The homeowner is owes 300k to on a first mortgage and they are behind on payments and the current FMV is 150K.
A company offers to come in and purchase the note from the lender at 75% of FMV and then re-sell the home to the homeowner at 95% of FMV with the home owner re-financing into a new loan.
Is this legal and if it is, what has to be disclosed to the lender?
Can the note buyer legally charge the homeowner a fee, either upfront or after the transaction is complete?
What would the chain of title look like?
What's in it for the lender holding the new re-fi note? Isn't this a big risk?
The note buyer obviously would make their money in the 20% spread.
Looking forward to hearing anyone's input who's seen this situation before.
We are working a similar strategy, but have restrained ourselves from selling the note back to the homeowner. Or refi'em. Our concern is related to how it could be seen a year from now...
If the homeowner falls behind in payments and we try to foreclosure, they could tell the judge they did not understand the terms of what was happening and we would lose the whole deal.
I'd get an attorney on this one. Attorneys costs on the front end here are definitely cheaper than the back end. Too much to do wrong here, especially if your state doesn't like "leasebacks". I know it's a "sale" but I've run into more than one person who's confused technicalities between land contracts and lease options.
I agree, this is why we are not offering people to keep the house, we simply offer the opportunity of walking away without the foreclosure on their record, and then sell the property quick to get the money back fast.
I am finding that many lenders are not that used to the idea of selling just one note.
It seems to me they have the system down for selling many at a time, but selling just one is kind of complicated.
for example, I tried this with SunTrust Mortgage and they simply are not doing it these days, or we couldn't locate anybody that knew how to make it happen in that bank. After multiple calls we found a manager that said they were not fond of selling their notes, and when they do it is usually in bulk, not one by one.
This sounds similar to a short sale (though a whole lot easier if the lender would agree to just sell the non-performing note).
I know first-hand that with a short sale, most lenders stipulate that the homeowner may not benefit in any way from the sale of the property. They literally by contract don't want a homeowner to get a single dollar out of the deal.
I think that if the lender got wind of your intentions, they'd frown upon this.
All in all, I agree with Tim. Get yourself an attorney on a deal like this.
Oh, and from personal experience since 1999: People that don't pay, don't pay. I know, right? Go figure.
Distressed property investing is a high-risk, speculative business right from the start. It's not a rescue mission, or a charitable endeavor- unless you have the means and you wish it to be.
Distressed homeowners are quite often people that didn't meet the minimum requirements of home ownership, or reasonable standards of credit-worthiness when they got into the house.
The best policy, IMHO, is to get them out, and get them renting because that's frankly where they're headed anyway and it'll save you a lot of time, money, and heartache.
My own company's distressed homeowner literature states plainly: In all of "my company" programs, you will be selling your house, and you will have to move"
We don't want to waste any time convincing people of the obvious- we'd rather they not call us until they're ready.
Actually, I read in Fortune or Forbes magazine not long ago a big company that does this. They basically buy bulk of underperforming properties from the lender. Resell them back to owner at resonable price and rate that they can afford. It is a win-win-win for all 3 parties involve according to that article.
Their new note wouldn't be for 300k, just 142,500 which is a lot less of a payment. I don't disagree that selling it to someone else would be better as others have said, however the original owner probably shouldn't have taken on a 300k mortgage in the first place, but one less than 150k they could probably afford.
Actually, the lender is a FORMER holder of the note, so unless they somehow encumbered that note (you wouldn't buy it if they did when you know your plan is to do as stated in the OP) ... well, you as the new holder of that note, can modify it as you see fit (within the limits of applicable laws). It is not like a short sale because you are not asking the original lender to release the lien - they are assigning it to a new note holder; getting the release of lien is where the lender stipulates that the borrower is to receive no benefit from the short sale.
One of my BP colleagues who is also local to my area (and local REIA) has a company that does the bulk purchase of second position loans, and once they are the new note holder, in as many cases as possible they modify so that the borrower can perform.
This does seem counterintuitive at first...
And the key is in the post just prior to mine; the note is purchased at big enough discount from the original lender so that this can be made to work.
However, it is also possible that this is part of a scam that takes on the appearance of something doable and beneficial - but turns out to just be a scam. Due diligence on the companies involved will be necessary.
Regarding the OP's question on chain of title: No change to ownership of the real estate means no change to title; if the real estate changes ownership, then that would have to be recorded and it would show on title. As far as changes in liens, that becomes a bit more involved. The original note is assigned to the new note holder when the note is sold. There can be a loan mod so that the original owner just continues with the liens that are already recorded staying put. If there is a refi, then there will need to be a fresh lien put in place by whoever gave the refi; the old lien should then either get a satisfaction or lien release recorded to show that it is no longer encumbering the property.
What's in it for the new holder - is it a big risk? No such thing as no risk, but it turns out that the people getting to stay in their home at an affordable monthly payment translates into positive cashflow. Most mortgages in the U.S. never run to full term - there is usually a sale or refi prior to the term ending on the loan; at that point, the payoff on the note happens - the returns can be quite nice from the examples that I have seen.
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