Suggest creative financing strategy for this situation?

Question

There is a couple who filed bankruptcy. They have a home worth ~ 82K. They owe 55K that they used a hardmoney lender for a 5 yr loan @ 11% with a balloon payment. They don't have the resources to pay the balloon when it's time comes. They have 2 yrs of good payments on the hardmoney loan. 
Can they sell the house for 55K, then buy it back for 65K so they can avoid the balloon?
They want to pay it completely in 8 years.
They have 35K equity.
Any creative and legal suggestions?

Jackie Lange · Answer

Seems the best strategy would be to contact the note holder/hard money lender and offer to buy the note.  The BK will tie them up for 3-6 months and they may be anxious to solve the problem quickly and easily...and at a BIG DISCOUNT

Once you get the note offer to do a loan modification with the owners.  Reduce their payment and extend the term.  With a track record on "on time" payments, these sound like people you'd want to work with.

Aaron Mazzrillo · Answer

Find someone with an IRA that would like a nice return. Have them sell the property to the IRA for the balance of the loan. The IRA does a lease option back to them for 3 years, very low monthly lease payments, option price at $75K.

They get to stay in the house, save cash, and have time to work on fixing their credit.

IRA gets a nice return when they exercise the option in 3 years (12%+) after they fix their credit and qualify for a loan. If they abandon the option, IRA owner sells the property for a very nice profit to the IRA.

You could do something similar with an investor and a note. Lots of ways and plays with a deal like this.

James Harris · Answer

You might consider buying/paying off their loan, Have them rent from you for a period of three years or so.  During that time they can work on their credit.  After the allotted time, they would obtain a loan to pay you off.

Greg Woolsey · Answer

Thank you all for your input...Especially Jon. I am trying to help this couple out, he is a friend. I don't want anything even resembling illegal. I have suggested that they find another hard money lender for a refi.

Jon Holdman · Answer

What are you really looking for here?  Of course they can sell it for $55K and then buy it back for $65K.  Even after the costs, the "buyer" would make a little money.  However, how are they going to financing it when they buy it for $65K?

Do you mean, can they find someone to buy it from the HML then sell it back to them for $65K with owner financing?  As they say "a sucker is born every minute".  But such a deal would hardly be a win/win.  A judge will view this deal as a $55K loan, not $65K.  Invenstors are going to be looking for something comparable to what they're paying now in interest.  If they want current 4%, 30 year fixed OO rates, they need to see a bank.  A 10% loan on $65K works out to a higher rate if the loan payoff is really $55K.  Essentially, they're paying $10K in costs to do a refi and that very likely moves the new lender into usury territory.

You say they have two years of good payments.  And declared bankruptcy at least two years ago.  And they have three more years to pay off their balloon.  And they want to pay it off in eight years.  That implies they can accumulate some cash.  Have they actually tried talking to a lender (or three or ten) to see if they can refi?  If they can come up with cash to cover the costs, and they have the equity you imply, a refi seems like a possibility.  The guideline is five years after bankruptcy, but a smaller lender like a credit union or small local bank might do it sooner, if the value is there.  At the very least, a discussion with some lenderw would help them know what they need to do to refi in a few years.

Steve Babiak · Answer

Worth 82K, owe 55K = ~27K equity, not 35K as you originally posted; and if the equity is 35K, then some other number you gave is incorrect.

If the 55K is enough to pay off all outstanding liens, then yes they can sell for 55K.

I guess they can even buy it back for more money if that is their choice.

The challenges you might face: 1. How do you get money to do what you plan? 2. If there is some dispute from these people later one, what will a judge think given that you made a quick profit here? 3. What are you prepared to do if they buy it from you on an installment sale contract (seems you're heading that way with what you posted), but then decide they no longer wish to pay you?

Greg Woolsey · Answer

Any advice would be appreciated.

Thanks.

Greg Woolsey · Answer

They already had filed Chapter 13 before the hard money loan. They want to keep the property and don't think they can refinance with the bankruptcy. If I can get the funding to buy it at 55K, and then sell it back to them at 65K....Is that legal? If so how can it be accomplished for a win win win?

Dion DePaoli · Answer

With that much equity in the property I don't personally believe the hard money lender will sell their note at a discount, they really don't need to.  Albeit, you did not mention what chapter the BK is and what time they have left on their term.

It might be wise for them to look at trying to refinance before filing their bankruptcy, they have some equity which might help make up for the presumed bad credit.  Also filing for BK will at the least put the hard money lender on notice which they may or may not respond nicely to.

Selling it and buying it back is not the right choice here since they have equity and they are about to file BK which will affect any new financing they need to buy it back.  The purchase of 65K is still considered 100% even though the property's value is more than the purchase price, they will end up loosing their most valuable quality which is the current 35k of equity.

Josh Green · Answer

how poor is their credit?

Suggest creative financing strategy for this situation?

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