How would YOU tackle this foreclosure deal?

78 Replies

Hello,

I will try and keep this as short, but detailed as possible. 

My experience with RE is at best limited to the BP podcasts and a little reading material, as I have only decided a few months back, that I would like to enter into this field.

I was out on a run today and happened to go through a sub-division.  I stopped briefly to hold a conversation with an older gentleman and one thing led to another, with him disclosing that his home was to be auctioned in January 2015.

This led me to investigate a little further and this is what I got.


Outstanding debt: 80K.  However, note that with auction charges, attorney fees etc, the bank (which is actually a Govt. agency) wants to settle for $100K.


Repairs: The home needs a bit of work.  I did not get enough information as he had to leave.  However, he seemed like a reasonably trustworthy person and actually was the one that disclosed to me that the home would need repairs worth $30K.  This figure would apply to the work being contracted out and I plan to get some sort of an inspection done.  


Other Expenses: If the home gets sold at the auction, he gets nothing.  I asked him what he thought would be a fair amount, if I had to pay him to get this deal closed before it went to the auction.  He told me that is he got $10K, he would be ecstatic!.  I acknowledged his response, without portraying any type of commitment.  In saying that, this gentleman has had the need to let his house go due to a very sad situation.  If I had to pay him this amount, I would still end up getting a decent deal and so will very likely not negotiate him down, as I can see that money lifting a huge burden off him.


Property Value: Running comps to what has sold recently (3 months) and what is on sale as of now, the average price/sq. ft. is: $116. This is a 1637 sq.ft home and so that would appraise it at: $189,892 (ARV).


Property Details: Built in 1988, 3/2.5, 2 car garage, 1637 sq. ft., single family home.  The home is within a sub-division, which is situated in a very high demand area due to good schools, low crime and a middle class, young family type demographic.


Calculations:

Bank Pay-off: $100K. I plan to negotiate this down with them, as they will be saving on costs to take the property to the auction and on time value as well.

Repair Cost: $30K

Payment to Owner: $10K

Closing Cost + Other Expenses: $4K

Total: $144K (Market Value: $189K; Savings: $45K)

Since I have not done any deals, how can I go about making this a successful one.

I thank you in advance for your opinions, guidance and suggestions.  From a newbie that wants to dip that first toe in the water, it is all very much appreciated.

Regards,

Sam

NOTE: I have other questions connected to this property that I will post tomorrow in the appropriate sections.  I will post the link here (if it allows me to edit the post) or in the comments section.  Alternatively, please find the posts via my profile.

So are you planning to retail flip the home then ?  How are you planning on buying the home?  I dont see how you could purchase with conventional bank financing as th home needs $30k in repairs.  

Please provide a little more info.

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com | TN Agent # 00321765

@Sam Alpha  

  don't count on negotiating the bank down.. if this goes to auction it will probably sell 3P with that kind of spread and quality area.

@Curt Davis  

 I would think this is a pre foreclosure SUB too deal... which in Oregon we can't legally do any more.. well we can but we can only take a small profit on a resale..

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Your post is way too long to engage a reader.  Here's how to set up a deal:

Property value (after repaired value) 

Less estimated:

Cost of repairs

Principal balance of loans

Cost-to-cure loan(s)

Equals estimated equity

I presume you are trying to buy equity at a discount. What are you willing to pay the owner or exchange for the equity?

@Rick H.  

I wasn't expecting many responses as quickly as this.  Knowing that I can't offer much from my position, it is very generous of you to give your time. So I say a simple, but sincere Thank You for giving me your much valued time.

@Sam Alpha  

  good luck let us know how you make out.. its always nice to hear about eventual outcomes on these deals.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Originally posted by @Curt Davis :


So are you planning to retail flip the home then ?  

I am planning to have this as a buy and hold


How are you planning on buying the home?  

Under normal circumstances, I would have paid cash, got the property in good order and then gotten a mortgage.  However, I do not have that option at the moment.


I dont see how you could purchase with conventional bank financing as the home needs $30k in repairs.  

I am in full agreement with you on this and am hoping that someone has a creative answer for this.

@Jay Hinrichs  I will be updating the progress via this thread.  I hope it works out like one of those stories you here on the podcasts, but I'm guessing those are the ones that are a long shot away.

Govt. agency? Notice with sale date, this isn't a Sub-to deal.

As mentioned, this is a cash purchase prior to sale or at auction.

Your first deal? Do you have the funds for the down and repairs, your newness can be cured with a contractor, but you may not have time to get all the ducks in a row.

I'd suggest you look for a cash buyer and try to partner, now that the owner disclosed to you and you have broken through the dangerous waters if the owner doesn't have misconceptions. Might take an option and flip the option to a cash buyer with the seller's knowledge!

Do not contact the bank/trustee unless you have a cash in hand buyer, new federal laws are in place and chances of messing up in front of some attorney/trustee may not work well, lots of "save you from foreclosure" schemes and red flags may wave at the trustee, so stick to the thinking of a cash offer. Good luck :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley  

  why can't it be a sub too deal... he just brings it current and owner deeds it to him if the owner and bank will go for it.  IE he has owner reinstate before the bank has the right to extinguish the reinstatement period.. Like in CA.. the banks do not have to reinstate within either 3 or 5 days of the sale. although in practice they will right up until the sale date.

I bought most of my sub too's when it was legal to do so in Or And WA and reinstated them day before in many many instances. I had an employee run the cashiers check up to the main trustee service in Seattle.. and of course since we were one of the primary players we were well known to this trustee service.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Originally posted by @Jay Hinrichs:

 Don't count on negotiating the bank down.. if this goes to auction it will probably sell 3P with that kind of spread and quality area.

Jay, I am on the wire on this.  If I ask, I could potentially miss out on the deal, but if the offer gets accepted, then a good deal just became a great deal.  If I don't, I will stay with that "what if" thought for a while.

This is just my amateur opinion and your thoughts on this would hold good value. What do you say Jay?

Also, was 3P (above) a typo, or does it stand for something?

Originally posted by @Rick H. :

Your post is way too long to engage a reader.  Here's how to set up a deal:

Property value (after repaired value) 

Less estimated:

Cost of repairs

Principal balance of loans

Cost-to-cure loan(s)

Equals estimated equity

Rick, you are right.  There was information I could have omitted.  However, sometimes readers tend to want more information to give a more precise answer.  

Also, thank you for showing me how to put it into a summarized form.

I presume you are trying to buy equity at a discount. 

That is correct.

What are you willing to pay the owner or exchange for the equity?

      $10K

@Sam Alpha  

 it stands for Third Party  when you have a trustee sale and if the asset is sold to anyone other than the bank it is said to be sold to 3p  or third party.. you will see this on trustee websites.

I guess I am not tracking this one correctly.

I am thinking this property is in foreclosure ?  is this correct?  and if it is your in direct contact with the owner who is losing it  is this correct?  and the owner if they pay all costs and arrearages has the right to reinstate? is this correct.?   The owner does not have the funds to reinstate and you do is this correct?  if it is then if you can make a deal with the owner to deed to you and you reinstate and take title sub too. then you have some time to either refi re sell or hold if the bank does not call the loan based on the alienation clause in the mortgage or deed of trust which ever is in use there.

am I getting this correct?

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Originally posted by @Bill Gulley :


Govt. agency?

Yes. The mortgage is with Fannie Mae.


As mentioned, this is a cash purchase prior to sale or at auction.

Bill, it may only have sounded like that due to my lack of knowledge. Either Jay or you could be correct.  At least, now I can add this as a question to ask the owner when I speak to him.


Your first deal? 

Yes


Do you have the funds for the down and repairs

I have about 50%


I'd suggest you look for a cash buyer and try to partner.

Might take an option and flip the option to a cash buyer with the seller's knowledge!

Bill, I would like to have this property as a buy and hold. The very first in my empty portfolio.

Jay, it's Sub-to, to the underlying loan, not 'too" as in too much loan, :)

Your first sentence, "if the bank" bank won't, he mentioned govt. agency, unlikely IMO. If it's in connection with an SBA, absolutely not.

So, you made an offer and are you buying or do you have a cash buyer?

What investors use to do is irrelevant, this is today, proceed with caution. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley  

  well I did a Bill G and did not read the whole thread thereby missing the government agency part.. and your surmising its SBA... Not sure I have ever seen an SBA loan on a personal residence.. but maybe it was as cross collateral. Wonder if they have to adhere to dodd frank..   Any errors in grammer or punctuation are intential..

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jay Hinrichs  

Your use of "is this correct" makes me feel that I stand in front of a very serious judge about to deliver! Lol

I would love to answer those question, but when I spoke to him, I assumed that only one situation was possible.  

- He was late on his payments

- As far as he can be current, the property is his belonging

- If I pay that amount (+ what I would forward him), I take over the property (possibly and preferably via a new mortgage under my name)

I will clarify all this with him and keep you updated.  Also, are there any other situations that can exist which I need to be aware of? Can you think of anything else that I need to be asking him?

Originally posted by @Jay Hinrichs :

@Bill G. 

  well I did a Bill G and did not read the whole thread thereby missing the government agency part.. and your surmising its SBA... Not sure I have ever seen an SBA loan on a personal residence.. but maybe it was as cross collateral. Wonder if they have to adhere to dodd frank..   Any errors in grammer or punctuation are intential..

SBA can take the subject property, the inventory, your residence, your aunt, your children, it's a federal debt, they can put liens on your shirt, can't even shake them lose in bankruptcy. Death is the only way to forget about it, then your heirs can pay. LOL

 I didn't mean it was an SBA, simply an agency. No, federal debt collection is not subject to DF, if that's what it is. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Bill Gulley :

So, you made an offer and are you buying or do you have a cash buyer?

I have not made an offer as I just spoke to him yesterday. Also, I do not have a cash buyer as I want to hold on to the property. I am in the process of researching my options on the financing part of this deal and will have a post under the finance section of the forum tomorrow with all the details and questions.

What investors use to do is irrelevant, this is today, proceed with caution. :)

CAUTION? Is there anything here that may be defined as illegal practice? If so, please do share, as I want to run this as clean as possible.

@Bill Gulley  

  I am familiar with all aspects of SBA loans..and when asked about them I always tell folks I would only do them at last resort unless you plan and can pay back in full... as you state no getting out of those once you have one ...

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

You should buy this using hard money first. HMLs don't care the house needs a ton of work. If you're paying 50% of the acquisition and rehab, the HML will have a loan at 30-35 LTV - a safe loan even if you're a newbie. Then you fix the house, rent it out and then refi out in 6 months using conventional financing.

There ya go - just send me $10K consulting fee for this advice (LOL)

@Wendell De Guzman  ... I like your idea, but I have a question. What happens if he cannot get conventional financing after 6mths?

Originally posted by @Sam Alpha :
Originally posted by @Bill G.:

So, you made an offer and are you buying or do you have a cash buyer?

I have not made an offer as I just spoke to him yesterday. Also, I do not have a cash buyer as I want to hold on to the property. I am in the process of researching my options on the financing part of this deal and will have a post under the finance section of the forum tomorrow with all the details and questions.

What investors use to do is irrelevant, this is today, proceed with caution. :)

CAUTION? Is there anything here that may be defined as illegal practice? If so, please do share, as I want to run this as clean as possible.

The issue is the foreclosure proceeding and contacting sellers giving advice, I don't see you doing that. You do need an attorney if he accepts your offer being new, now other issue, just get guidance to proceed. Good luck with it! :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Wendell De Guzman :

Hi Wendell, I looked at your profile and website and I must say that it is an impressive one.  I also liked the way you have everything laid out in such an organized manner (on your website) including the numbers.

You should buy this using hard money first. HMLs don't care the house needs a ton of work. If you're paying 50% of the acquisition and rehab, the HML will have a loan at 30-35 LTV - a safe loan even if you're a newbie. 

Using a HML is an option. However, I am also exploring other options to see which may result in the best fit. Your profile states that you are a HML too. If I decided to take that route, is it something you would be interested in?

Then you fix the house, rent it out and then refi out in 6 months using conventional financing.

I am looking at rehabbing the property as soon as it is aquired and getting it all completed within 8 weeks (12 at the most).  You have mentioned 6 months above.  Am I missing something or are you being conservative with time?

There ya go - just send me $10K consulting fee for this advice (LOL)

Now that is some consulting fee! I'm giving up the hard work in RE and switching over to consulting exclusively with the aim of retiring in 3 years (WINK).

Sam,

Conventional lenders or banks can do a cash out refi only after 6 months. They have to "season" your ownership first. It was not like that in the good ole days but those days are basically gone. You can search for portfolio lenders in your area - they may be able to do a cash out refi even before 6 months is up.

On lending you $ - I only lend in 3 cities right now (these are where I have partners who know the market and these are partners I trust)

- Chicago IL

- Cincinnati OH

- Ft Myers FL

Hope that helps.