Urgent Advice Needed: Pre-Foreclosure Deal

8 Replies

I am new to real estate investing and have a potential opportunity (at least I think) fall into my lap. Someone that I know personally owns a very nice house that is currently listed for sale for over $1 million. From what it sounds like the house was fully paid for when it was built, but now the owner has taken out a home equity loan. The owner does not have an income and has stated that they cannot afford next months payment and need to sell the house asap. I saw an opportunity to a) help them out of their financial situation, and b) get a great deal on the house and immediately re-list it to hopefully make a nice profit. I presented the idea to an investor friend of mine who said he would put up the money for the deal if we could get it at the right price. I have no experience in this type of investment so I wanted to get some opinions on what i need to look out for and how i should structure the deal.

My questions:

1) How should i approach the property owner to present the deal? I'm not sure how much they owe on the loan and i doubt they would tell me. Do i just make a written offer and see what happens?

2) Are they legally allowed to sell the home for less than what they owe on the loan? Is this what would be considered a Short Sale? (I apologize, i am a total newbie in real estate)

3) Since i am not bringing capital or real estate knowledge to the table, how should i structure my portion of the deal? Commission, finders fee, percentage of profit once the house sells?

4) Is there a rule of thumb or a percentage of the appraisal i should be spending on a deal like this?

Thank you for the help!

Hi Drew,

1. "I'm not sure how much they owe on the loan and i doubt they would tell me." - your lender or agent can look up how much the maxed out HELOC line is in like 2 seconds, or you can pop down to the county recorder's office in person to find out. If the person is without income, it's a decent bet that he's maxed the HELOC out and has been living on it. IE: make next months HELOC payment by drawing on the HELOC itself (if anyone is curious why HELOCs are harder to get, this is exactly why). And now that it's maxed, he can't draw on the HELOC any longer for the next payment.

2. I find it highly unlikely they have an underwater HELOC that's a $1m line....

3. Your investor buddy should be perfectly happy to cut you a nice check. How else would you be motivated to bring the next such deal to him? But check with a lawyer in your state, I have no idea if that's lawful without you having a RE license. 

I agree with what Chris said and would also add that if you put it under contract and sell the contract to your investor you won’t need a realtor lic. Selling contracts is perfectly legal. The industry term is called wholesaling.

@Chris Mason thank you for your insight. Based on the situation and what i know about this person it would not surprise me if they were underwater on a maxed out HELOC. I reached out to the person and told them i had a buyer that was willing to purchase the home at a discounted price with the plan of re-listing it. Their response was "unless they can pay the asking price i will have to pass for now. I need full price in order to get my investment out." 

So would you say the next step is to find out how much is owed on the HELOC?
If they are underwater on the HELOC, can I approach the lender about a short sale or does the borrower have to request a short sale?

@Rick Zink what makes most sense to me is that i would split profits with the investor once the home sells. Is there a way to setup a wholesale deal like this, or would i only be making money when i transfer the contract to the investor?  Since neither of us are Real Estate agents, can we legally write up our own profit share agreement?

If you are going to attempt a short sale, the lender holding the HELOC is going to do an appraisal or BPO and they are going to want the property sold at/near fair market value. If there’s plenty of equity, the lender is going to want to be paid in full. I doubt very much they would take a settlement so that you could make more of a profit. I would definitely say first step is find out what is owed on the HELOC.

You can write whatever deal you want.  Attach it to the contract if you want. That's the awesomne thing about real estate.  You can make whatever deal you want. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here