Seeking advice on a pre-foreclosure for my first deal.

4 Replies

Hi, I live in Oklahoma City, OK and have been interested in property investment for a while. I am new to this and currently looking for my first deal with no money down. I have a neighbor who advised me she is behind on her mortgage payments and her lender is going to foreclose on her. Would I want to offer her to do a lease/purchase deal with her, and I rent her house out to someone else for profit while she keeps it in her name as I have no money down. Thanks for any advise and tips in advance that I may receive.

Lease options can be a great tool, but not in a pre-foreclosure situation.  Your neighbor needs money to bring the payments current or she will lose the house.  Need to know the value of the house vs loan amt + arrears.  Do you know those numbers @Monique Morrow ? If there is equity, other tools are available for a win-win for you and your neighbor.  A no money down lease option will solve nothing in this case. 

Monique,

You should know firstly that there is a very strict difference between a lease-purchase and a lease-option. In your case, unless you have every intention of purchasing the property at the expiration of your lease, you'll want to use a lease-option wherein you'll have just what the title implicates, the option to purchase the property upon the lease's expiration, rather than the obligation provided by a lease-purchase. Speak with your neighbor and figure out what their mortgage payments are, then subtract that amount from what you'll be able to rent the property out for to find your cash flow number:

  • e.g., $650 rent - $392 mortgage payment = $258 cash flow.

Beyond that, you should know also that this may or may not save your neighbor from foreclosure. It's difficult to know (unless they tell you) how far into the foreclosure process they are, or how far behind they are on their payments. Not to mention the possibility of delinquent taxes and insurance. If you do have the money to pay an option-fee, which typically ranges from 1-5%, then your neighbor may be able to use that money to catch up their mortgage payments and then thereafter rely on you to rent out the property so that they may henceforth keep their payments current. Remember, you'll want a lower option-fee percentage on your lease (A-B) than you're going to implement on the sub-tenant's lease (B-C), so that if you pay, we'll say $1,400 as an option-fee, you'll be able to collect $2,100 or more from the sub-tenant; this way you'll be paid back your fee plus an upfront profit. Ultimately, though, the option-fee is not required and will only be applied at the seller's discretion; but may, in this case, be a necessity to avoid foreclosure due to outstanding mortgage payments.

It will depend on negotiations between you and your neighbor whether you use a fixed lease or a performance lease. With a performance lease, you won't have to pay your neighbor unless the sub-tenant pays you first. Whereas with a fixed lease, you'll be required to pay whether you receive payment from the sub-tenant or not, such as with a traditional lender. Either way, as long as you don't default on your end of the lease and approach grounds for early termination, you're protected from foreclosure. Since 2009, lessees are allowed to make use of the property until the expiration of their lease, despite foreclosure proceedings.

My advice is to get with your neighbor, figure out where they are, then discuss options based on their position to see what will prove beneficial to the both of you. But anyhow, that's all my brain can conjure at 2:00 AM, so I hope it proves useful to you. Best of luck!

I personally do not like purchasing using a lease.  I would purchase the house subject to the existing mortgage, providing it's a good deal and you have a profitable exit strategy.

Is the seller willing to walk away from the property?
What's the value of the property?
What's the current loan payoff?
How much to bring the mortgage current?
What's the mortgage payment currently?
What could the property rent for or if you resell the property on contract or lease/option, how much per month can you get?

In all of these types of deals, regardless of how you structure it, there are basically 4 profit centers:

1.  The equity in the property when you buy.  Buy below market value but you don't necessarily need to buy it really cheap.
2.  The down payment you collect when you sell on contract (if you do this).
3.  The arbitrage between what you can receive in rent vs what your payments are.  Consider property taxes and insurance.
4.  If you sell the property to someone one contract or with a lease/option you are probably selling slightly above market value...the high end of the market.

You're going to run into the issue that you MUST catch the payments up with the bank or work out a loan modification.  I'm not sure it's really probable for a no money down deal here but maybe a LOW money down.  It really just depends on what it will take to bring the loan current.

Hopefully your neighbor isn't too far behind.  Maybe just a few months.  You can clean the house up and then sell it on contract or do a lease/option.  Collect enough money down to catch up the payments.  Make a few hundred per month while working with your buyer to get their credit repaired.  In a couple years they can officially buy the property and you can collect $15-30k (the difference between buying slightly below market and selling slightly above).

Steve, Matt you guys are really helping Monique out with such great answers so late at night. I'm going to vote for you both. Is BP the best are what, Monique, ?

Join the Largest Real Estate Investing Community

Basic membership is free, forever.