Newbie stumbled into a Preforeclosure

14 Replies

I'm trying to learn about buy and hold for myself, but I just stumbled into a situation with an acquaintance in West Houston / Katy that is in preforeclosure. I haven't done enough homework to know how to help them at the moment. Can anyone help me with what information I need to gather to make a formal posting to solicit an investor that would be interested? I expect I need to figure out exactly how far they are behind, how much equity they have, and when the bank sale date. What other information should I gather?

I've never purchased anything like that. However; I think Kristine Marie Poe has, maybe she'll weigh in.

@Bryce Christensen I would ask all those questions and also take a close look at the condition of the house. Once you got all that info, run a CMA to know what the house might sell for in optimum conditions. With theARV and repair costs, you will have an idea of how much you can offer for the property and see if that will cover the outstanding balance and back taxes. Only then, you will know if this is a deal or not.

If everything checks and it is a good deal, I would partner up with an experienced investor if it is your first flip or maybe wholesale it if there's enough profit to be made.

Dennis

Thanks for the help above. It may be that they don't have options other than selling so I'll continue gathering information for that option, but I thought I had heard about people offering notes to people that are behind to help them keep their homes? Do you know anyone on the forum that can help me with that? I can't seem to locate the forums I read that seemed to reference it. I also don't know if it works in Texas.

You're asking about someone willing to lend money to someone in foreclosure.....highly unlikely. You need to know:

Loan balance, including ALL accrued interest, fees, attorney fees, etc.

Any other liens/judgments and back taxes

Current FMV, as is

Yes, I know. Just wanted to explore all of the options. They had a period of unemployment, but they are back to having regular employment/income again. Thanks for the input.

Originally posted by @Bryce Christensen :
Thanks for the help above. It may be that they don't have options other than selling so I'll continue gathering information for that option, but I thought I had heard about people offering notes to people that are behind to help them keep their homes? Do you know anyone on the forum that can help me with that? I can't seem to locate the forums I read that seemed to reference it. I also don't know if it works in Texas.

By "offering notes" do you mean lending money to borrowers in foreclosure? Not something anyone I know would do unless the equity was amazing and there was strong evidence of ability to repay. Lending in junior position to people in trouble? Yuk.

What kind of equity do they have? What's the reinstatement amount? Where are they in the foreclosure process. How many mortgages?

Thanks everyone. Now I feel like I at least know what kinds of questions to ask. The good news is a new freeway went up in the area that has sent demand for property in that area through the roof, so I expect there will be significant equity, but I'll have to talk to them about it again to find out.

First, I would not attempt to make even $1 off this deal, in your shoes. Help out your friends, sure. But don't try to make any money off them.

The place to start is 1) what's the place worth as-is, 2) what do they owe in total, and 3) how much do they need to bring the mortgage current.

Have they tried speaking with the lender about a way to have the loan modified? Possible adding the back payments and fees into the loan balance and adjusting the payment? Have they tried getting a loan from another source to be able to bring the loan current? I think that's really what you're asking for. But making a second position loan is extremely risky and few investors are going to be interested. Not to mention loaning against a owner occupied house is highly regulated.

Can they sell something to raise money to get current?

Whatever they want to do they MUST move very quickly. Foreclosures in TX can be accomplished in a matter of weeks.

Thanks, @Jon Holdman . I'm just trying to help them understand their options. And I definitely am not seeking to benefit from what ends up happening. They are losing hope because with their damaged credit history, they are getting rejected for even renting, so they know they will probably have to move out, but they haven't been able to nail down a destination. Very stressful. And the irony is this is after finding employment again- now they actually can pay their bills.

I think the posts I saw might have involved tax liens and I had thought that was similar to a loan modification. I'm now seeing the difference- being in first position ahead of the lender is a very different position than after the government and the lender. Very important difference, I'm gathering.

Tax liens shouldn't be relevant here. That would only come into play if they have unpaid property taxes.

The general rules is "first in time, first in line". If you buy a house the seller will typically pay off all existing liens and encumbrances and give the buyer clear title to the property. Buyers very often get a loan on the property. When they do that, they give the lender a security interest in the property. That's made official by recording a document, either a "mortgage" or "deed of trust" depending on the state. Even though I've owned property in Texas, I don't recall which. That's the "first" mortgage.

Now, if the owner gets a HELOC or some other sort of loan using the house as security, a new mortgage or deed of trust is created and recorded. That's a "second mortgage" because its recorded after the first.

If the first forecloses, the second gets wiped out. If the property sells at auction, and there's more money from the sale than is needed to pay off the first (and all fees), then that would go to the second lienholder. If there's still money left after paying off all junior liens, then it goes to the former owners.

If they do have equity in the place, and cannot come up with cash to cure the default, they should absolutely sell. Foreclosures are expensive and all those fees come out of their equity.

But, again, they will need to move quickly.

If they're underwater, they still might get the lender to accept a short sale.

Sounds like they were like many people and living paycheck to paycheck. This shows how essential it is to have an emergency fund. Lots of folks live their lives assuming the paychecks will just keep coming. When they don't, the lives they have built for themselves fall completely apart. Then, even when they find work again, they find themselves in a hole that's very hard to escape. A six month emergency fund will go a long way toward avoiding that. Doesn't help these folks now, but its might serve as a warning to others.

@Bryce Christensen "And the irony is this is after finding employment again- now they actually can pay their bills."

So have they made any attempt to contact the lender and see if they can somehow get back on track again? They could keep their house, not ruin their credit, and the lender gets their payments again.

@Sharon Tzib It hasn't been an indepth conversation yet, but they indicated that they have been in contact with the lender. They said they tried to catch up the loan, but given the foreclosure notices, I presume those efforts were insufficient.

@Jon Holdman Having an emergency fund is solid advice and doubly so for people invested in real property.

From what I could gather on the county website, there aren't any outstanding property taxes due.

Unless it's a bad idea, I'll try to post the answers with the hopes that you guys will point out anything essential I missed. Your patience is appreciated- this is a lot different than when I was a transaction coordinator in a different state during my undergrad a dozen years ago!

Bryce - here's my easy-to-use (and understand) format for looking at opportunities, PETIO:

P - property: what type, condition, estimated value as-is, ARV

E - equity: loans and liens on property, cost to cure, etc.

T - title: current owner(s) of record, barriers to transfer (probate, bk, etc.)

I - interest(s): principals (could be heirs or others)

O - opportunities: this is your "ways and plays" section; how to monetize

While this format isn't intended to be a detailed analysis as would, for instance, a pro forma financial statement or CAP rates. I've used this for many years to look at the equity in an opportunity in a snapshot form.

Are you trying to buy equity or cash flow at a discount?

Originally posted by @Bryce Christensen :
@Sharon Tzib It hasn't been an indepth conversation yet, but they indicated that they have been in contact with the lender. They said they tried to catch up the loan, but given the foreclosure notices, I presume those efforts were insufficient.

@Jon Holdman Having an emergency fund is solid advice and doubly so for people invested in real property.

From what I could gather on the county website, there aren't any outstanding property taxes due.
Unless it's a bad idea, I'll try to post the answers with the hopes that you guys will point out anything essential I missed. Your patience is appreciated- this is a lot different than when I was a transaction coordinator in a different state during my undergrad a dozen years ago!

Reinstatement is outside the reach of many defaulted buyers. I reinstated a a defaulted loan last week on a property I took sub2. The P&I is only $113.00 ($25K at 3.5%). Loan was defaulted 10 months. Reinstatement on that tiny payment required a $3500 cashier's check to the lender and a $2500 cashier's check to the foreclosing trustee. Fees, penalties, tax payments, legal and trustee fees really add up. The borrower that managed the $113/mo is not someone who could manage a $6K cash payment (and a bunch of other debt against the property). The reinstatements on median priced houses in CA are usually huge cash payments. Dodd Frank now requires that the borrower be 4 months behind before you can file an NOD. So a CA borrower will be be a minimum of eight months defaulted before trustee's sale, mostly like more if there is an attempted workout. I'd say most wage earners just don't have the capacity to earn or borrow an extra 20K or 30K or 50K to bring a loan current.

Create Lasting Wealth Through Real Estate

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

Start here