Would You Do This Deal?
Guy called me off my direct mail. He's facing foreclosure March 2nd.
He owes 675k on a 1.3 million dollar home. He needs 60k to bring the loan current.
He told me that if I give him a second, he'll pay me back at 30% interest only with a one year balloon.
He said to solidify the deal, he'd be willing to do a quit claim deed and add me to title for security.
What could go bad on this deal for me?
Ah, why would you take second?? If he ends up being foreclosed on you lose your money. Some might take this deal because of the equity spread but I am always leary of second positions when its my money. Best to ask a hard money lender what they think. Have you confirmed those numbers?
Just got the appraisal emailed to me...worth 1.27 million.
There's a ton of equity there, plus I'd be on the deed.
If he can't get a second, he's going to file BK
I might take a strong second position, or why not negociate to buy the property from him outright and rent back to him....
any deal you can make with him...is better than a bankruptcy.
But check the appraisal..Who did it? If a friend????? Run it past the bank and see if they would accept the appraisal.
You loan him 60K as a second motgage at 30% for one year. That's $1500 cashflow per month.
As I see it there are five possibilities:
1) You make $18000 over the course of the year
2) He defaults on your loan and you foreclose. You bid at the auction and recover at least your 60K plus any payments and possibly the whole property subject to the first if you are high bidder.
3) He defaults on the first again and it goes to auction. You bid to protect your position and once again recover at least your 60K plus any payments and possibly the whole property free & clear if you are high bidder.
4) He defaults on either or both mortgages, refuses to pay, files bankruptcy repeatedly, and ties the house and your money up for the next 3 years. (I have seen this done!)
5) He defaults on your or both mortgages and you record the quit claim deed and take the property. Depending on the case law in your state, this could be overturned by a court. Check with your lawyer!
If it were me and the equity you say there is is in fact there and I could spare 60K for a year, I would do it. The equity in the property makes it a win for you because there is room to bid up at the auction and cover your position. In this situation, you will only be wiped out if you do not bid at the auction.
After you catch him up for 60K Where is he going to get the money to keep his 1st current while he pays you a 2nd at 30% sounds fishy to me. If he can come up with paying you 30% he could stay current. I think the numbers are inflated to make it look like a great deal.... I would CHECK EVERYTHING all amounts, and what is going to change in 1 yr that he will be out of trouble and able to pay everyone back with interest ?
yeah it does. The whole thing is enticing but remember this; the guy owns a million dollar place for a reason. He isn't stupid!
I would tread very lightly on this one. AND, I never assume to win a house at auction, especially one worth that kind of cash -- who comes up with 3/4 of a million dollars on the spot????
not me.
If the property is really worth 1.2mil I would consider it IF I had the cash/credit to take over the first when he defaults on both loans, which I would bet he will.
[addsig]
Let me preface my remarks by saying I am not an expert.
I've seen millionaires that make there living robbing Peter to pay Paul. They always have loans coming in from some private source or another to cover their lifestyle (exisiting loans). They never use their own money. If you don't mind lending 60K to someone you don't know who doesn't seem to be able to use his own money then good luck. Is he foreign, by chance? Dual citenzship has it's rewards. If he ruins his credit here he can just zip away...
If you can afford to but the house back at the courthouse steps at full price as a last resort to save your second then maybe you would come out ok. Maybe. Is it worth the risk?
Just my .02 cents. I would be wary.
I'm not an expert, but why not treat this transaction like a 100k transaction? Get the deed or don't do it. Same principle, right?
jwilson, how would a strong second work?
JohnCl
[ Edited by JohnCl on Date 02/26/2004 ]
Just a thought.. why not draw up an agreement to make him whole, sell the property you get back the 60K and you split the equity? It sounds like he's in a hole with no where to go.... at least this way he has something to walk away with.....
My opinion, do not rent it back to the owner or arrange a deal in which the owner lives in the house...it will most likely end up on a bad note. If he can't pay the 1st lender, then why how is he going to pay you?
Either buy the house from him with whatever method you choose and get the seller out or leave it alone. Also remind the seller that if he files bankruptcy, it will only stall the foreclosure proceedings. When the bankruptcy proceedings are over the foreclosure auction will be rescheduled and picked up from where they left off. He will eventually be kicked out of his house and may still be held personally liable for the loan amount and attorney fees.
What I would do? Do a title search and make sure there are no other leins on the property. Offer him cash for his equity and have him deed you the property. Then either turn around and sell it quickly, bring the loan current and take over the payments, or refinance and get someone in it. Do not let the seller's stay. Just my thoughts.
Tanya
Second mortgage @ 30 %?
Have anyone heard word U-S-U-R-Y recently? In some states it very well may be.
Besides, Real Property in 1.2 million ranges is not as liquid as house that worth $150,000. You will not turn around and sell this house within 3-4 weeks period. It may take months if not years to find a suitable buyer. Mortgage qualifications and financing process is totally different for this large scale purchases.
Also,
You won’t be able to rent the house to cover the mortgage payments as well, there is a limit of what people (even a rich one) will pay a month for the place of residence (unless you are in the Beverly Hills).
O, yes, last peace of advice:
Don’t trust the homeowner who promises to pay you religiously on the 2nd if he can’t keep up on the 1st.
Dmitry.
Whatever you do, make sure that YOU are the one in control, and if he ever gets the house back, it's because he fullfiled the contract that the two of you have.
There are a lot of red flags.
Have him QCD you the house, you bring it current, and treat it like a rental. If he defaults, evict him and sell it. Let him know upfront that that is your intension if he's ever late on the payment.