I am currently reading the book Building Wealth Buying Foreclosures by John Schaub and on page 42 he includes a case study that I can't seem to follow the numbers on:
1. Why do the homeowners owe $280,000 if the purchase price was $200,000? I understand there is interest on the property but $80,000-worth seems high.
2. Furthermore, on the second page it says, "They have pulled out $80,000 in profit" which I don't understand. Where is the $80,000 in profit coming from?
Thanks for the help!
It looks like they are behind in payments by a couple of months, but even with attorney fees it wouldn't amount to $280,000. Most likely they took out a second on the house. Many times I see homes going to auction that have been purchased for $150,000, but they owe $300,000 on because they refinanced or added a large second.
These homeowners had refinanced the house and taken out $80,000 over and above what they paid for it. Today we are again seeing credit requirement loosen so refinancing by homeowners who want to "free up" their equity to buy new cars and take vacations will become more common. Unfortunately, when there is the next downturn in the economy, many will be unable to repay these large loans, and foreclosures will result. Lenders will often renegotiate both the payments and the amount owed on loans in default. That allows you to buy at a below market price and with payments low enough that you can rent it for a profit.