How can I help someone who is in pre-foreclosure without taking advantage of them?
Denton, TX · Member since 2013 · 13 posts · 2 votes
Is there a way to help someone sell their house or use some sort of wrap-around financing to sell their house and get back a portion of the sale or payments for myself?
The owner has some equity but I don’t want to steal it from them (deed-in-lieu or something like that). I just want to help them out of a bad situation and make a little something for myself.
Does anyone have any recommendations about how to do this? The property is located in Denton Texas. Is anyone already doing anything like this in Texas?
If the owner has enough equity to cover commissions and closing costs, the best thing is simply a straight up sale, on the Open Market. Of course, that generally means nothing for the friend/investor:)
A wrap on a mortgage in foreclosure is risky, and unnecessary.
Richard, absolutely, are your a Realtor?
If not, take care in your approach, if the notice has been given you'll be need to take great care in advising them as there are "foreclosure help" laws.
Can you tell us the info? Value of the home, amounts in arrears/past due, payoff amounts, time frame you have to work with? Do they want to stay there os sell? :)
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Richard Chapman I am curious to see the replies to this as I also have a friend in the same predicament!
If the owner has enough equity to cover commissions and closing costs, the best thing is simply a straight up sale, on the Open Market. Of course, that generally means nothing for the friend/investor:)
A wrap on a mortgage in foreclosure is risky, and unnecessary.
Without numbers we could speculate all day and do what ifs and such simply complicates matters for those trying to figure out a path to take.
Market value
Payoff amount owed
Payments past due
Time frame when foreclosue auction happens or roughly when
Getting too involved here has the potential to bite you.
If your friend indeed has equity they should sell if they can't afford payments. In this case doing anything that's not an arm's length transaction would be bad.
If you want to help your friend buy them a beer or offer to come over and help paint to get it ready to put on the market.
If they don't have enough equity to cover the mortgage + selling costs then there's nothing there for you. If they do they need to get it on the market so the bank's late penalties and foreclosure costs won't completely destroy their equity.
But don't get too close to the situation, as the bank isn't likely to be understand with 'friend deals' if they're having to foreclose.
It is a large brick colonial style house (almost 4,000 SqFt) in an upscale neighborhood in Denton Texas. Retail value is around $330k (per property tax appraisal) $336k (on Zillow). Mortgage is around $200k but currently not paying. Fees and back payments are probably around $7-10k. Owner was helping family members, who were in financial trouble and out of work, by letting them live in the house. They actually took advantage and generally trashed the house while the owners were paying the bills. Estimated repairs amount to ~$15-25k. Owner would allow up to $50k to a retail buyer who wanted to fix up and live in it. Not to flip and make a killing.
Richard, the owner or someone needs to pay the costs and reinstate the loan. Saying the owner would allow 50k to a homeowner shows personal attachment, meaning they may not be motivated in reality.
They are in no position to dictate who buys, that limits your ability to operate, so you need to work on them as to a sence or urgency.
Get rid of the muchers if they are there.
After the loan is brought current you can look to a wrap arrangement, a lease/option would allow control, a sub-2 put someone in to make repairs.
Next what is the marketing time on a property like that in Denton? I'd think it might be a long time, I've been there several times but don't know the market. If it is long, the price needs to come down.
Your friend made some bad choices, as family will, bring them to reality or you may be spinning your wheels. :)
I might be able to help them get current on the loan. After that, how do I "look to a wrap arrangement and put someone in to make repairs."
I am not interested in "getting control" of the property but I would like to partner with the owner and get a little bit of the net sales proceedes or a portion of the payments. How might I set that up and "put someone in to make repairs?"
It looks like a very attractive SUB2 but I would be a little weary of this seller/friend and the choices they have made. Entering an owner partnership on this kind of deal is too risky in my opinion. Especially, if the owner intends to stay in the house until fixed and sold.
Are you a Realtor?
What would the marketing time be after repairs are made?
You said get someone in to make repairs, are you paying that as well or do you need another partner/contractor?
If so, that means 3 are seeking a profit, you, the owner and the fix up guy.
You enter into agreements to control the property, putting money on the loan without control means you can lose the money.
Who will make payments during construction, did the owner just give up? Are they gone?
You can't just partner per se unless you have a contract to have an interest in the property which is "control", the owner might deed 25% interest to you, but that has loan issues, options in Tx are limited to 180 days, contracts for installments are not allowed, so your degree of participation, what you can do is limited by your marketing time.
Doing these deals is working backwards, the end sale, the construction work, catching up the loan, entering into agreements, we need to map it out first as time is money and the bank only has so much time as well. :)
The owner already lives somewhere else. I have been helping clean the place out to get ready to sell. I trust them completely to honor any type of arrangement we can work out. They also trust me to do the right thing. I can set up any contracts necessary and they will sign. I do not want to take advantage of them, just help them out and make a little bit of profit or residual income for my efforts.
What contracts do we need to set up and how can I “put someone in to make repairs?”
I get it, you are friends and you trust them. You want to help and not mess over them.
I have no idea which contracts to use or a strategy because I don't have enough info, those answers to the above questions will guide us to what contracts to use. You can't just have any contract without knowing what I mapped out above.
I assume you are not a Realtor now, that too made a difference.
Might just consider making them a loan
Bill Gulley I think Richard wants to have the retail buyer buy as is and make the repairs themselves after closing.
Richard - Where is this in the foreclosure process? Notice of default, Lis Pensden, Notice of Trustee sale? When will it hit the courthouse steps???
County tax records and Zillow are not good substitutes to determine value in Texas. PM me the address if you'd like to know what similar properties are selling for in the same subdivision.
If DOM is low and the numbers you quoted are accurate, there is enough meat to bring current, fix, and sell at retail.
I am not a realtor.
Marketing time could be 30 to 90 days based on what a realtor told me.
I can probably pay to get the loan reinstated but I can't afford to pay for repairs.
We would need another partner/contractor to do the repairs. Can we do some sort of wrap-around mortgage to a retail buyer and have them fix it up to build equity?
I can't afford to make additional payments other that what is required to get the loan current.
The owners already bought another house and live somewhere else. Their family members were in the house until the owners didn't have enough money left to continue to pay the additional mortgage. They finally had to kick them out and the house is now vacant.
Did I answer all of the questions?
Owner has been in regular contact with the bank. The bank says “they are in the foreclosure process” but no date has been set yet. Only late fees so far, no foreclosure lawyer’s fees yet. A date could be set at “any time” but if some sort of sale is in the works they could delay to accommodate the sale.
Local realtor said value as-is is around $280k. If in tip-top shape it could bring $330k.
Thanks, now, what do you want to make?
You need an agreement for repairs to be made, can you find a contractor type of a fix it guy that you might work with? Materials can usually be purchased on credit, that gives you some float time.
Carlos F. does the marketing time sound right to you? Some Realtors tend to say what you want to hear to get listings.
You might pay part to the bank, inform them of the repairs to call off the dogs, and have some funds to pay your fix it guy, and work with the contractor for your fee and simply make a loan to the owner, file a deed of trust, at closing, your loan is paid off and the construction lien is paid in full or as needed.
If you can't get the lender to go along, we will move to plan B, the contractor will need an incentive to profit to carry the entire load and go to closing for thier money.
You might get a special power of attorney from your friend to hire the contractor and close the transaction, then the owner won't need to show up, if that's a big deal.
Looks to me like working with the contractor, a simple agreement keeps you in the deal, the loan secures your money. That keeps you from technically buying and flipping or assigning a contract to close.
Still more options to go....
A couple of thoughts here.
One, is that the bank is going to want one of two things to happen. Either they deficiency is cured or they will want to have the property sold and pay them off. The best and simplest thing is for your friends to simply get this house onto the market at a reasonable price and sell the thing. Don't bother paying the back payments, as long as the lender is willing to hold off on the auction. If its worth $280K as is, then list it a bit lower than that to try to get a quick sale. If it sells for $270 and the seller pays the bank off for $210K and pays $20K in closing costs and RE commissions, they walk away with $40K. Done.
I see no path that puts MORE money into their pocket.
That, admittedly, doesn't put a penny in your pocket. But since you're not an agent (which would let you list it for them and collect a commission) I don't see how you put a dollar in your pocket without taking it out of theirs.
As a fix and flip, its not much of a deal. The bank is owed $210K. You say repairs are $25K and that its worth $330K fixed up. There will be some closing costs on a purchase, too. Even ignoring those, purchase plus rehab ($235K) is 71% of ARV ($330K). That's a good deal for a fix and flipper, which might well make $50K out of the deal. But its not "a killing". If it goes on the MLS and is sold through an agent, there would be about $20K in RE commissions and closing costs, making the minimum price to pay off the bank about $230K. Now purchase plus rehab is $255K or 77% of ARV. That's not a deal for a fix and flipper. At best, their profit is about $20K. That might seem like a lot, but that's too think of a deal for the risk involved with a fix and flip.
One way an investor might work a deal like this is an equity split. The investor would come in and pay the deficiency and fund the rehab. That's $35K if I have the numbers right. Then the property would be sold at retail. Say that's $330K with about $20K in costs. That nets $110K after paying off the remaining $200K loan. Now, the investor takes back the $35K they invested, leaving $75K. That gets split 50/50 with the owner. That's $37.5K each. That's not a great deal for either party, to be honest. That's not as much as the owner could get just selling it as-is. And its a fairly small payday for the investor for such a big project. However, the investor only has to invest about $35K to double their money, so someone might take it on.
But you say you can't fund the $35K, so you would have to find another investor. That has you doing a bunch of work without getting paid.
Why doesn't your friend just get this on the MLS and get it sold?
Bill Gulley 30-90 days does sound like a standard reply. Denton is 90 sq miles. I'd need to know house specs and subdivision.
What I don't get is if it's worth 280k as is per the realtor, why doesn't the owner just clean it up (not fix it up) and list it? He'd pocket over 40k at closing vs splitting ~60k with two or three others.
Didn't see Jon's reply when I posted this. Leaving it for the sake of redundancy. :-)
I agree, just don't know what Richard wanted in the deal, at what point are you screwing over someone that you take out of foreclosure?
Absolutely, make a loan, list it and sell. The owner can pay him to help him with the loan and cleaning it up, as they may agree. :)
Richard, I agree with Carlos, since you don't have the means to rehab, holding costs, cure late fees and payments, and list, then you should do one of two things.
1. Have your friend pay you a fee for cleaning the place and perhaps making some minor repairs up to the $10k you have and list on the MLS. You can protect your $10k or less investment with a second deed of trust against the property. I would also suggest sending some amount of payment to the lender to extend the foreclosure allowing you more time.
2. Buy it from your friend sub2 giving them $10k or whatever makes sense and payment to be made upon resale f property. Do minor repairs, list on the MLS as u are then the owner, and keep the profit spread.
Either way, both parties and the bank benefit.
Richard,
I understand your concern for not wanting to take advantage of someone in a bad situation. I cant tell you how many times I have essentially given away money I rightfully deserved for my hard work and expertise, out of my desire to be "fair" and to use the gifts Ive been given to help others. But sometimes "helping" someone out only minimizes the sting of a lesson they need to learn. While it isnt my place to judge what lesson they should learn or what it should cost them, it is my place to ensure that i take care of me and my own so that I AM in a place to give back and help those who need it.
It appears that your friends made some poor decisions and if they were in a place to remedy the situation on their own, they would do so. That said, any assistance you give them is "help" and your time and money is worth what its worth. Dont sell yourself short. Youve been given some great advice as to the options. I would choose a path that presents the least risk to your hard earned money, and approach it as a business transaction, looking for an acceptable ROI and what is left for them to recover will be FAR better than loosing both the cash and credit in a foreclosure.
Thanks for all of the feedback.
To sum up, if I understood correctly, the options are:
1) Have the owner list and sell as-is and hope it closes before the bank finishes the foreclosure. I would make an arrangement with the owner to get compensation (on the side) for my help cleaning, etc. This option results in the most money for the owner, least risk (and money) for me, and still has the risk of foreclosure.
2) I make a loan to the owner to reinstate the bank loan which would get them back in good graces with the bank. Have the owner list and sell as-is and hope it closes before the whole foreclosure thing starts/finishes again. This option gets me more money (if it doesn’t foreclose), allows more time to sell but still eventually has the risk of foreclosure.
3) I help the owner pay for some of the repairs, create a loan for compensation, list and sell partially rehabbed for maybe a little higher price and hope it closes before the bank finishes the foreclosure. This option might make a little more money but the risk of foreclosure is the same as option 1.
4) Bring in a 3rd party rehabber to finance the repairs and pay for holding costs, list and sell at a higher price after rehab, then split the net returns. This option allows more time to sell but any profit would be split between more parties. This might be a good option if rehab costs are low, rehabbed sell price is high and holding costs are reasonable. Eliminates the foreclosure risk.
5) Have the owner sign over the property to me (SUB2) for some reasonable consideration to them at closing. I would do one of the first 4 options above but now as the owner. If this deal goes to foreclosure, the owner would still have a foreclosure on their record and I would not make anything on the deal (also might lose a friend) unless I went with option 4 and bring in a 3rd party.
Clarification question – If I take over a property SUB2, am I actually the “owner” or is the current owner still at risk of foreclosure?
Are there any other options already proposed that I missed?
I heard about a method where you can sell to someone who wants to buy a house and can pay the payments but can’t get conventional financing.
6) Option 6 might be this: I loan money to the owner to reinstate the bank loan, help find a buyer who would do the rehab for equity consideration. Create “wrap-around” loan(s) to buyer where I get payments on the loan to reinstate the original bank loan plus some extra consideration for my efforts and the current owner gets the rest of the payments. The current owners, and I, continue to receive payments from the new buyer. The current owner continues to pay on the bank loan. This option might result in the most money for me and the current owner but profits are spread out over a longer time and there is a risk that the new owners might not continue to pay which would start the whole thing over again.
Do any of you have experience with something like option 6? What are the risks/benefits? If it is a legitimate idea, how would I find a buyer, etc.? How does it work from the buyer’s and seller’s perspectives regarding property taxes, insurance, income taxes, etc.?
I believe option 6 would be called a lease with option to buy
I think you have it.
Option 6, and others, since this is a foreclosure in process, it has the attention of the bank. You can bring the payments current, but if you do a Sub-2 or anything beyound a lease, you stand to violate the due on sale clause and the bank starts the foreclosure all over for the violation. Since this bank has the property in thier sights, I wouldn't advise it. Violating the due on sale right after the bank working with you to reinstate the loan might just tick them off.
You best bet is to get an authorization from the owner to talk to the bank and run the options by them, if they approve a sub-2 to a known buyer you would be good to go. Consider too, the liability to any new sub-2 buyer and a foreclosure and not paying amounts due. :)
Richard Chapman, your clarification question. In a sub2, yes you are the owner on title, AND the previous owner is still liable for the mtg/foreclosure.