Single Family Home with Second Mortgage They Can't Afford

Buying & Selling Real Estate
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Single Family Home with Second Mortgage They Can't Afford

Matt Morgan
Lakewood, OH · Member since 2013 · 22 posts · 1 vote

I have a question regarding a real estate transaction. I have came across a home in northeast Ohio. They can barely afford the home and it has nearly gone into foreclosure.

The home was built in 2000 for $750k; however, it is only valued at $400-450k. They paid for the home nearly all in cash except for a mortgage of $125k. When their business was doing poorly they borrowed $225k in a second mortgage.

I was listening to a podcast about how it's possible to offer the second mortgage company a very small amount of the actual loan, because they would likely receive nothing in foreclosure. Then you would do a transaction where you would receive the first mortgage for a certain value and receive the house. This would help out the seller, yourself, and the mortgage company through the process. 

Do you have any ideas of how I could possibly structure a deal in a situation like this? I would love to buy their house from them, or help structure a deal to help them.

Please let me know if you have any suggestions. Would love to hear them!

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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
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From the information you posted the property is worth $450k and has a debt of $350k.  There is $100k in equity.  Neither lender is going to give a discount at this point.  They do not have to.

These people need to simply sell the property if they can not afford it and if for some reason the price comes in closer to the $400k then maybe one of the two loans will take a short.  They will not contemplate that short payoff until something actionable occurs.  

The plan that you are describing is not really reality.  Lots of details missing.  Too many to really dig into it here nor does this description seem to warrant any such ideas.  

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  • Kevin Yeats
    Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
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    Matt, You don't explicitly state that the owner needs/wants to sell the house but I presume so.

    Taking the numbers you state as accurate.  From the second note holder's perspective, they could take out the first noteholder for $125K (perhaps less) and then foreclose on both notes and get the house (value of $400K) for only $125K.  If second holder then sold this $400,000 property at a 10% discount, the property would sell for $360,000.   Netting out closing costs and the second note holder comes close to breaking even.

    If you think you can get this house for $100,000 (ish), that would require a LOT of debt reduction by both the first and second note holders .... probably something that they won't do.  Basically, do you want both first and second noteholders to allow a short sale?

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
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    From the information you posted the property is worth $450k and has a debt of $350k.  There is $100k in equity.  Neither lender is going to give a discount at this point.  They do not have to.

    These people need to simply sell the property if they can not afford it and if for some reason the price comes in closer to the $400k then maybe one of the two loans will take a short.  They will not contemplate that short payoff until something actionable occurs.  

    The plan that you are describing is not really reality.  Lots of details missing.  Too many to really dig into it here nor does this description seem to warrant any such ideas.  

    2Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
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    What are the terms on the 2nd? Is it 15 year?  I'm thinking they should look into refinancing the two mortgages into one 30 year fixed.

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  • Matt Morgan
    OP
    Lakewood, OH · Member since 2013 · 22 posts · 1 vote
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    Originally posted by @Kevin Yeats:

    Matt, You don't explicitly state that the owner needs/wants to sell the house but I presume so.

    Taking the numbers you state as accurate.  From the second note holder's perspective, they could take out the first noteholder for $125K (perhaps less) and then foreclose on both notes and get the house (value of $400K) for only $125K.  If second holder then sold this $400,000 property at a 10% discount, the property would sell for $360,000.   Netting out closing costs and the second note holder comes close to breaking even.

    If you think you can get this house for $100,000 (ish), that would require a LOT of debt reduction by both the first and second note holders .... probably something that they won't do.  Basically, do you want both first and second noteholders to allow a short sale?

     Thanks. So really there is no way to help them out?

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  • Kevin Yeats
    Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
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    You could give these borrowers some money.  That would really help them

    Bu more seriously and realistically, they either need to find a lender willing to refi both mortgages into a single first mortgage or they need to find a way to generate more income from their business.

    Truly, they bought too much home and their income dropped as did the value of their house .... but their debt did not drop.  Such is the nature of debt.  They risked their home when they used it as collateral, in essence, for a business loan.  It didn't create more value and thus their home is at risk.

    Bottom line, refi if possible and/or work harder to generate more income.

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
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    As Dion stated, there's no reason for the second to take a discount.  There is enough equity for them to come out whole, or at least close.

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  • Phillip Tillotson
    Ozark , MO · Member since 2014 · 61 posts · 40 votes
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    For me it depends on what their goal is. Do they care if they have to move or not? If they absolutely want to stay then wouldn't it best to buy out both notes and then do a lease /w option to purchase? (this is assuming they don't qualify to have both loans wrapped) They'd have a lower monthly payment and they'd be able to stay in their house.

    If they don't care about keeping the house then they should straight sell the house as mentioned before.

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  • Matt Morgan
    OP
    Lakewood, OH · Member since 2013 · 22 posts · 1 vote
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    Originally posted by @Phillip Tillotson:

    For me it depends on what their goal is. Do they care if they have to move or not? If they absolutely want to stay then wouldn't it best to buy out both notes and then do a lease /w option to purchase? (this is assuming they don't qualify to have both loans wrapped) They'd have a lower monthly payment and they'd be able to stay in their house.

    If they don't care about keeping the house then they should straight sell the house as mentioned before.

     They would like to stay in the home. Could you explain this further? 

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  • Phillip Tillotson
    Ozark , MO · Member since 2014 · 61 posts · 40 votes
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    Traditionally, this was used when houses were selling fast. People would find a house that they wanted, but couldn't instantly qualify for. To solve this they would agree to lease the house with the option to purchase. They would put down a large security deposit that went towards the purchase of the home once they were able to qualify for financing to buy the home. Lease w/ option to purchase. Two separate agreements. If they failed to qualify within the agreed upon lease period then the home could be sold and the buyers would lose their security deposit.

    There are creative ways to use this solution. It would be best for you to research this solution to determine if you want to use it. There are gotchas.

    Finally, don't use this like a crook. You'll lose a lot of money.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
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    Unless the OP comes to the table with $350k there is nothing to do here.  Do not presume you can buy either of these notes.   You can pay them in full but it is extremely doubtful either of these loans would be interested in selling.

    I do not see much hope for Phil's ideas. Anything less than paying off the two mortgages here is not worth the risk. Neither a wrap nor any type of Subject To structure is going to be able to provide a discount on the underlying mortgage obligation. So the balance and payments due are, well, what is due. Messing with any of that, from these homeowner's point of view, is likely to remove any relief they 'might' obtain from the mortgage companies in the first place. In a wrap or Sub2, you are inferior to their liens and they can simply foreclose you out. They have no obligation to take less than what is totally due.

    If we want to talk about what is in the best interest of the Borrower's.  Sell the house.  They will get a couple of dollars to put in their pocket and they will avoid foreclosure while paying both mortgages in full.  

    Most of the time, the best answer is really the simplest one.  

    2Reply
  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
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    If they cannot refinance both loans into one lower monthly payment and want to stay in the home but can't afford it, they need to increase their income somehow, by working extra (part-time job if their business won't produce more right now) or rent out a room or two to cover the difference. As others have said, if they only owe $350K total and it's worth $450K, the banks have no reason to take less than they are owed. They should research what is available out there for what they can actually afford if they do sell, then see if it would be worth taking the hit and selling to clear up their finances or if it's better to stay where they are, especially if there is potential for more income in the near future. Not sure about bankruptcy protections, but maybe a lawyer could tell them how to keep their home and lower the payments. Or see if they qualify for the HARP or FHA Streamline refi programs that have much easier qualifications for refinance, but I'm assuming they've already tried that route.

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