I made a newbie mistake, WORST possible, bought a 2nd! Advice please.

33 Replies

Like the title says, after months of research, I felt reasonably confident to buy my first foreclosure at an online county auction. I'm not an investor, this was for my family and I to live in.

I ended up paying full sticker for the 2nd thinking it was a 1st ($110K). The auction went that high because there were about 7-8 other bidders in it.

1st has a statement of claim of almost $700k for a house that just appraised for $420k. When my attorney contacted their attorney to pursue a cash offer, they wanted full settlement.

My attorney, who has been handling my business affairs for years, was aghast at what I did and said I should've just stuck to business rather than real estaate. needless to say, I became physically sick because of the stupidity of my actions.

Please, I'm not looking for bashing, just simple advice from the pros whether there is anyting I can do.

The 1st is in forclousre, house is vacant and I have title. My wife and I still want the house, but don't want to pay double the market value.

Thank you in advance.

This post has been removed.

Originally posted by @Fadi W. :
...
I ended up paying full sticker for the 2nd thinking it was a 1st ($110K). The auction went that high because there were about 7-8 other bidders in it.

...

Seems like the blind leading the blind, with 7 or 8 blind folks ...

Assuming that this auction was deposit only the day of auction, you could just not pay the balance. But I am going to guess that this particular auction required payment in full, so you are out that money.

I will try to get a colleague @Dave Van Horn to comment since he purchases second position notes and the circumstances have similarities.

@Fadi W.  

Well, you didn't pay "full sticker" at $110k for a house worth $420k.  My best suggestion would be to contact the other bidders you out bid, and try to make a deal.  Not sure why any pros would go that high, on a property upside down on the first.  Maybe they were playing the "5 year statute" game, which has been debunked.

@Fadi W.  

Rule Number 1 of investing is: Don't lose money. You broke that rule by failing to search the real property records to discover all liens against the property.

Rule Number 2 of investing is: Cut your losses short. This is your position at this time.  You need to consult with an attorney and/or a CPA and determine what options you have to cut your losses short. Then you need to agressively pursue whichever option will cut your losses short.

I would attempt to negotiate further with the holder of the first lien. They will not be made whole if they proceed with the foreclosure sale, so if you can offer them FMV, I would be surprised if they didn't take it, regardless of what they told your attorney in the initial call. Try again. Beg.

As others have said, but this would be my recommendation:

1) If you have only put down the deposit and not the whole amount, walk away.

2) Call the other bidders, maybe there is something you're missing that they saw that could help in this situation, although it is a long shot.

3) Negotiate with the lender, tell them you won't pay the loan and hopefully they will start to be reasonable. Try to get the decisionmaker on the phone. Be difficult.

4) Cut your losses and move onto the next deal. Learn the right lesson; more due diligence, not the wrong lesson; give up on real estate.

And of course, talk with your attorney to see if he has anymore ideas.

In foreclosure situations, most times the bank will start to pay attention once the home is in default. This may help with negotiations if you were to pursue a short sale.

Hope that helps!

Hi @Fadi W.  

I do agree with @Andrew Syrios on #1 if you only put down the deposit.

We’ve seen several cases, where sheriff sales have brought in buyers, who ended up buying a 2nd thinking it was a first. It is a common mistake.

In situations where we foreclose on a second, the property is vacant, and the first is still in place, here are few options we may pursue:

You can reinstate the loan and start making payments, while living in the house or with rent from a tenant (this may not make the most sense with high mortgage balances and payments or rents lower than the mortgage payment).

You could try to reach out to the previous borrower to get a homeowner authorization to assist you in working with the first (for example, with short sale or loan modification).

You could list the property with a licensed realtor and try to short-sale the property with another entity.

Live in it or rent it out until the first forecloses (without making any reinstatement or mortgage payments) to recover some of your loss.

Generally speaking, even though real estate values are localized, most economists expect equity in the real estate market to be back to the level it was before the crash by 2017. Unfortunately, riding out the return of equity may not help in a case like this, with a high mortgage balance and payments.

Whichever option makes the most sense to you, I do urge you to treat this as a learning experience. 

I've made many expensive mistakes in this business over the years, and I'm still learning.

All the best,

Dave

Wow! Lots of good note investor advice here. I've been working foreclosure since 1978 and still make mistakes. Can you resolve without taking a hit? Maybe. Maybe not. Time will tell.

Is it survivable? Sure! Money can be replaced. It's only an idea, remember. You are a consumer who tried to "play the other man's game."

You are not defined by your mistakes. That's just your ego giving you negative feedback. Consider the source and dial into a different station.

I once overhead my former wife, a former kindergarten school teacher, give solid advice to an adult friend who was in fear of financial loss: "Honey, they can take stuff away from you, but they can't eat you."

'In every adverse event can be found the seed of a greater benefit'. So, you're job is to turn lemons into lemonade.

Now wipe the tears away and get into action.

@Fadi W.  


Take 3 deep breaths.

You are in Clearwater, FL.  Is that where the Subject Property is located?  If not, where is the Subject Property located?  Would you mind sharing who the first lien holder is or who you contacted perhaps their servicer?

You have an interest in the property now subject to the priority of the first lien holder.  You are entitled to redemption but we do not know when that right expires until we understand where the Subject Property is located.

You mentioned that you are willing to pay for the property, you just do not wish to pay over the FMV of the property. So, to be clear do you have cash to pay FMV for the property still or what does that (in general) look like?

There are some ideas in my head but I want to look up a couple things based on your post first.  I will look for your response.

Originally posted by @Stephan K. :
Originally posted by @Wayne Brooks:

Maybe they were playing the "5 year statute" game, which has been debunked.

What is that?

I believe it is the 5 yr statute of lim on mortgages in florida. If 5 yrs comes and goes without mortgagee filing for foreclosure- then he will have waived his rights to foreclose.

Sebastian

Gentlemen, and lady, I am simply blown away by the positiveness and decorum the members exhibit here. I came looking for advice, I got much more than that, I'm grateful for your support and encouragement.

Unfortunately I did wire the funds and the deal closed, so now I'm holding what seems to be a worthless title. My attorney tried negotiating a buyout with the 1st (Chase) but their attorney, whom already filed a Lis Pendens on the property last October, informed him that they require full face value of the claim to dismiss the suite. Face value is almost $300k above FMV.

I am in a position and willing to pay full FMV, but but not almost double that. Is there a way for me to approach Chase directly, a faceless behemoth?

Funny thing, I am in the business of buying small, failing businesses, rehab them then sell them to bigger industry players. Something a lot of people consider to be significantly more risky than RE investing, but I do it in my sleep.

Originally posted by @Dion DePaoli :
@Fadi W.

Take 3 deep breaths.

You are in Clearwater, FL. Is that where the Subject Property is located? If not, where is the Subject Property located? Would you mind sharing who the first lien holder is or who you contacted perhaps their servicer?

You have an interest in the property now subject to the priority of the first lien holder. You are entitled to redemption but we do not know when that right expires until we understand where the Subject Property is located.

You mentioned that you are willing to pay for the property, you just do not wish to pay over the FMV of the property. So, to be clear do you have cash to pay FMV for the property still or what does that (in general) look like?

There are some ideas in my head but I want to look up a couple things based on your post first. I will look for your response.

Dion, the property is located in St Pete Beach. I can certainly pay FMV cash. Any ideas, please shoot them my way.

OK, I think it may work but it's only a theory of mine but you do not have much to loose:


1.  Go get a full appraisal of the Subject Property.  This should be conducted by a licensed residential appraisal and filled out on form 1004.  This will cost you in the ballpark of $350.  

2.  Have your attorney tender your offer in writing with a copy of the appraisal to the 1st lien holder's attorney.  I am hoping your offer can be made in cash.  If you need to finance any of this, that will make this unlikely to accomplish.

Within the re-tendered offer, ask your attorney to nicely suggest the current mortgagee accept your offer and sell you the Mortgage and Note.  This saves the first lien holder money in further holding the property and foreclosing, etc.  Have your attorney nicely suggest that he is willing to submit the same tender offer to the judge in the first's foreclosure case.  The proper window of time would be during your redemption period.

The idea here is to strongly suggest, this is the offer that makes the most equitable sense for all parties involved. Since the first lien holder, in normal circumstances would not stand to net the FMV in accordance with the appraisal (where the appraised value would be the FMV) due to cost of eviction (of you), cost of sales (of the REO) and holding costs. The judge may deem it "fair" and force the sale. Further, tendering the offer with the appraisal (reference it in the formal attorney letter to the first's counsel) the attorney will have to submit that to the first mortgagee servicer. If that is a securitized trust, then there would be an obligation to take the deal since it represents the highest execution on the asset.

It's just a theory, like I said.  It really only likely works if you are willing to pay full price and evidence what full price is and you pay in cash.  Finance would likely not work.  

My take on the first attorney responding with only payment in full will satisfy them is the attorney playing hardball.  It is not reasonable to expect to be paid above the value of the real property.  By sort of over documenting the offer and having the door opened to use your rights of redemption (which you were granted when you bought at auction) there is a chance this may work.  

For any other reader, I don't think this works with any type of discount and does not work unless you have either the right or equity of redemption on your side in a judicial state.  

Run it by your counsel and see what they think.  Let us know his thoughts.  If I come up with any other theories I will share those.

Good Luck.

For some clarity here, I have been in some side discussions with other knowledgeable folks around foreclosure in Florida.  So as to clear up confusion of what my THEORY is, which could not work at all:

Florida's Right of Redemption is PRIOR to sale.  The statue is as follows:

45.0315?Right of redemption.—At any time before the later of the filing of a certificate of sale by the clerk of the court or the time specified in the judgment, order, or decree of foreclosure, the mortgagor or the holder of any subordinate interest may cure the mortgagor’s indebtedness and prevent a foreclosure sale by paying the amount of moneys specified in the judgment, order, or decree of foreclosure, or if no judgment, order, or decree of foreclosure has been rendered, by tendering the performance due under the security agreement, including any amounts due because of the exercise of a right to accelerate, plus the reasonable expenses of proceeding to foreclosure incurred to the time of tender, including reasonable attorney’s fees of the creditor. Otherwise, there is no right of redemption.

It seems this can be confused with the OBJECTION OF SALE.  Which is not the same idea.  An Objection To Sale occurs within the window of ten days post auction.  The grounds for that objection is the sale was improperly conducted.  The Objection being granted does not re-open the window for any interest party to redeem per se.  Since the right of redemption, per statue above, could be argued the date specified in the Judgement is when redemption rights expire.  Seeking a "re-do" on sale, should not legally grant an extended window to rights granted to any party to redeem.

The idea of mine, is since the amounts due to redeem are within the jurisdiction of the court which can be contested within the legal process, there "may be" a chance to get a court to hold that what is "equitable" (fair) to the parties involved is to allow redemption for an amount due in line with what a reasonable outcome at auction or in open market might bare.  

It seems to me, that so far as the above does not impair the Mortgagee from the second legal process of a Judgement of Deficiency, which is where the court calculates the amounts due on to the Borrower not recovered by liquidation of the asset either at auction or through REO sale, then the Mortgagee will be in the same place, in terms of aggregate amounts recovered. This would give rise to reserving this capacity to redeem to another interest party outside of the actual borrower. Since the actual borrower is subject to the Deficiency and allowing redemption for a lesser amount impairs the Mortgagee's right to deficiency.

I have never bounced this off of any of the attorneys I know, so I do not know if it has any legs.  I have not found myself in a situation to deploy the idea.  It may very well not work as I mentioned.  That said, this situation does not give way to many options.  In the event my theory hold no barring and can not be accomplished, then the OP has only one resolve, since a Judgement will be entered and the property will be sent to auction.  Go to auction and be prepared to bid.  

Hope that clears up what I was thinking for the masses.    

Originally posted by @Dave Van Horn:

You could list the property with a licensed realtor and try to short-sale the property with another entity.

What am I missing here?   How does this help?  Wouldn't he just end up going through the hassle of a short sale, and still end up with nothing?

@Fadi W. I am sorry to hear about his situation you had to face and I know how to fell especially when you work hard for your money. On a separate note, would you be able to reduce your future tax burden for years to come by claming this as some sort of investment loss. I am not sure of the phrase but I believe you can reduce your tax burden with this loss. If you can, then is a positive for you.  Is there anybody that can say is Fadi can use this loss as a tax benefit ?

@Fadi W

I am not going to suggest ways out of the predicament because I have no direct experience in the USA market, especially these types of deals and it appears there is a lot of very good advice on alternatives that could help you posted here. What I would like to suggest to you is more about how we look at things in life in general. For some reason or another the Universe has decided that you needed to do this deal for a reason. I do not know what that might be, but I do know that you do if you look for it. Everything in the Universe is in perfect balance and when a bad thing, or what appears to be a bad thing happens to us is it for a reason and I would suggest to you that if you sit a look at what the benefits are to you of this deal you will find that it is as equally good for you as it is bad. That is the way all things work.

Let me give you an example of what I mean. You might be thinking that you have lost $100,000.00 and that is a bad thing. But what is good about losing, or apparently losing $100,000.00? How has it been or will be of benefit to you for this to happen?

Has this event taught you something of value? I would suggest it may have.

Has this event opened your mind to seek more information before you act again in this type of deal? I would suggest it may have.

Has this event demonstrated to you that you make money easily in an area of your expertise and that perhaps this is where you might want to be in future? I suggest it may have.

Have you saved someone less fortunate than you from making this mistake? Possibly.

There are many more questions we can ask along these lines that will show just how valuable this lesson really is and that there is never a loss. It is a case of your $100,000.00 representing some other form of value unique to you. The value you derive from all deals is unique to you and may not be measured in money alone. The price you chose to pay for this lesson, whatever this lesson turns out to be for you, was $100,000.00. That is what the Universe determined was the price you were capable of paying for this particular lesson. Thankfully, in life, all lessons have a cost, if they didn't they would not be worth learning at all.

If quitting investments in real estate as your attorney suggested you do is the real value you are to get from this event then it is money well spent. If, on the other hand you look for the real lesson you may find the price you paid today is well worth it. I would suggest that many successful property investors lost money at some time, I know I certainly have, but always gained a valuable lesson from it, if they looked for the lesson and accepted it as a learning process. The ones who don't look for the lesson simply quit investing in property and ignore the lessons. Unfortunately for those people the Universe will provide the next challenge until the do learn the lesson, whatever it is.

I hope you find the true value of the lesson and if you do you will not have lost a cent in value, it will have just changed form from cash to whatever the lesson means to you.

Good luck in your endeavours in sorting this deal out and I am sure the people here at BP will help wherever possible with knowledge, skill and support.

@David Nolan
"The universe is in perfect balance. "
I had come to this or a similar thought myself after pondering.
My thought is that the universe exists because it is continuously seeking balance, which is why things happen. The earth moves around the sun to counterbalance the sun's gravity pulling the earth into it. Life therefore exists on earth.

Humans are born different from one another and imperfectly and have to each seek his/her own balance. The fortune I have in this life is maybe because of the universe seeking to balance whatever good karma I or my ancestors have accumulated in previous lives. Or maybe it is to balance whatever misfortune I may encounter in the future. I don't know but I just need to be aware that the universe is seeking balance. I must seek my own balance.

This is all I have arrived at so far. The above general hypothesis was initiated in me by my general reading on Ayurveda and extending what I understood from it to life in general.

I also agree with one of your other posts that real estate investments should be based on understanding the cycle of low and high values in a local market and buying when it is at the low portion of the cycle.

Run it like you stole it.

Cash flow it out with recovery housing or student housing, and don't spend a cent on repairs.

If 1st won't negotiate, buy it back at auction after the kids and the recovery house people have roughed it up.

If they bring it to foreclosure, you can bid on the first. It doesn't matter if they say they want full value. At auction they may bid well less than the note value. Make sure you are in a position to buy out the first if they don't aggressively bid. They may be bluffing hoping that you will make them whole. They don't want the property as a general rule.

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