Borrower about to loose house - Creative Financing Ideas Needed

45 Replies

So I received a call for help on this scenario.   Trying to figure out how it could work. 

Borrower faces foreclosure sale next week.  He needs $19,000 to bring his first position loan current.   He is living in the house.   He owes about $178k on a 30 year fixed at 3.74%  and reports there are no other loans or liens on the property.   Approximate value of the home is $800k.   Houses in neighborhood in central California where houses are selling for $650k- $1M.    

He doesn't want to sell the house.  I'm not a registered lender so max I could charge is 10%, so the risks are definitely not worth the reward, but maybe we could do a joint venture or figure out a way for me to get paid?   He is willing to payout a considerable amount as he is about to loose $600k in equity.   Maybe he gives me a quick claim deed, that I don't file, we do a wrap, and he buys me out in 1 year?   Or he employs me to do some consulting work for him, and secures the amount due with the house?   

He ultimately wants to keep the house, and not repurchase it because he is grandfathered in with very low property taxes.  

Time is of the essence.  Ideas? 

Originally posted by @Bryan Miller :

So I received a call for help on this scenario.   Trying to figure out how it could work. 

Borrower faces foreclosure sale next week.  He needs $19,000 to bring his first position loan current.   He is living in the house.   He owes about $178k on a 30 year fixed at 3.74%  and reports there are no other loans or liens on the property.   Approximate value of the home is $800k.   Houses in neighborhood in central California where houses are selling for $650k- $1M.    

He doesn't want to sell the house.  I'm not a registered lender so max I could charge is 10%, so the risks are definitely not worth the reward, but maybe we could do a joint venture or figure out a way for me to get paid?   He is willing to payout a considerable amount as he is about to loose $600k in equity.   Maybe he gives me a quick claim deed, that I don't file, we do a wrap, and he buys me out in 1 year?   Or he employs me to do some consulting work for him, and secures the amount due with the house?   

He ultimately wants to keep the house, and not repurchase it because he is grandfathered in with very low property taxes.  

Time is of the essence.  Ideas? 

 Most people that do a lot of hard money loans will not lend on owner occupied, thanks to the CFPB existing and Dodd Frank (this is what they cite for why they will not do it).

That puts him in a tough position. I'm sure if you do some "dialing for dollars" someone out there will lend him in 2nd position (think 16% and 4 points, if not more) and make him sign a document wherein he promises NOT to live there, but we all know dang well he does live there. Which means, whoops, someone on the verbally just convinced him to commit fraud in writing. And if it comes to pass that a judge reviews this, what said judge will see is an allegation about someone doing something naughty on the phone versus documented proof that someone lied in writing before a notary public. Yay for the unintended consequences of well-meaning legislation. I'm not a lawyer and this is not legal advice, but I wouldn't want to be standing  before a judge in that person's shoes! Really sucks that this person put his head in the sand like that.

So, another alternative is that someone could buy this home cash. Maybe it's a long game -- offer him a 2 or 3 year lease with discounted rent along the lines of his current PITI. That's great that he says that he does not want to lose this property, but that was a position to take 6 months or a year ago, not today at the last minute. His actions say that he's actually fairly indifferent about losing the house (and perhaps he needs to be educated on this fact), but he probably doesn't want to immediately lose a place to stay. Great, that 2 or 3 year lease might let him milk it a bit longer, and set it up so the buyer puts $50k in his pocket to boot ($200k to cover the loan + $50k for him + $10k for you = $260k cash... making up numbers). And then the person playing this long game has multiple viable exits that all make it worthwhile.

If you'd found this guy two or three months out there would be a few easy creative finance solutions involving above board vanilla 30YF Fannie stuff. 

If you do buy it and allow him to stay (via lease or other means), make sure he signs something that says in BIG BOLD LETTERS something to the effect of "I UNDERATAND IAM SELLING MY HOUSE TO JOHN SMITH AND THAT IF I DO NOT MEET THE TERMS OF MY LEASE, I MAY BE EVICTED.  I ALSO UNDERSTAND THAT AT THE END OF MY LEASE, JOHN SMITH MAY OR MAY NOT ALLOW ME TO RENEW MY LEASE.  IF THE LEASE IS NOT RENEWED, I WILL HAVE TO MOVE OUT."

I've heard too many horror stories in which the investor bought the house, allowed the seller to continue living there (on a lease) and then the seller (now tenant) sued the investor claiming they didnt know they were "actually selling the house".

@Bryan Miller , Chris gave some good input that obviously comes from experience.  Let me give you the advantage of my own experience.

Don't even think about lending money in this situation.  The owner doesn't know you or, frankly, care about you.  His only priority is to fix his immediate situation to forestall the inevitable foreclosure down the road.  As @Chris Mason pointed out, it says a lot that he's that far gone with a house like this.  If he can't take care of his own problem now, it won't help if you add to his debt, and ultimately you may end up waiting for your money through his bankruptcy.  Also, if he happens to have anyone else in the house whose primary language is not English, you may find yourself explaining the situation in a deposition.  How do I know this?

Solution: get the deed.  He may not want to lose his equity but that's exactly what will happen through foreclosure, so now is the time to talk some sense into him.  You won't have time for conventional financing but you could also buy with $200k hard money, give him a second for $100k to get him out of the house now (or offer a portion of the sales proceeds if you want to be sure he doesn't trash the house on the way out), then flip the property for the rest of the equity.

Whatever path you take, it's worth your time and money to consult with a knowledgeable attorney for this one.  Remember you're in California and some people don't take a kind view of investors working with a homeowner in foreclosure.

How old is he?  Most hard money company's don't lend to owner occupants. This is not legal advice but you'd likely need a private individual who is qualified under an exemption from dodd frank. Also, $19,000 is a small loan most people wouldn't lend a low amount like that.  

If he can't afford a 178k loan, is he going to be able to afford a higher payment if he is lent money?

He has a way out to make his life easier if he has substantial equity.

@brett

@Brett Goldsmith    Borrower is 45 years old.  Was counting on a lump sum payment to catch him up, but it hasn't materialized for him.  

He was ignoring the situation, hoping for a business deal to develop and then get caught up.  He is focused now on creating more cashflow.  I totally understand your point. 

@Robert Burgess   Good points.   Thanks for sharing what sounds like hard earned wisdom. 

@Chris Mason   - Interesting.  The problem with anything above 10% is that it may look usurious, if I have to foreclose.   

I am considering lending in second position, but requiring a quick claim deed to the property,  as insurance, and if borrower fails to perform on the first or my 2nd position note, then file the deed and take the house.  Much cleaner than foreclosure.   Thoughts?

@Bryan Miller First of all, it's a Quit Claim Deed.  Secondly, depending on your state laws (and left coast consumer laws won't help you)  the old "hold a QCD to avoid having to foreclose" usually won't stand up in court.....referred to as "circumventing foreclosure laws".

I'm sure your market there is competitive, so the worst he'd probably do at foreclosure is the property sells for $600-$700k and he walks with $400-$500k cash.....probably much better than you'll do for him.

This fool has $600k equity in this property and can't get another loan against it?

This isn't an emergency if there is a clear head in his corner.

@Tom Gimer    It's not that easy.  Hard money lenders won't lend to him because he is living in the house.  Bank financing would take too long.   The sale date is in 7 days. 

@Bryan Miller BK is the easy fix as it buys time for clear thinking. Unfortunately no investor gets rich.

If he files bankruptcy, he can buy some time, but that comes with other obvious problems.

Equally, if he files homestead, that will buy him a little time.

If the property forecloses and is sold over the existing loan amount, he will receive the difference.  So, not ALL of his equity is lost.  The bank doesn't keep all of the foreclosure money, just what they are owed plus fees, accrued interest, attorney fees, and any cost associated with foreclosing.

At the very least, he should contact the lender and discuss options.  They may be willing to work with him, and perhaps do a loan modification.  My guess is that doing that may be his only option for actually staying in the home.  Everything else is just buying time....limited time.

@Cara Lonsdale Right now -- due to complacency -- the only important to-do is buy time.

What other obvious problems would BK create? Time either facilitates the workout with secured parties or allows owner time to sell at retail.

I certainly agree with contacting the lender... through BK/foreclosure atty.

Originally posted by @Tom Gimer :

@Cara Lonsdale Right now -- due to complacency -- the only important to-do is buy time.

What other obvious problems would BK create? Time either facilitates the workout with secured parties or allows owner time to sell at retail.

I certainly agree with contacting the lender... through BK/foreclosure atty.

 The most obvious problem he creates by filing BK is that he eliminates many lenders from being able to loan to him.  By narrowing that field of options, he may be buying time, but to what avail?  If he isn't able to refi, then what does he have?  Most lenders have a 2 year minimum seasoning on BKs.

Honestly, IMO, his best bet is to contact the lender (NOT the servicer, but the LENDER), and throw himself at their mercy for a loan modification.  If he has the kind of equity he states, they shouldn't have an issue with doing this, and placing the amount owed onto the principal, and perhaps spread the loan term out to reset at 30 years, or even going to 40, which would lower his monthly payment, and lessen his burden, which is what I am guessing got him in the trouble he is in now.

Thanks everyone for your thoughts and insights!   He has credit issues, so he already has damaged credit, so BK may be an option that doesn't have tons of downside.  The rate is 3.74% so it's hard to beat that if he refinances now, with bad credit.  Cara  -  Interesting idea to do a loan mod. 

Originally posted by @Bryan Miller :

So I received a call for help on this scenario.   Trying to figure out how it could work. 

Borrower faces foreclosure sale next week.  He needs $19,000 to bring his first position loan current.   He is living in the house.   He owes about $178k on a 30 year fixed at 3.74%  and reports there are no other loans or liens on the property.   Approximate value of the home is $800k.   Houses in neighborhood in central California where houses are selling for $650k- $1M.    

He doesn't want to sell the house.  I'm not a registered lender so max I could charge is 10%, so the risks are definitely not worth the reward, but maybe we could do a joint venture or figure out a way for me to get paid?   He is willing to payout a considerable amount as he is about to loose $600k in equity.   Maybe he gives me a quick claim deed, that I don't file, we do a wrap, and he buys me out in 1 year?   Or he employs me to do some consulting work for him, and secures the amount due with the house?   

He ultimately wants to keep the house, and not repurchase it because he is grandfathered in with very low property taxes.  

Time is of the essence.  Ideas? 

 Hmmmm, "bring his first position loan current" and "reports there are no other loans or liens on the property."

better run a title report before you do anything. Something doesn't "smell" right. Think seconds, tax liens, IRS, utilities, unmentioned "other owners".

This might draw a laugh, but have you considered a personal loan from Lending Club or another P2P lender? No idea if that would work or what the interest would be, but it springs to mind since $19k is a relatively small sum. I think Lending Club loans go up to $40k.

@Cara Lonsdale This guy hasn't paid his mortgage in 18 months. The monthly payment amount isn't the problem. The problem would seem to be zero income. 

Current lender isn't going to modify without some payment... and regardless this isn't happening in the next 7 days. (My opinion.)

BK or foreclosure awaits.

Originally posted by @Tom Gimer :

@Cara Lonsdale This guy hasn't paid his mortgage in 18 months. The monthly payment amount isn't the problem. The problem would seem to be zero income. 

Current lender isn't going to modify without some payment... and regardless this isn't happening in the next 7 days. (My opinion.)

BK or foreclosure awaits.

 I think you're right, Tom.  

The question was how can he save his home because he doesn't want to leave or sell.  I was speaking to that.  I mentioned that a BK would definitely buy time, but then would limit options for any kind of lender conversation.  I understand he has no income, but if that were to change, and he provided a LOX (Letter of Explanation), you would be surprised what lenders can forgive, especially when there is SO much equity in the property, and it's an owner occ.  A loan modification would be an option at that point.  However, his options will lessen with a BK because the lenders can't apply conventional guidelines to the loan until the BK has at least a 2 year seasoning.

BTW, the call to the lender to request a loan modification will most likely also delay any foreclosure action as it really is NOT the lender's goal to obtain the house.  They want their money.  If the Seller shows signs of having the same desire, they will give him the time to work it out.

My main point is that communication with the existing lender is vital asap.  In the absence of that, the lender will continue as they don't know the Seller's intentions.

In the end, if the Seller sits on his hands, does nothing to save his home, then BK is the only option for delaying the inevitable, but it won't solve his problem, and he will lose his home in the end anyway.

there are laws about dealing with those in foreclosure and what you can and cannot do.  Like in Oregon its illegal to rescue it and lease it back.. I know silly but its the law .. do look up the foreclosure rescue laws in CA I know they are there @Sean OToole   knows them by Heart.

Now also the loan with Quit claim is totally illegal I know its done but anyone complains and your in hot water that is circumventing the borrowers right to cure.. so forget that one.

also if there is no junior debt and its a California trustee sale its probably going to sell for at least 75 to 80% of ARV so figuring no sales cost no fix up work.. that could be his best bet let it go to sale get the MASSIVE overage tax free and move on..

depending on your financial capacity I did this in Oregon 10 years ago.. and before the laws changed . I paid it off and gave my lady a life estate.. same kind of numbers it was a 250k house she owed 40k but did not want to move.. so I paid it off let her live there Totally free she just paid for her utls.. and she made it about 10 years.

property is now worth about 750k.. so not a bad deal for us. we are building 3 homes on it now.

so stroke a check and let him live there for free for a number of years and do an equity split down the line. 

other wise really the best for him is to let it go and get overage as his credit is toast already the BK will buy him some time but it will cost and he will end up in the same place.. maybe make a few more dollars. 

@? its too late in the process to call the lender and beg.... you need a bona fide sale agreement or letter from a for real lender and they may postpone. 

in CA once your 5 days from the sale the bank does not HAVE to do anything by law except a FULL payoff you cant just bring it current.. that is the banks choice of course.. were up here ion Oregon and Washington we would bring them current at 8am the day of the sale when the sale was scheduled for 11am.. Pissed off the court house steps folks big time.. as they were all ready to bid only to have it pulled from the auction.

Originally posted by @Jay Hinrichs :

@Cara Lonsdale  see my post above forgot to tag you  LOL

 Hey Jay!  Good insight as always my friend.

In AZ, a Seller has all the way up to the auction to redeem, file BK, or make arrangements with bank for a loan modification.  California is a consumer state, so my guess is that the rules/laws are as liberal as they get in favor of the owner.

As you stated, the lender doesn't HAVE to do anything, but I would think it'd be worth a call to the lender to discuss loan modification and/or document the process by going online and completing their form.  Most banks have a link near your loan account info.

But I agree with you Jay, if all else fails, let it go, sit back and wait for the overage check, and move on.

My advice to you, @Bryan Miller , is to walk away.  At the best, you're dealing with a person who has very poor money management skills.  At worst, you're being scammed.  

The problem with any sale/lease/repurchase deal is that it can be judged to be not a sale at all.  Rather, its a loan.  The money you put out to buy the place is the loan amount.  Rent is the payment.  The repurchase price is the balloon amount.  Do the math on those numbers and you've just made a usurious loan.

Or, you'll start out being the white knight that saves the day with a loan.  But then you don't get paid.  He already has  PROVEN track record of not paying the first lender.  You try to foreclose and now you're the dastardly huckster you conned him out of his house.

He needs (so he says) $20K, has $600K in equity in his property and can't scrape this up somehow?  He has NO other assets (e.g., a vehicle) he can sell?  If this is his ONLY asset and he has NO income then he needs to pull his head out of you know where and just sell the bloody house.

@Jon Holdman   for a little over a decade i did this foreclosure rescue last minute stuff it was hair on fire.. and almost all of them were within 3 to 5 days of the sale. And before it became illegal we rented many of them back and even gave them an option to buy us out.. after doing well over 100 of them

I can say that 90% we were evicting within the first 6 months.. exactly 2 bought the home back.. One worked for a company and got an esop sellout and got a big check and paid us off the other the family rescued it.

everyone else lasted on average 6 months a few went a year or more but that was rare.. we would let them stay until they moved or stopped paying we never gave them a drop dead date.. did not need to.

once you get into this end of it you will realize folks that are 3 days from losing their house are very poor credit risks and rental risks.. even though you let them start over their bad habits just surface again.

Maybe thats why Oregon made it illegal to rescue and rent back I don't know.

but talk about drama holly man..  and of course many had 75k worth of cars and a 50k RV in the drive way maybe a boat.. .LOL.. just cant manage credit..  those with true problems like illness or what have you would usually just sell and move on.

@Jon Holdman   although those with good equity I did give them cash on top of rescue no one sold us a home without getting some cash.

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