option With Cash Out
I am a Mortgage Broker with a client whose parents are in bankruptcy and almost in foreclosure. Their house is worth $300k and they owe $181k (no they didn't do a cash out when they had the chance). My partner and I are thinking about buying the house for what they owe and then turning around and leasing it back. We are also looking for a lender that would let us do a cash out of the equity based on the appraised value.
We are in Texas so we are limited to 80% of the value. The question is can we turn around and do a cashout right after the purchase and use an appraised value. Or is there some other way to get our money and cash out.
I'm not a mortgage broker, but here's an idea...
What about purchasing the home for what it's worth: $300K.
Then lease option in back to the current owner, with a LARGE fee for the lease option....say the difference in 300K-181K = $119K.
That is just an example. I don't think there's any law that prevents you from purchasing a home at its' appraised value (and I know a lender that does 100% financing, if you need), nor a law that restricts how much you can ask as a nonrefundable lease option deposit.
...just an idea.
Good Luck!
Ask the seller to hold $119K 2nd mortgage. Get a first mortgage of 80% or $240K (assuming purchase price is $300K). $60K of the 2nd mortgage would be credited to the purchase price as down payment and $59K would be credited to you. Remember, you are doing them a service loaning them your credit and helping them out their problem. At closing, $181K would pay off the other first mortgage and the remaining $59K would go to you. The sellers $60K credit would be used towards the original mortgage. Of course you would need to explain to them that this is a way out of their difficult situation and a promissory note will need to be prepared by an attorney. The note would explain that you will pay the $125K off in increments. Then you offer them a chance to TRADE THE OPTION FOR THE SECOND MORTGAGE. Now you've got $59K cash, a home with no money down and if they agree to trade the option, a T/B and only the $240K mortgage with $60K equity. Of course always consult an attorney when doing any kind of seller financing. ITS A GREAT OPPORTUNITY TO HELP SOMEONE AND MAKE SOME MONEY. DONT PASS IT UP![ Edited by cmyke on Date 09/29/2003 ]
Not sure how you are going to find a lender that would go for using the credit on the second mortgage as down payment. The lender is going to want the 20% to come from the buyer. If it can be done someone explain to me how.
I may have confused you with the $119K 2nd mortgage. Let me explain it again. The terms of the offer are that the seller will hold a 2nd mortgage for the total of the down payment. $60K. The $59K they receive will be the cash back to you for the service you provided them. Make that clear. Otherwise, you'll have everything to lose and nothing to gain.
On the offer the lender receives as part of your mortgage application, you show the down payment amount. But instead of cash, the seller has..... A PROMISSORY NOTE(which is just as good as cash). After the deal closes, you give the seller the second mortgage and the seller gives you the promissory note (along with your $59k for helping them) because you have satisfied the note with the second mortgage. You can negotiate the L/O however you want but the $59K is for helping them out of their difficult situation.
Again be sure everything is in writing and understood before anything takes place. Its not that complicated if you communicate properly. The only other option for them is....FORECLOSURE!
[ Edited by cmyke on Date 10/01/2003 ][ Edited by cmyke on Date 10/01/2003 ]
Dear Mortgage Broker. May I suggest that you merely obtain a new loan to replace the old loan. For a larger amount of money of course. If necessary have your "client" cosign the new mortgage. That solves the problem, people in trouble now have money, you have an earned commission and your "client" has done a service to his parents by cosigning their new loan. With the funds gained they take a breather and then decide on their next move, change of employment whatever. Everybody happy, nobody got super rich, but nobody lost anything. Cheers Lucius
That's called a cashout refinance and 2 things are a problem:
1. They are bankruptcy and there isn't a lender other than hard money that would do it.
2. Texas has really strict Home Equity laws.
We actually are doing the deal by filing a 3rd lean on the property. Turning around and buying the house for $300K financing it 90%. This would pay off the loan and the 3rd lean. This would give us all our money back, the sellers get about $30k back and we get about $50K and lease it back to them.
Man, how things have changed in Tejas!
It was only a short while ago that Tejas didn't even permit home equity loans.
First you have to get permission from the BK Trustee to acquire the property. They usually want an appraisal and want as close to Fair Market Value they can practically get.
Two or three of these scenario would work. I prefer your plan.
The only input I have is that leasing back to these people is a bad, bad idea.. I use to do that & had nothing but problems. I'll never lease back again. I'd urge you to give them some cash after they leave the building vacant, broom clean, and give you the keys.
There's good equity here. So you can be generous. I'd immediately transfer title to a LLC/Corp and hope that their attorney (once the heat is off them) does not come sueing you as an "opportunist" who took advantage of this lovely couple who in distress sold you the property under duress, ****Must Reach Senior Investor status before posting URL's***.."
Judges and jury will tend to see you as a vulture and/or a pirate. I'd get as many legal documents and disclaimers (notarized ) as a good Real Estate Lawyer could draw up. You want an over kill in paper work for this one.
Great reply. We will definitely get the title in an LLC. You are right about litigation though. Especially in Texas with the homestead law. Basically foreclosing on someone here is big hassle. Thanks again. We're off to the attorney for the book of documents.