Create a 75k Note on 230K house?

Question

Hello BPers. I got a call from a seller a couple days ago in the following situation......He and his wife bought a house in 2010 worth about 230K. The mother in-law gave them the majority of the money to pay for the house but was 55k short. Somehow, he got into a hard-money loan to pay for the shortage. He even admitted lying about the purpose of the loan......telling them it was for investment/rehab and not primary residence. The balloon is due now and the lender is pursuing foreclosure but has stated that all they want is their money back. I don't think he has tried to refinance because his credit is bad.

Is it possible for me to create a note for anything above 55k and sell it to another investor, keeping the spread as my profit? If so, how do I accomplish this?

Barry

Is it possible for me to create a note for anything above 55k and sell it to another investor, keeping the spread as my profit?  If so, how do I accomplish this?

Barry

Account Closed · Answer

It's a great thing that you came and asked for information.

My best advice would be to keep it simple. The situation you described, even if it was possible, sounds like a recipe for disaster.

Just go out there and find another house to rehab that doesn't have all these underlying problems. The time you spent looking into this and trying to help out these fraudsters, you could have talked to 10-50 other people.

Barry Taylor-Young · Answer

I'm new to real estate, only having completed one rehab thus far so please excuse my naivete:)  I've started marketing recently and this guy gave me a call.  All in all, I was trying to come up with a way to monetize as many leads as possible as I hear I should be doing.  I was hoping I could create a winning solution to this problem by getting the lenders their money, allowing these folks to stay in their house, giving another investor 1st lien on a really nice house where the owners have been living and paying for 3 years and make some money for myself.

Bill, you're right......they can't meet the balloon!  When I heard, I actually couldn't believe it had gotten this far.  I'm not a mortgage broker (obviously!) but I can't understand why they hadn't tried a refi in the last 3 years even with bad credit.  If they end up loosing the house, the real victims in this thing are the kids and the mother-in-law. Man, that sucks pretty bad!

Bill Gulley · Answer

Not sure what you mean by making a note, unless you fund a loan, no you can't. If you have funds you could refinance the property for more than is owing with a new note. You will need your own cash and go through an attorney. You can not make the note for more than you actually fund and actual loan expenses, you can't charge fees as you are not a lender.

You will need to go through a mortgage broker/originator or attorney.

Since you can't add some profit to the note you can't sell the note at a profit.

Might be able just to buy the existing note, but why?

This will need to be fully amortized as the borrower is unlikely to meet any balloon requirement.

Actually, the story at application of rehabbing and then moving in doesn't bother me so much. 1. many buy with great intentions and then realize they need to move in to get stuff done and do the work. 2. The rehab, especially for newbies, finds that it's not so easy, as cheap, is more time consuming and a financial drain, the solution is often moving in. 3. Moving in lowers the lending risks, if they were to say it was an owner occupied and never move in to do a rehab, that would be a different story, but what they did is actually common usually due to the matters mentioned and lenders don't nail borrowers on a fraud front when they do something the reduces risks.  Reduced to a point as we assume the property is marketable as it stands.

All in all, I'd agree that this is not going to be a lending deal.

You might buy it paying off the existing loan and partner with the owner to split some profits re-selling the place, you need to see an attorney and make sure you can force sale at or above an offer received. :)

Barry Taylor-Young · Answer

Thank you Tom and Dion,

Tom, a second lien position wasn't my thought.  A first lien position with definate security in the property would have been the goal if this was possible but as you and Dion have said.....this is something thats messy, fraudulent and not possible.

Dion, I understand some of the issues you are trying to point out.  Court dates and lawyer fees have already started to be imposed on the borrower.  I was just wondering if it where possible to work something out in this situation but I will take your advice and walk away.

Barry

Dion DePaoli · Answer

Barry,
	
	As Tom points out, the idea that the borrower intentionally mislead the Mortgagee in application about the home is not a good thing.  This speaks to the integrity of the borrower.
	
	That aside, NO, it is not possible for you to create a note for more than $55k and make the difference.  A new loan is a refinance.  The transaction will be documented on a HUD1.  The exact payoff amount for the current lien will be requested and received by the title agent.  You are not a lien holder, you have no interest in the property, you  are not a party to this.
	
	Also, remember the borrower does have to pay back the loan and is responsible for payments along the way.  So what you are also talking about would increase what the borrower actually owes and the base of his payments.  Which I am just trying to get you to understand the many issues with your question. 
	
	Lastly, and perhaps most important for you.  We know this is the borrower's primary residence.  Any loan negotiations requires a license.  I suggest as Tom did, to simply walk away from this, there is nothing for you to do here.

Tom Goans · Answer

@Barry Taylor-Young,

Why would you want to be associated with this?

First, if I am reading your post correctly, this family willfully committed fraud. If this is correct, major legal issues may be looming.

It appears you are considering a loan in second position with the only very remotely possible security is the property. The borrowers have already proven they are extreme risks. I view this as an unsecured loan with the very high possibility I will not see the return of my investment, much less make a profit.

As an investor in real estate notes, this is a very unattractive investment.