Help Solving THIS problem, drawing a temporary blank..

20 Replies

Alright BP, any and all thoughts on this particular deal would be appreciated! I'm trying to solve a problem that a client is facing, but I'm currently having just a slight 'brain fart'. 

Owner has a property (Town Home), that they took 2nd mortgage out on; Balance: $47k (total was $50k'ish)

Owner has unpaid balance of $5k (reason for pre-foreclosure)

Mortgage payment of $420/mo

Auction is very soon = owner wanting to rid the property.

ARV is $75-$80k.

Repairs to get rent ready = $5k-$10k 

Rent for the area is approx. $1,100. 

I was looking to structure this as a subject-to deal and pay the arrears, to keep the property from going to auction and reinstating the mortgage. The owner is fine with sub-to, as I explained a few different methods in which we could assist. 

My question is, with the numbers stated above, how would YOU structure this? Does this make sense to sub-to with the figures I've listed? If not, I would like to hear how you would assist this individual. What methods, if any would you use to solve this person's problem. Thanks for any guidance!

Also, if I didn't post enough info, let me know and I'll provide what I can. 

Updated over 2 years ago

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Updated over 2 years ago

I was in a bit of a rush typing this out, I mistakenly put "2nd mortgage", when in fact it was just an unpaid balance on the loan that was taken out against the property. There are no other additional mortgages. The mortgage for the $47k is $.420/mo. Apologies for the confusion.

You said “he took a 2nd mtg”....is the $47k and $420/mo for Both mtgs?

If so, it looks like a great deal....but I suspect this is not the case. 

@Wayne Brooks I totally butchered that. I was in a rush to ask for help that I labeled it as a "2nd mortgage", its not. It's simply the unpaid loan balance (original mortgage) against the property. So the total amount for the loan was $52k. The remaining balance is $47k with $5k unpaid. The monthly mortgage payment for that loan is $420/mo. 

@Jason D. My apologies for speeding through the initial post. This is actually the 1st mortgage/original. 

There are $150 in Hoa fees, the taxes are $650 annually, and the insurance is approx. $75/mo.

The Town Home was built in the '70's, and it could use a 'deep clean'/ replace floors (carpet). The HVAC was recently serviced, as well.

@Jason D. Awesome! Thanks for the reply. That was what I was thinking too, I just wasn’t sure if there was any other creative ways of structuring this, so I wanted to hear from BP what you all would do in this scenario.

I had actually explained the sub-to in depth to the owner. I told them that I could pay the arrears of $5k, start making the monthly payment, and that would reinstate the mortgage. I would then assume the 47k loan and we would transfer the title/deed over to me (my business). They were already ahead of me; they stated, “it sounds like you’re going to pay my unpaid balance of $5k and get the deed/title?” I agreed and they were totally fine with that.

I was thinking of doing some light rehab for a sell, but the other option was to hold it as a rental or possibly structure a owner finance type of deal, though I’m not too sure of many people interested in buying/owning Town Homes... of course I could always market it.

@Jonathan Newsome

Id invest in a lien search.

A red flag for me would be the hoa. He doesnt pay his mortgage but paid his hoa fees?

I got a little lost on the property info you wrote but just make sure someone else isnt in position to take property from under you or has to get paid wiping away any potential profit. Sometimes the hoa moves faster on foreclosing than a bank holding 1st position. Not that they’d win but would need to be satisfied or at least partially satisfied.

@Jonathan Newsome Based on the numbers provided, it looks like a decent buy and hold for you, cash flowing $180/month after holding back 20% of rent for maintenance and vacancy. ($1100 - 420 - 150 - 55 - 75 - 220) The ROI is 14.4% if you're all in at $15k and don't refinance, but a portfolio lender should be able to improve that. A first time homebuyer would likely be interested since there isn't much cash flow for other investors at $80k ARV.

@Jonathan Newsome

Are you thinking of assuming the original mortgage? Most mortgages I’ve seen are not assumable. If the mortgage company finds out, they could call the loan due.

@Matt M. I would assume the responsibility of the mortgage payment, but on paper they would still be the sole individual on the Mortgage.

@Jonathan Newsome

Right but if you transfer deed, there’s a chance the mortgage company could find out.

Years ago my mom co-signed a mortgage for me. Simply needed her to co-sign, I am self employed so income was my issue. I wanted her to quit claim the deed to me to get her name off the deed, my title agent talked me out of it. Unless it’s assumable, the mortgage company will definitely have an issue if the mortgagee is not on the deed. Be careful.

@Javier D. You're right. I called the owner back and turns out they HAD owed $2000 in HOA's. The thing is, the owners mother originally owned the property and passed away, so the owner took the death certificate to the court and the judge dismissed the fees, supposedly. I'll still do my digging but that's what I have right now.

@Jonathan Newsome

How long have they held the property? Is this the original loan at time of purchase or was this mortgage/equity loan taken long after purchase?

Reason I ask is the difference in 50k of current debt to 80k ARV. I'll assume this was a equity loan or method for them to pull equity. If this was original loan I'd question arv.

@Will C. You bring up a great point! So this was taken out long after purchase; it was an equity loan. They just got behind on the payments.

New to this type of deal, but essentially do you give the monthly mortgage payment to the current mortgage holder, and expect them to pay it in their own name?

Beyond the legal concerns of that, how do you force someone flush with cash in the pocket, with a history of not paying their bills, to do exactly that?

I'd want as much control over this as possible, and with a key cog being that person doing what they're supposed to do, it seems risky, given their history.

I might be missing something totally here, and this might be a great deal...but if it still contingent on someone doing what they're supposed to do with a flaky history of doing it...I'd personally be wary of that...

@Joe P. I most definitely do not expect the owner to do anything whatsoever with the mortgage payment. Actually, the way it would be structured would be in such a way where I was personally making payments on the mortgage. I'd use a Letter of Authorization, which will allow me to contact the Lender and explain our situation; I will be the individual taking over and making the payments on that property. I'll explain that if any payments are behind, I will be bringing those payments current. The way I'd set up the payments would be in a separate escrow account, that way they can be disbursed from escrow account to lender on the date needed.

Originally posted by @Jonathan Newsome :

@Joe P. I most definitely do not expect the owner to do anything whatsoever with the mortgage payment. Actually, the way it would be structured would be in such a way where I was personally making payments on the mortgage. I'd use a Letter of Authorization, which will allow me to contact the Lender and explain our situation; I will be the individual taking over and making the payments on that property. I'll explain that if any payments are behind, I will be bringing those payments current. The way I'd set up the payments would be in a separate escrow account, that way they can be disbursed from escrow account to lender on the date needed.

If that all works, then great. Still it seems like an odd situation but it must be somewhat common given the steps you described.

@Matt M. To be honest, I don't want the mortgage in my own name. It's currently fine where it's at and also, transferring it to my name defeats the purpose of a 'sub-to', doesn't it? If I wanted it in my own name, I honestly could just out right buy the property with financing. 

This is honestly a way where: (a) the current owner feels comfortable with an investor (me) assuming responsibility for the loan, (b) the owner doesn't want the property to go to auction, (c) the investor does not want to go through the process of obtaining a mortgage when one is already in place and set at a fixed interest rate, (d) both parties understand all risks involved. I have a few exit strategies, IF the Due On Sale clause is triggered and I've also explained that to the owner as well.

Also, I mentioned it in another post somewhere above, but I will be contacting the Lender to let them know of the current situation (through a signed Authorization Letter). I'm definitely not hiding anything from them, as I would hope that in explaining that I'm bringing the loan current and will begin making payments promptly, they will say that this is ok or not ok. Hope this helps explain my reasoning Matt.