Need Creative Ideas- Owner Wants To Stay In House
Spoke briefly with a homeowner so I do not have details...am meeting with him tomorrow. Here is what I have. House is in a very desirable high end town. Large house not too old (don't know year yet) on 1 acre of land in an expensive area.
He was making about $175-200k a year and got laid off. He has (I think 2 mtgs) totalling $400k. FMV is ~$650k+ It sounds like he may owe the IRS a couple years of taxes and is working on a forebearance agreement with them.
He doesn't want to sell the house but is open to creative ideas that will allow him to fix his credit and save the house. Combined income is now $125k+ with wife's salary, however noone will refinance him.
He says he is about $200k in arrears!! to bring the loan current.
I was going to walk away but started to think is there a way to make this work.
Initial random thoughts I have ( I would want to have an atty help draft up any paperwork) - I buy the house for $400k. I now own the house (if title is clear of tax lien...). I rent back to him for 18 months with enough to cover the mtg plus a little profit. I get a security deposit up front to cover 3 months mortgage (to cover eviction if he is late with the payment, otherwise he will get this back). After 18 months if he has cleaned up his credit, he buys the house back from me for $460 (or whatever amount I want to factor in for profit). House worth $650k+
If his credit is still bad, we sell the house and split the net profit above "x" amount to factor a minimum profit that I wish to make.
Just some initial thoughts. Has anyone made an investment work with minimal risk and allowed the homeowner to stay?
pushcart,
One thing you might want to be careful of. If you in your contract with the owner include the option to buy back the house, there may be a danger that this may be considered a usurious loan. I do not have first-hand knowledge of anyone getting nailed on this but I keep hearing about it.
I did something some years ago that was very similar. I bought a note at a very big discount, received income from it while I held the note and gave the note seller an option to buy it back at a substantial profit to me. I would not do such a transaction today because litigation is more of a danger.
What I have done recently ( a year ago) was to buy a property pre-foreclosure and rent back to the previous owner. The fact that they could stay in the house was motivation for them to sell to me rather than someone else. On their own they have been trying to find a way to buy it back and I was sure that there was plenty of evidence that I did not promise to sell it back to them as a condition my purchase. I could write an adventure story about what has happened since and this is , hopefully, coming to a close soon.
I hope this is of some help to you.
Regards,
Ed
Based on what I experience out there, I recommend that you let this one pass. Other then a shoulder to cry on, there is no place for help as you envision with this person.
Here's a lesson that I learned from an experienced Investor early on, and that I still follow to the letter today.
Be aware: Expect no gratitude, loyalty or sympathy!
As an Investor in Preforeclosures the only person who will step up to the plate to defend your interest is yourself.
In this case you are apparently dealing with an intelligent person, who is using every method available to retain possession of his real estate.
Just question him as to what he has had to do in order to reach the incredible amount of 200k in arrears to bring his balance to 400k. That did not just happen by a stroke of good fortune..,
You are at risk of being used to achieve his goal of staying in the property, and subsequently finding yourself in Court accused of usury, fraud and a whole set of other unthinkable allegations.
The safest ground I see is to try to position yourself as his Plan B; that is an all-cash purchase of the property before the auctiondate.
This does not look like a scenario where you would allow this homeowner to stay in the house when you complete the transaction. His personal problems (IRS?) are far from over and I would personally avoid an ongoing business involvement with such an individual.
Now keep in mind that this is a very personal opinion, and there are many out there that see this as a great opportunity for a good payday.
So I rest my case.
Just my 5 cents worth...
_________________
Luctor et Emergo[ Edited by Hawthorn on Date 06/09/2004 ]
Thanks! I am leaning away from this deal, the only way i would is if my atty set it up so it was very low risk. i also do not want to tie up any money for a period of time such as this.
Has anyone made an investment work where the owner was allowed to stay in the property? Maybe without the stakes being so high?
pushcart,
Mine has worked very well financially, however, I have earned it based on the time and energy spent managing it.
The fundamental problem is that if they are in preforeclosure they are economically desparate and this does not change the day after you take posession. All of the reasons and excuses they used for not making mortgage payments will now land on you as reasons for not being able to pay the rent.
The prevailing wisdom is to not rent back to financially distressed previous owners. That being said, I would consider doing it again under similar circumstanstances.
Regards,
Ed
Let him know that he's going to loose his house. If he wants help saving his credit and MAYBE walking away with a little bit of money, he should call you.
Negotiating debt is difficult enough without messing with the IRS. The IRS does not accept a payoff any less than amount owed and income tax defficiencies stay on credit reports like back child-support, again, non-negotiable. I have been speaking with several mortgage brokers, who say that little hiccups like losing your job would be an excellent risk for doing what you're doing, however, I would agree that you should probably walk away, unless you want a headache for the next 9 months. To re-enstate this loan for a 400k mortgage would cost you at least 6 months intererst and a new payment of maybe 4,500 a month. Someone who makes 125k can probably afford a max of 2,000 buck a month. If my numbers match yours, I would suggest to stay away. A lot to read and a lot to think about but I hope it helps.
I ended up calling him to cancel and told him I was still interested in buying the house if he wanted to sell. I did say the best way he could get the most money out of the house was to list it with a broker if he couldn't refinance. It sounds like he has the time to do this especially if he prices it right. He sounded disappointed but will call me back if he wants to sell to me.
I am still curious to know if anyone has made a deal work where the owner was allowed to stay even for a short time?
How about if you buy the house from him for the loan balance (assume no arrears for the moment), have him pay you a mortgage assumed at around 8-9%, you get a one year arm for like 2% (you collect the spread) and then offer to sell the house back to hm at the end of one year for what you paid +$15k or so?
I keep hearing of a number of companies who do what you were thinking of. But the guys I hear about are Tax buyers. Invariably when I get news of the sutiation they are proceeding with eviction or foreclosure on the lease or the land-contract that they took back from the person they had "helped" get their house back after it was about to be "lost" due to unpaid taxes.
Now there may be a great many deals they do where they get paid without trouble that don't come to my attention. For some reason people get sent to me when all other options are exhausted. And I'm not even in that business.
Anyway. The problem here is that you are a soft touch, wanting to help the people keep their home. The guys who do this seem to all be hard asses. Yes, they will cut a deal for you to stay, but if you screw up on that deal they will also cut your throat (figuratively) and leave you bleeding in the gutter while the eviction guys unload your house.
[quote]
On 2004-06-08 22:03, edmeyer wrote:
pushcart,
One thing you might want to be careful of. If you in your contract with the owner include the option to buy back the house, there may be a danger that this may be considered a usurious loan. I do not have first-hand knowledge of anyone getting nailed on this but I keep hearing about it.
I did something some years ago that was very similar. I bought a note at a very big discount, received income from it while I held the note and gave the note seller an option to buy it back at a substantial profit to me. I would not do such a transaction today because litigation is more of a danger.
What I have done recently ( a year ago) was to buy a property pre-foreclosure and rent back to the previous owner. The fact that they could stay in the house was motivation for them to sell to me rather than someone else. On their own they have been trying to find a way to buy it back and I was sure that there was plenty of evidence that I did not promise to sell it back to them as a condition my purchase. I could write an adventure story about what has happened since and this is , hopefully, coming to a close soon.
I hope this is of some help to you.
Regards,
Ed
Did you buy this house subject to?
Anthony
commercialking - do you have any details of how exactly these companies are doing it, or if they are large enough to find/contact. PM me if you want
arborlis - so the actual purchase of the home for its loan balance may be perceived as part of the 'cost' of the workout/solution...which would be quite high if they couldnt pay rent and the house sold at market value (& there were a lot of equity), unless the contract said that even if the house were sold at market value, then most of the proceeds go to them, but then they have a perverse incentive not to pay you so you sell the house and they access the equity that no lender would have
I was more concerned that they file for bankruptcy while in the house...would payments be suspended, or would the contract one had with them be made null (isnt there a lookback that cancels recent contracts for bruptcy filers?). There just seems to be an angle here where this can go very very badly, but this isn't my area of expertise
People I know who do it interview the heck out of the person, their family, scrutinize every line in bank and credit card statements, keep in touch week to week or month to month, watching very carefully every step of the way. Nothing is failsafe, though
I have heard of people trying to go on the deed with the person, but that seems very risky, because you are subject to all the attachments that may hit that property and if you had any assets it would encourage same.[ Edited by dealjunky on Date 06/22/2004 ]
Ask the owner how much of a monthly payment they could afford now? Chances are they bought the home for less than what you will buy it for now and they may not be able to pay the increased rent.
I have heard of someone buying a home in preforeclosure that has a lot of equity (like this one, presumably), for about 70-85% of FMV or of appraised value. Getting the owner to sign over the balance due (the difference between payoff and your new loan - fees) at closing to the seller. If it could appraise for 625k, and you could get a loan for 500k (80%LTV), pay the arrears (to stop the foreclosure), pay off the existing loan (you never mentioned what he owed or what his current payments are), pay closing costs..., then have him sign over the difference back to you at closing. Offer him 5k or so to leave. Or offer him 5k or so of his equity (he can do whatever he wants with it) with a 6 month lease and you help him get financed in 6mnts to buy it back from you- if he cannot, he must leave. That way you have given him some of his hard earned equity back, and given him a second chance. If you can't work this deal with those numbers, then move on. You are taking on too big of risk with home of that value. Homes in that price range are staying empty for a while and you may not have enough left over (from the proceeds at closing) to keep it afloat.
Also, I like one person's advice of letting the seller know you may not be able to save his home, but you may be able to save his credit from foreclosure.
Also, don't inflate the appraisal just to get a highter LTV loan, that equals to fraud.
Also, with Chpt 13 bkrcy, once they make a deal with payments to pay back their "loan", if they miss, they lose their home.
Let your home owner know all of his options.
If you end up being able to give him some cash back at closing, let him know most investors would not do this.
Good luck. Just my 2cents. I have only heard of doing a deal this way, haven't been able to do one myself this way yet.
Thanks for all the great feedback. I did walk away from this one.
However I am interested to hear examples of investors who have made a successful investment but have allowed the distressed owner to stay in the home at least for a small period of time? How did you structure it? What was the outcome?
pushcart - my earlier post about buying house for loan balance (provided theres a good cushion of equity and market is well above that), charging 8-9% (vs hard money of 12-15%) to the person, getting a one year arm yourself (assuming 720+ FICO) for much lower and then charging $15,000 or so on the back end (3-5% of your purchase price which was loan balance) is a way I understand a couple of people have done dozens of these. It amounts to a one year lease-option while they get on their feet and you are backstopped by the equity in the home - and that equity is the carrot before the horse that they get back at the end of the year of they get rolling again
Anyone else with actual examples?
Look, from everything posted here it should be obvious there are legal issues if you do a deal with the owner staying.
Also, if they could not afford the place what is going to change? If they can not afford it and all they really need is to make up the back payments, have then call their lenders. If the owner can provide the problem is in the past, they have the income, etc. some lenders will move the missed payments to the back of the loan.
To be flip, the easiest way for someone to stay in their home is for them to make the payments. If they can not do that and you want to do it for them, just give them the money but leave the title alone. If you want some upside, agree an option for some future point where you get to buy when they decide to move.
John
PS. There might be some investors who can work magic. Some of them will be the people you read about in a few years when the law catches up with them or they get sued by an owner who just did not understand.
[addsig]
I was reading the other day that on owner was able to stave off bankruptcy and eviction for 11 years in California. I personally know a person here in Oregon that did it for over 2.5 years.
A lot depends on how savvy your owner is and what lengths they are willing to go through. They file BK and then when they are about to be evicted their husband does and then the children, after that others get on the deed and do the same= a long time to foreclosure.
THe IRS issue is interesting, if they haven't liened the house then there is hte possibility that if he put it in trust in the name of the trustee and they don't currently have a record of it it would not show up under a general judgement against the owner. THis has been the case in other instances, I personally know of one fellow that despite court and owing millions to the IRS has kept house, commercial trucks etc. through this tecnique because they can't find it.
[addsig]
Am I missing something? The owner is no longer the owner. What you have is a renter. You own it. There is no foreclosure b/c you boiught the house from him/her. What are all the mysterious legal issues?
Anthony,
No, I paid cash for the house (from a HELOC) and all of the loans were paid off. We were under a tremendous time crunch with the sale looming and I actually put up $15K of non-refundable money to get the sale postponed for 30 days while I got the HELOC in place. We closed on day 29!
Regards,
Ed
We have done these deals and it's like everything else. Sometimes they work and sometimes they don't. It depends on the homeowners situation. As Commercial stated, it's business and you have to keep it that way. If they don't pay, they don't stay. In the case you brought up I would have passed. Not enough income coming in to swing the new payment.
Quote:
On 2004-06-08 22:03, edmeyer wrote:
pushcart,
What I have done recently ( a year ago) was to buy a property pre-foreclosure and rent back to the previous owner. The fact that they could stay in the house was motivation for them to sell to me rather than someone else. On their own they have been trying to find a way to buy it back and I was sure that there was plenty of evidence that I did not promise to sell it back to them as a condition my purchase. I could write an adventure story about what has happened since and this is , hopefully, coming to a close soon.
Would you please elaborate on the adventure story. I keep running into people who would like to stay in their home, but the investors I've spoken with all say NEVER to do that, as it's a nightmare trying to get them out if they become 'tenants gone bad'. I would like to be able to help someone out if I can, but want to know how to cover myself in case of non-payment of the rent.
Thanks!
You can shortsale and then wholesale to another investor who will rent it back to the home owner.
This way you get the deed and the control of the property and do shortsale.
You will let the home owner know that the other investor will sell it back to them providing they keep up the payments. (Lease Option) if they default again they will be evicted!
I am sure you will find some guru is out there like Bill and Dwane can help you with this!
[/quote]
Would you please elaborate on the adventure story. I keep running into people who would like to stay in their home, but the investors I've spoken with all say NEVER to do that, as it's a nightmare trying to get them out if they become 'tenants gone bad'. I would like to be able to help someone out if I can, but want to know how to cover myself in case of non-payment of the rent.
Thanks!
[/quote]
I am in the process of closing a deal now (property was foreclosed) where the previous owner will be leasing back with an option to buy. The previous owner is paying my down payment and closing costs. They are also paying monthly rent equal to a 12% payment (PITI) while I am buying on an 8% note. I will receive a spread monthly of 4% interest. The entire deal is set up with a lease and a separate document for the option to purchase at a later date. The down payment and closing costs being paid by the previous owner are the non-refundable option funds and will be credited to the purchase price when/if the option is exercised at a later date.
crf3boys,
Both husband and wife had been using the bankruptcy courts like an umbrella when it rains. They wanted a fixed amount from the sale and we were having a difficult time nailing down all of the debts that would be paid at close of escrow. Their BK attorney told me to fix a price and offer it to them which I did.
Wife was angry because they felt that they didn't get enough money from the sale. I was very concerned about getting paid on a lease considering the previous track record. I wanted to see some money before I entered into a lease agreement which with 20/20 hindsight was a very good move.
I did not get paid. The property is in an area where there is a light rent control, but a very strong eviction control ordinance was passed in 2003 which severely limits reasons for eviction. Without a rental agreement my eviction attorney took the position that they sold me the property and were "squatters". They hired an attorney who produced evidence that I had promised to rent to them. Here is where I got a bit lucky. Their attorney believes that every defendant deserves a jury trial, however, they could not afford one and dismissed the attorney. I showed up in court with my high-powered attorney and was unopposed. Needless-to-say I won a court order to evict along with a money judgement.
I then decided to put the property on the market since I did not want a rental in an area with eviction control. Wife finds a loan broker who helps people in their position and they want to buy the house. I did not believe that they could pull this off with their credit scores and dances with bankruptcy. They came pretty close. They inherited the house so they qualified as first time buyers. They were looking at a 95% 30 year loan at 6% interest and I was going to finance their down payment and closing costs. Husband who had higher credit score was to purchase house, however, he had not been out of bankruptcy for a year and did not qualify. Since there was only four months before the bankruptcy anniversary, I agreed to a stay of execution on the eviction with the condition that they pay monthly payments in the amount they would need to pay if they re-purchased the house. The loan broker liked this because it gave her a period of time to observe their payment performance before climbing out on a limb and recommending them for a loan.
I thought things might change since they were very determined to buy back the house and I now had the threat of putting them on the street in days if they failed to perform. I was wrong! They did not make one payment on time and the stories and excuses kept pouring in. First, she got sick over Thanksgiving, then his paycheck wasn't being payed by his employer and he changed jobs. Another time her paycheck was supposedly a month late (from the state!) and yet another time "the IRS grabbed the money" before they paid me.
Of course with this track record when they went back to the loan broker she pretty well closed the door on them. Then came a series of new loan brokers all of whom could not help once they found out the truth.
Very recently money that they promiised showed up in my account. Several days later I received a bank envelope with two checks that were written from an account that had been closed for two years. Husband had placed a bet with a bookie in hopes of relieving their financial stress using the money destined for my account and he decided to temporarily cover it up by felonious activities!
The reason that I have stuck with this so long is that I was the only one who was willing to give them an opportunity to stay in the house and I wanted them to exhaust all of their options. I also knew that the house would be very well maintained and that I would come out very well ultimately.
The house is being listed and I will make another $70K of profit over what I would have made last autumn. This is close to the unabridged version!
Regards,
Ed[ Edited by edmeyer on Date 06/29/2004 ]
I purchased a house earlier this year pre-foreclosure and let the seller stay in the house. They agreed to pay rent plus some expenses I incurred to close the deal. I bought the house for about 70% of FMV so if they default, I kick them out as we have a rental agreement. There is no option for them to repurchase the house and none was ever discussed. I had an atty draw up the papers so I am confident I will be OK. They are slightly behind now, so I think it is just a matter of time before they get the boot. My atty says as long as the purchase was clean and the rental agreement is clean, I have nothing to worry about. Worst that can happen is I loose 6 weeks rent until they are evicted. If they trash the place, insurance covers most of that.