My grandmother passed away recently. She had a reverse mortgage with a current payoff balance of $150K. The house is in near-perfect condition (Grandpa maintained it well until he passed). I haven't gotten a BPO or appraisal yet, but looking at comps the house on 11 acres in this rural town is worth $210K-$240K. Her heirs are her three sons. None of them have any interest in taking on a mortgage to turn this into a rental or flip it, they are all greiving for their mom. Since I've never done a flip I wouldn't be comfortable taking out a second mortgage (although I could front the $30K for the downpayment with creative financing). I know a flipper that would love to get ahold of a "paint and carpet" flip with 60K-90K equity in the deal, and she would be willing to pay a finders fee since she regularly deals with wholesalers.
My question is: Can anyone come along and purchase the house for the amount owed to the reverse mortgage company? My thinking is that only the sons can purchase the home for $150K. If they don't buy it then everyone else will get a chance to purchase it when the reverse mortgage company lists it on the MLS at appraisal value. Is my thinking correct?
Another interesting wrinkle: My father (one of the sons) purchased the 75 acres of farmland adjacent to this property shortly before Grandpa died, to lower their property tax bill. This was before the reverse mortgage was in place. Dad now owns the right of way (driveway), and the well for the 11 acre property. In order to sell the property the reverse mortgage company would have to dig a new well ($10K) and cut a new driveway, 200 yards from the road and bridge over a creek (an EPA/DEP nightmare to permit).
Any ideas on how to approach the reverse mortgage company? Any ideas on how to extract the equity from the property for the brothers? They are all successful and financially sound, but it would be a shame to just let the property go. Any thoughts are greatly appreciated.
First, I'm not an expert on reverse mortgages, and these have some provision that are different from a regular mortgage. Get out the paperwork and give it a read.
My thinking is that only the sons can purchase the home for $150K.
The sons probably already own the house at this point. The house was owned by grandma and would have passed to heirs at her passing per her will, beneficiary deeds or relevant law. So step one is to figure out who now owns it. You may have to go through probate to sort this out, if steps weren't taken before her death (that is, if there is no will or beneficiary deed.)
Any ideas on how to extract the equity from the property for the brothers?
Yes, its dead simple. They should sell the property on the MLS. The reverse mortgage company does not, AFAIK, own the property at this point. The heirs do. The reverse mortgage is still in effect. If its not paid off the lender will foreclose and take the property and will then own the property if nobody bids at auction.
It appears the property has a serious defect that I wonder if you're properly accounted for in the valuation - lack of a well and access. Does your valuation account for these effects? If your father insists on keeping his property, requiring the buyer to deal with the well and driveway, the price a buyer will pay will be reduced correspondingly. If he's willing to cut off the necessary slice of his property and add it onto grandma's property then you might get something closer to the value you think there is. But he would need to be compensated from the sale for that piece of land.
If the mortgage isn't repaid and the reverse mortgage company does foreclose, they will not do any of the steps you mention to correct these issues. They will sell it as is. So, not only will the value be hurt because of the small number of bidders at the sale and all the usual stack of fees will be tacked onto the balance owed, but the defects will come to the forefront. The bids will be must lower than the value you think. Which means any overage from the sale (that would go to the current owners) will be reduced or eliminated.
A savvy buyer may be able to take the driveway and well by adverse possession. That law (which is state specific) says that if someone uses someone else propery in an open way and their use is not opposed by the owner of the property they're using, it can be taken. There was a case here a few years ago where a couple went to build a house on a lot they owned and ended up being unable to because the neighbors had been using part of their lot for many years without opposition, and were awarded ownership of the part they had been using in court. If your grandparents were using the driveway and well a new buyer might have a case to take that portion of your dads property via adverse possession.
Good analysis, Jon.
If the subject property is in PA, adverse possession is not practical as I believe the statute is 21 years. So, unless the house buyer is young and patient (if those things are compatible), other avenue ought to be considered.
I take it that no probate has been opened to date. If so, opening probate would provide standing for someone to deal with the RM lender. If the lender can be persuaded to see the true value as affected by the lack of utility due to no access or well, they may take a substantially reduced payoff.
On the upside, you could obtain a voluntary, negotiated or prescriptive easement from the relative to use road and well. I might mention that power must run that well and, unless buried, power lines must run over someone's property to reach the wellhead and pump.
Unless you own the RM and obtain title to property as successful high bidder from foreclosure (risky in this case) you're probably better off getting capacity, powers and authority by opening probate to legally control title and possession.
So, the opportunities are centered around control of title, possession AND reduction of secured debt.
Thank you both for your help.
Dad would be more than willing to give a new buyer easements or sell the right of way and well. He wouldn't be willing to give those same easements to the reverse mortgage company. The property was appraised at $165K at the time of the RM and my grandparents were given $90K. I realize that this is how the industry operates and they pay out based on mortality tables etc... but the family feels they were treated unfairly. My guess at value was with dad adding the slice of property with the driveway and well, leaving the property without defect.
I like the idea of opening probate and then aproaching the RM company. I was looking at this the wrong way. So the process would be:
1. Open probate.
2. Negotiate reduced amount to RM company based on "defects" and secure financing from traditional bank for that amount.
3. Have Dad sell the slice of property to the "estate" and have the parcel re-surveyed and recorded at the county.
4. Minor touch up work on the house.
5. List on the MLS.
Did I get the gist correctly? You two have given me options to explore, and some hope for a positive outcome. The old standby family lawyer leafed through the RM document and said "pay them the $150K or let them forclose, that will be $250 for the consult". Looks like it is time to find a more creative lawyer.
Even shorter: once you have power as admin., negotiate lower payoff with lender, list and sell for full price ASAP to pay off lender during probate
No need to get a conventional loan, plus this would require closing probate to distribute.
Should be able to list and sell during probate, even if court confirmation is ultimately required (may not).
No sense in overcomplicating.
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