Buying a home with a Reverse Mortgage

Buying & Selling Real Estate
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Buying a home with a Reverse Mortgage

Curtis H.
Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes

So I have learned that when trying to create a list with owners who have less than 10% equity, I accidentally made a list of a bunch of reverse mortgage owners and mailed all of them. LUCKILY I only mailed one zip code. But the phone rang...

Situation...

85 year old lady with a BofA Reverse Mortgage and following details...

Amount - $735K in 2009

Home is worth $550K-600K MAX right now if completely dolled up

Loan term 70 months @ 2.74% ADJ

Lives with 1 dead beat son, the other son is in jail. Both supply no income. Believe it or not this is a good area.

She wants out but is too old to think about how to make that happen and what to do with her sons.

She is ok with living in an apartment

My thoughts so far...

From what I have researched, if she is the only borrower, when she dies the sons have to pay off the loan immediately or they are kicked out anyway because the bank will sell to get their money back. So either way they are going to have to move whether she sells to me or the bank sells it when she passes.

This is for me to live in, not an investment opportunity. So there doesn't need to be a whole lot of meat on the bone. My primary goal is to get into a place with as little out of pocket money as possible. Making the payments isn't a problem. This scenario may not work because my guess is a significant dollar amount will be required to be payed immediately when she sells. I don't know that figure, nor would she tell me how much she is getting monthly.

Has anyone bought a home that has a reverse mortgage on it?

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Account Closed
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y

Reverse mortgages don't make good subject-to deals as they are due and payable when the borrower (or the living spouse) dies or when the property is no longer their primary residence. The borrower and their heirs can pay off the loan at any time for 95% of current market value. So if your borrower owes $735K and wanted to sell today, the bank has already agreed to a short sale as part of the mortgage terms. The payoff is 95% of the appraisal value. There is no deficiency judgment on a reverse mortgage.

Do you know the seller's actual mortgage balance? $735K is the max amount on the line of credit. If she's already borrowed more than the value amount, she will get no proceeds out of the sale.

The short answer is no, you cannot take over payments on a reverse mortgage and live in the property. IMO, reverse mortgages lenders are staying on top of residency (and deaths) of their borrowers and are calling loans due and payable in full relatively quickly.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    The reverse mortgage is due and payable..when the owner moves out, or dies, or doesn't pay the insurance. So it's likely you'd get foreclosed on. Unless you knew the current balance owed, you can't make a decision.

    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Reverse mortgages don't make good subject-to deals as they are due and payable when the borrower (or the living spouse) dies or when the property is no longer their primary residence. The borrower and their heirs can pay off the loan at any time for 95% of current market value. So if your borrower owes $735K and wanted to sell today, the bank has already agreed to a short sale as part of the mortgage terms. The payoff is 95% of the appraisal value. There is no deficiency judgment on a reverse mortgage.

    Do you know the seller's actual mortgage balance? $735K is the max amount on the line of credit. If she's already borrowed more than the value amount, she will get no proceeds out of the sale.

    The short answer is no, you cannot take over payments on a reverse mortgage and live in the property. IMO, reverse mortgages lenders are staying on top of residency (and deaths) of their borrowers and are calling loans due and payable in full relatively quickly.

    3Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    RMs are annuities based on the value of the home and age of the borrowers. Mortuary tables are used just as in insurance contracts and are usually on a basis of joint ages of a H&W or the age of a single borrower. If a spouse dies that was underwritten on the loan the loan is not called due, if it was made to a borrower who later married and died that new spouse may not be included, state law will prevail. Dead beat sons need to move. And as mentioned, moving out, failing to pay taxes and/or insurance are events of default. You may not assume the contract as there are no payment made to the lender. The only way to get that property is by cash payoff. :)

    1Reply
  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    12y

    @Wayne Brooks

    @Account Closed

    I just want to make sure I have this right...So if the amount is $735K, and she has been getting monthly payments for 5 years, and the loan term is for 6 years, that she may have gotten a lump sum already? I guess my thinking is if she never elected to get a huge lump sum in the beginning, and have only been getting payments, that she has not borrowed nearly as much as the place is worth?

    Also, if she sells to me, they will call the loan due for 95% of the appraised value today, which say is $550K, then I would have to get a loan like any other house on the MLS and pay off the lender. Correct? So either way, once the banks get someone to agree to a reverse mortgage, they win. I thought maybe I could get away with paying only the balance she borrowed and some fees, and she gets the remainder in monthly payments that she needs to live off of, and the rest of the payments get passed to her sons when she passes.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    The $735k was a max. As stated before, you don't know what the current pay off is. She could have recieved a large lump sum, plus monthly payments, or just monthly payments. In any event it will be a straight up sale if she has equity, and the reverse mtg is gone, Or if it's upside down, then a short sale at 95% of appraisal. Either way, the loan is gone and there are no more payments, and the full price has to be paid by the buyer at closing.

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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    12y

    @Wayne Brooks

    "and the full price has to be paid by the buyer at closing"

    Thanks that is all I needed to hear :-)

    BUT...

    What if the payoff is not that high, could I in theory have her do seller financing for the rest? So I pay off the reverse mortgage amount with fees, and she carry the rest? That's the part I'm not crystal clear on. Or are you saying there is no way to get out of paying AT LEASE 95% of appraised value in cash?

    And thanks your answers have all been helpful and I think will be to others. I searched for Reverse Mortgages and not that many posts came up surprisingly.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Curtis H.:
    @Wayne Brooks
    "and the full price has to be paid by the buyer at closing"

    Thanks that is all I needed to hear :-)

    BUT...

    What if the payoff is not that high, could I in theory have her do seller financing for the rest? So I pay off the reverse mortgage amount with fees, and she carry the rest? That's the part I'm not crystal clear on. Or are you saying there is no way to get out of paying AT LEASE 95% of appraised value in cash?

    And thanks your answers have all been helpful and I think will be to others. I searched for Reverse Mortgages and not that many posts came up surprisingly.

    The borrower owes only the amount she borrowed if she's not upside down. If she's upside down then she owes 95% of current market value

    I see very few RMs with equity, but I'm sure they are out there.

    If you don't know her balance and she won't tell you, then there's no way to make a deal. Additionally it sounds like she needs cash proceeds from the sale to move, and to relocate her son. Even if she has equity, how much do you have for a down? Do you have enough to pay off her mortgage and for a down? Are you eligible for a mortgage?

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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    12y

    @Account Closed

    I guess I just need to get that info in order to move forward, but doesn't sound like much of an opportunity at all. What's confusing is if a RM is for people who own their home free and clear, and they did NOT take a lump sum of money, how can they NOT have equity? I don't get that. So if they own a $600K house free and clear, and get a Reverse Mortgage where they got $100K up front and have borrowed another $200K in monthly payments over 5 years, isn't there $300K left somewhere? Or am I missing something? Is that what the bank is counting on? Them dying with $300K worth of equity in a home they own the rights to?

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Without knowing the balance you are just guessing. The borrower may have refinanced and taken a huge lump sum to pay off other mortgages and is taking the remaining amount of credit in payments. She could owe $500K, she could owe $700K. The lenders set the amount based on age and area and then they are committed to it.

    A few weeks ago I got a call from a daughter managing her father's affairs and he needs to move into nursing care. Since 2005 he's borrowed $650K, his max credit line is $900K. The property is worth $500K. It's happening all day long where I am. The vast majority of upside down ones that I see go to foreclosure, as soon as the lender is notified that the borrower isn't living in the property. There is no incentive for the heirs to open a probate or manage a trust in order to facilitate a short sale. It's the rare family that can pay the 95% of market value to keep the house. If they could, they wouldn't have used an RM in the first place.

    But get this: If the borrower is upside down, and they have access to refinancing or cash, they can payoff the mortgage at 95% themselves. You can short pay on your own loan and stay in the property. That's a newer ruling from HUD. I doubt most seniors are abusing RMs because the loan product is expensive and, like I said above, they would be using a better loan if they could.

    IMO, RMs are a numbers game for the lenders and a free money grab for many borrowers. The loans are insured by the feds so the lenders need to make enough profitable loans to offset the bad ones

    0Reply
  • Rick H.
    Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    12y

    Curtis - I've done plenty of RM deals. Stop speculating and go get the facts from the borrower. Facts mean current loan statement, not anecdotal "I think" stuff.

    Normally, two security instruments are recorded. In CA, two concurrent trust deeds are recorded, equal amount, one for lender, one for the GSE guarantying loan (FHA, etc.).

    As stated prior, any number of events are considered "maturity events" and will trigger breach and ensuing non-curable default to be recorded.

    Since the majority of RM's written are for the HECM product with a credit line, a copy of the escrow closing statement will show how much the initial credit line was accessed. A low initial draw and relatively short elapsed time may mean that there is equity remaining in the property.

    Acquiring property from anyone about 60 years of age or older will, IMHO, increase your chance of exposure to a relative who, believing their future inheritance has been compromised, be quick to try and unwind your deal if you are not careful, citing elder abuse. If claimed, you've got a better chance of surviving a twenty year term as a convicted child molestor in a Turkish prison.

    Good investment tip: cigarettes. Better than bit coins for prison barter.

    1Reply
  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    12y

    @Account Closed

    That is just a weird product from the banks. Loaning $900K on a $500K property? So what you are saying is this makes no logical sense and I agree.

    @Rick H.

    You encourage and scare me in the same post :-)

    So you have done plenty of RM deals, but at the same time there is a HIGH possibility of exposing yourself to kids protecting their meal ticket and claiming elder abuse. My area there is a high number of seniors, so the potential if I became educated about it is high. So has anyone ever claimed you did the same thing to their poor old parent? Did you come out ok?

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Curtis H.:
    @K. Marie Poe

    That is just a weird product from the banks. Loaning $900K on a $500K property? So what you are saying is this makes no logical sense and I agree.

    Actually the product makes sense when we don't have a real estate crash. The lender made the loan in 2005 when the property was worth about $700K and the borrower was 74. So they calculated appreciation and number of years they thought the borrower would live and loaned based on that. Property values haven't recovered to Bubble prices in many places and the property is now 10 years older and needing repairs to make it sell-able, so that further reduces the value.

    I still follow up on RM leads because being able to purchase at 95% of current value in some areas would work for rentals for me. However, if the property isn't held in a trust, the deal is a no go. Probating a property in order to transfer it at 95% of value isn't going to happen on my dime. :)

    0Reply
  • Brandon Foken
    Wholesaler · San Francisco, CA · Member since 2012 · 259 posts · 147 votes
    11y

    I don't have anything to add, but I'm negotiating with a seller right now that has a reverse mortgage so this was all really good information. Helps me know what questions I need to ask and what information I need to know before I can present an offer (if one makes sense). Hopefully they haven't got to their maximum credit limit. I'm lucky here in the Bay that even though she took out a RM in 2008, values are back to those levels or even above them.

    0Reply
  • Micki M.
    Flipper/Rehabber · York, UK · Member since 2013 · 895 posts · 453 votes
    11y

    Thanks for posting everyone, I was hoping to find a creative finance solution with an owner who has a reverse mortgage and now I understand the limitations much better.

    0Reply
  • Andrew Angelo
    Rental Property Investor · Colorado Springs, CO · Member since 2016 · 7 posts · 1 vote
    9y

    I just got off the phone with my first direct mail hit and it's similar to this. RM with ARV 270k and owed is 200k and needs 10k repaired.

    The only way she'll agree to something is if she can get money to pay rent after she sells.

    I work for NASA, but please, someone tell me if there is any meat on this bone.

    P.s. she is defaulting because of missed tax payment $1100

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  • Pratik P.
    Flipper/Rehabber · Sacramento, CA · Member since 2016 · 807 posts · 815 votes
    9y

    @Andrew Angelo Seems like there may be something there. If you're in a very hot market where $15-20k profit is considered good, then that may work if she'll sell at around or below 210k. Not much more though.

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