Need help analyzing this deal - BRRRR?

Question

Hi All!

I need some help analyzing this deal and what the best approach is to finance it.

So this property is located in New Jersey, in a very good A neighborhood, approx 1hr to get to New York City. It is a 3 family house with an ARV of approx $450k.

This house is currently in Pre-foreclosure, and as of right now, the owner is owing about 3 years in payments. Because of the late payments and fees and interest, the total balance as of right now is about $350k (which means I can pick it up at around this price). Out of the 350k, about 125k is what it will take to bring the mortgage current. I am good friends with the seller, and she is flexible as to what we want to do.

This property currently generates about $4400/mo in income from the 3 units, and the operating expenses are around $2220/mo (tax, insurance, water/sewer, vacancy @5%, management @10%, repairs @5%, and cap ex @10%).

So my thinking to proceed with this deal is as follows:

Option 1: Talk to the bank and see if we can help her talk down the back payments owed. I am not sure how much success we will have, but it's worth a try. The more we can talk down, the more equity this property will have, and the better the deal IMO. (I have never spoken with a bank for this reason before, any suggestions and tips on how to approach the bank will be great appreciated! ). If the bank is willing to do something with the existing loan, I am willing to put up the cash to bring everything current and then perhaps assume her existing mortgage and pay it off? The downside is her existing interest is pretty high, and I will not be able to cash flow positive until I refinance it out.

Option 2: Take a conventional loan and cover her existing mortgage for 350k with 20% down, and do a cash out refinance in about 8 months (since it's worth $450k).

Or perhaps a variation of both options? Short sale approach? Loan Mod?

Either option, with a cash out refinance, based on the 450k value, the new mortgage will be around $2150. With the income and new mortgage, this property will cash flow positive about $25/mo. But I will have $0 dollars in the deal.

I need to act quickly because of the penalties, fees, and interest is racking up fast. Any suggestion would be much appreciated. If this deal does not look good for whatever reason, please let me know why as well. Thanks all!

John Leavelle · Answer

@Michael Lee

Not sure how you can do a Cash-out Refinance.  If the property Value is $450,000 you can only get $337,500 from the new loan (75% LTV).  That does not cover the remaining amount owed.  What ever cash you put into the deal will stay in.

James C. · Answer

Michael,

Before any money goes down, make sure that you have an attorney draw up any of the documents. A attorney that knows foreclosure/alternative financing and their associated laws would be a smart idea. You will also need the seller's permission to talk to the bank (most likely in writing), so that needs to get going ASAP.

My first question is with 4400/mo income, where has that money been going for the last 3 years, and can the seller bring any of that to the table? My thought is that if the seller can bring some to the table, then you can write a second on the 3 family for the money she puts down, and reduce your cash into the deal. There might be a way to borrow the 125K on a second, pay off the arrears on the first, then pay on both.

Absent that, you could negotiate with the bank to pay part of the arrears, and pay over and above the monthly mortgage amount to pay down the arrears over say the next year or two. Unless the mortgage holder is bent on getting the property, that should at least garner a conversation.  I'd start with something along the lines of 10K and the balance paid in monthly installments of 2K for 5 years. See what they say... they probably will want more down, and a shorter time frame... say 1/2 down and 2600/mo for 24 months.

Another option is some sort of loan modification. Put some "good faith money" towards the arrears, and add the remaining arrears to the principal balance and extend out the note for 3 - 5 years. Again, this should make the banker at least want to talk to you, and go from there. You might consider working through their title attorney to make that happen.

I guess another option is to start making payments again, but there is no guarantee that they would stop the foreclosure action. You could ask them to do so, and indicate that you would like to work something out. They could balk at that, but my hunch is that they would take a workout over a foreclosure. It is possible to have the bank forgive penalties, and fees, and it never hurts to indicate that you are looking to do so to get a deal. Keep in mind, they have heard it all before, so know your limits going in.

Overall, it's a tight deal no matter which way you slice it.

Good Luck!

Jim

Michael Lee · Answer

@James C. Will do!

James C. · Answer

Michael,

Keep us up to date on how it's going.

Good Luck!

Jim

Michael Lee · Answer

@James C. and @Jonathan Boyle,

Thank you for the reply guys, much appreciated! I am currently working with the bank to go the short sale route, which seems to make the most sense at this point. Hopefully I ll hear back from them soon!

James C. · Answer

Michael,

It depends. You have to make a decision:

A) Buy the asset using a "Short Sale"

B) Buy the asset for what is owed.

C) Find a way to take over the current mortgage (reinstatement, loan modification, assumption, lease/purchase MLO)

A & B require new money loans with all the attendant down payments etc.

C will most likely use less cash, more negotiating.

I still think I would at least explore the "C" route first, with a backup plan of "A" or "B".

If you have to purchase for 350K you are looking at 70,000 (20%) to 87,500 (25%) down payment plus closing costs. I doubt the bank will let a short sale go for much less... since current LTV is about 78%. This, in my mind makes "A" the least viable option.

If the "C" route takes less cash than "A" or "B", then it's the better route. I'd try to target 10k or so all in, and determine at what level of cash you think is your breaking point i.e. at 50K of cash in, I'd prefer "B" over "C". Put another way, if you can buy/control this asset for very little cash, you can acquire the next one for the leftover cash. Two for the price of one. 10K for asset one, with 60K leftover for asset two (assuming your 20% down payment (70K) availability)

My order "C", "A", "B". My hunch is that "C" and "B" are your best bets and "A" is not as viable. That being said, I would still try "A" if "C" fails, because if I want to purchase an asset, and I get to pay less for it... I'm all over that deal.

Hope this makes some sense.

Good Luck!

Jim

Michael Lee · Answer

Hey @Chris Seveney , yea I plan on putting the money up to bring the payments current (depending on the negotiation of the arrears) and take the money out with the refi.

Michael Lee · Answer

@James C. I will talk with the seller and check out all her loan docs see if there's the Due on Sale clause. I do know it's not an FHA or VA loan. Do you think it is wise for me to go to the bank and tell them I'm interested in purchasing this property - let's talk numbers, or should I act on behave of the seller just to negotiate the arrear down first, and come in later and say oh by the way I want to buy the property? I have never spoken with the banks before in this capacity, any strategy here would be much appreciated!

@John Leavelle Thanks John I'll keep that in mind, I'll make sure to get my refi lined up before getting into the deal!

Need help analyzing this deal - BRRRR?

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