Flip in CA - Seller financing hen they still have a loan - help?

Question

I have a neighbor that is in a distressed situation. She is in foreclosure, with a primary mortgage, secondary mortgage, and an additional lien on the property. She wants to sell, pay off all her debt, and move out of California to Ohio, where she has family. The house is in good condition, but needs some cosmetic and space planning work in order for it to sell for top dollar. She wouldn't be able to sell it on the market for how much she needs to pay off all her debts and have enough to set her up in Ohio (she already tried).

My partner and I are trying to "buy" the house from her for a certain amount of money, will take over the mortgage payments, fund the fixing of the house (our own cash or HELOCS), and then will sell it for profit. She will receive the initial "buy" amount that we agreed on, a portion of which is going to be paid up-front in order to bring her mortgage current and give her enough to move out to Ohio, and then a percentage of the final sale amount.

The reason this flip works is because we are avoiding going through two purchases and also avoiding financing fees from a HML on the purchase of the house, since the owner will still own the house during renovations.

Since she doesn't own the house outright, this isn't really "seller financing," but maybe more like a joint venture?

What kind of legal documentation do we need to make sure all parties are covered in this situation? I would assume that she adds us to the title via quitclaim deed, but the mortgage(s) stay in her name. She will move out to Ohio, we fix up her house, put it on the market and sell it, and she will do her part (signing documents, etc.) from Ohio (the percentage of the sale price is the motivation for her cooperation).

I feel good about the fact that we are swooping in at the very last minute and are able to help out a neighbor, while also giving us a nice flip opportunity. Being able to pay a higher amount because we can avoid major holding costs from a HML is what is making this deal work. I just want to make sure that all of us are covered and protected legally.  Everyone is happy right now, but if bumps arise, I want to ensure both her cooperation and that we make good on our promises.

Has anyone done something like this? How did you structure the deal?

Did you have issues with the loans being called once the quitclaim was recorded and there was another person on the title?

If nothing else, does anyone have a real estate lawyer in the Los Angeles area that they have worked with that you would recommend?

Thank you in advance for your help, advice, and referrals!

Account Closed · Answer

Don't use a Quit Claim Deed, use Warranty Deed. Get a Title report. Use an attorney. I've done these for 25 years and if the numbers work, they work and are worth doing.

Tom Makinen · Answer

If you can't sell it and make enough now, are you sure you can get enough to pay off all the liens.

Brandon Sturgill · Answer

@Irina Costea this is a massive assumption of risk...not to mention problems. What's the profit?...

Account Closed you don't have to go on about it here, but how do you structure a nightmare deal like this and come out clean...very curious. Thanks in advance.

Calin Costea · Answer

Just as a thought, what if you structured the deal as a lease-to-own transaction? Pay her through escrow a sum that clears the backlog plus whatever she needs to move out, pay a monthly lease equal to her combined payments on all debt and include that you have the right to do the rehab. When ready, sell and transfer the the option to buy.

I'd be curious to hear the community's pros and cons on this idea.

Curt Smith · Answer

You're talking about buying subject to the existing mortgages.  You will be on the hook for paying both mortgages each month as well as fund the rehab.    I do subject tos as well.   At closing you need a POA power of attorney from the seller to manage the home owners insurance, and another POA to manage each of the mortgages.   Both comments above are good, certainly get a warrantee deed.

I suggest you contact a agent who has signs in your neighborhood to give you a CMA for what this house would be worth and with what improvements.

Flip math is approximately:   $ARV (from the CMA) - 10% cost to sell (6% + 3% concession to the buyer for closing costs and 1% seller concessions) - $rehab cost - $rehab-oop over run factor - $costs of closing on your buy side -$costs of your financing - $sum of all debt and liens = your $profit.

You need to investigate current owner liens and debt in public records.   Each state sometimes counties have their public records searchable by anyone, just just closing attorneys.   Ask around, google;  your county public records.   Join local REIAs and ask there.  You need to be a member of local REIAs anyway.

Do this math, ideally post here.  My interest is buying rentals with subject to, not so much flips.  If you don't show with this math a profit of >>10% of ARV the deal is too tight.  Flippers target 20% profit, why not you too.

But the flip may be tight today,  Is the sum of both monthly mortgage payments less then area rent by at least $300, ideally more??  You may rent for a number of years then fix and flip.   For this scenarios you really have to have a complete subject to closing with all POAs.   FWIW my closing tactic is to close into a trust etc etc.

Flip in CA - Seller financing hen they still have a loan - help?

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