The Call Every Real Estate Investor Will Eventually Get
I could hear the desperation in her voice. Diane was nearly hysterical. She had just found out that she lost her home of 18 years to foreclosure. An investment group bought her property at the courthouse steps for $70,000. Then, they promptly posted a notice on her door that read WRITTEN DEMAND AND SURRENDER OF POSSESSION.
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Diane had gotten my number from a Realtor that attended a class I teach about working with real estate investors. This Realtor told her I may be able to help. Of course, I felt bad for Diane. She’s a school teacher and is suffering from arthritis. And if things weren’t difficult enough she’s also the primary caregiver to a stroke patient.
She sent me an 8 page fax, complete with a letter from her attorney addressed to the foreclosing trustee and a copy of the eviction letter. It turns out that Diane’s foreclosure had an additional wrinkle to it. She wasn’t the owner of the home. Back in 2006, she sold it to an investor for $185,300. This investor allowed her to stay in the house and rent it back for $1,300 a month.
Less than two months later this investor flipped it to another investor for $265,000.
What amazed me most about all of this is that the investor who purchased the home for $265,000 was able to hang on to the property for 5 years. He must have had at least $500 a month in negative cash flow. Plus, he was underwater on the mortgage by over $150,000. I’m surprised he didn’t stop paying the mortgage much sooner.
In any event, Diane wanted to know if I could buy the house from the investment group that picked it up at the auction. She would then rent the house from me for $1,300 per month.
Now if you’ve been investing in real estate for long you’ve probably received a call like this before. It’s easy to convince yourself that there’s a lot of upside to doing a deal like this too. You get to help someone out of a bad spot. More importantly, you get the property for below market value with a built-in tenant.
But if you study history you can see that this deal has lose/lose written all over it.
Diane has had financial problems in the past. That’s why she had to sell the house to an investor in 2006. What happens if she encounters trouble again? I would have no choice but to evict her from a house that she believes is really hers. And do you think she would voluntarily leave without a fight after 18 years in the home?
I explained to Diane that buying the house and renting it back to her was not an option. She became very distraught. I was told you could help me, she said.
Yes Diane, I can help you. I advised her to start packing immediately because a law enforcement officer would be at the door in a few weeks to lock her out. I also instructed her to find another house to rent as soon as possible. She said she didn’t have the money to move and didn’t know where to go to find a rental property.
No problem, I said. I can get 6-8 guys to your house this weekend that will do it for free – and I’ll call property management company I do business with to find you a house to rent.
Diane said thanks, but no thanks. She was not going to move. After all, it’s her house right?