Pre-Foreclosure (Purchasing from Family Member home needs repair)

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Pre-Foreclosure (Purchasing from Family Member home needs repair)

Kerry Arm
New Haven, CT · Member since 2018 · 23 posts · 4 votes

My elder Aunt has a home that is in the Pre-Foreclosure stage and she would like to sell it to me. Found Multiple issues after little research. The house needs about $70k to $100k in repairs  and the current mortgage balance is around $245k. The home value seem to hover around $270k to $290k. My understanding is that she can sell me the home while it's in the Pre-foreclosure stage but my problem is, would the bank accept a selling price of $120k? Has anyone had a similar experience or knows how the Pre-foreclosure process works?  Oh and she is willing to sell me the home for the above mentioned price with no gain to her. 

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Minna Reid
Real Estate Broker · Jacksonville FL & Middletown CT · Member since 2008 · 1k+ posts · 632 votes
5y

In a short sale the property gets listed at market value, a buyer is secured and contracts executed, and then you would go to the lender for short sale approval on that sale. It is a complex process and you will definitely need assistance. The lender will also require that the property was listed, so you will need to get an agent to help you with this (I've been specializing in CT short sales since 2008 and can help if needed. PM me if you like). However, whether the lender knows you are related or not, mortgage fraud is mortgage fraud. Signing an arms length agreement and lying on it is fraud. I do not recommend committing mortgage fraud. Whether an arms length agreement will be required is unknown at this time, but it is likely. It is very specific to the investor on the loan. If you can find out who the investor is, I can tell you whether you will be required to sign one at close.

During the course of the short sale, the lender will order an appraisal of the property. Having documentation on necessary repairs to give that appraiser would certainly help towards having an appraisal support a lower price. What the lender will approve will be a percentage of the value the appraiser reports back to them. 

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  • Minna Reid
    Real Estate Broker · Jacksonville FL & Middletown CT · Member since 2008 · 1k+ posts · 632 votes
    5y

    You would be looking at a short sale, and most lenders will have an arms length agreement involved preventing the sale of the home to a family member (Unless it's a reverse mortgage).

    0Reply
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    5y

    Um, no. Not even in the ballpark. The bank, at this stage, will accept anything over the amount owed, nothing less. It won't succeed on a short sale either because the bank will never go that low and no one will bid close to the upset value because of the repairs needed. It will cycle all the way through to REO in about three years and you won't be able to do much to stop it.

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  • Minna Reid
    Real Estate Broker · Jacksonville FL & Middletown CT · Member since 2008 · 1k+ posts · 632 votes
    5y

    @Jonathan Greene You absolutely do not know that. Sounds to me like if the property ARV is 270 to 290 and it needs 100K of work it's clearly upside down. This is absolutely a good short sale candidate. Doesn't sound like 120 will fly based on those numbers but what the lender will except will be based on an appraisal that they perform. This has nothing to do with what they are owed. The only thing that doesn't work here is the fact that the OP is related to the seller.

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  • Kerry Arm
    OP
    New Haven, CT · Member since 2018 · 23 posts · 4 votes
    5y

    Thank you both for the information and also for responding so quickly, I truly appreciate it. Just to add two more elements that may or may not be a major factor. The bank is not aware that I am related to the owner of the home, we do not share last names. The home is also in a flood zone and my contractor provided me with the repair estimate base on a walk through. He believes because of the sewer line backup and electrical issues, total repair could exceed the $100k figure, possibly $120k but he is not certain until the walls comes down.

    I have worked on a previous Project with my contractor and those repairs ended up being about 15% more than the estimated repair cost.

    Does this new information makes a short sale possible and in your experience how low would the bank be willing to go? I have never done a short sale before so please forgive me if I am asking the wrong questions.

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  • Minna Reid
    Real Estate Broker · Jacksonville FL & Middletown CT · Member since 2008 · 1k+ posts · 632 votes
    5y

    In a short sale the property gets listed at market value, a buyer is secured and contracts executed, and then you would go to the lender for short sale approval on that sale. It is a complex process and you will definitely need assistance. The lender will also require that the property was listed, so you will need to get an agent to help you with this (I've been specializing in CT short sales since 2008 and can help if needed. PM me if you like). However, whether the lender knows you are related or not, mortgage fraud is mortgage fraud. Signing an arms length agreement and lying on it is fraud. I do not recommend committing mortgage fraud. Whether an arms length agreement will be required is unknown at this time, but it is likely. It is very specific to the investor on the loan. If you can find out who the investor is, I can tell you whether you will be required to sign one at close.

    During the course of the short sale, the lender will order an appraisal of the property. Having documentation on necessary repairs to give that appraiser would certainly help towards having an appraisal support a lower price. What the lender will approve will be a percentage of the value the appraiser reports back to them. 

    1Reply
  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    5y

    You can't typically buy a property from family as a short sale unless if it's a reverse mortgage loan on the asset. You wont' know what you can buy it for until the servicer completes a valuation and the short sale review is open. 

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  • Kerry Arm
    OP
    New Haven, CT · Member since 2018 · 23 posts · 4 votes
    5y

    I would like to thank each of you for providing me with your feed back and the information is very valuable. This will definitely help me moving forward if I should chose to pursue this deal. I will keep you posted on what happens next. 

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