Motivated Seller Underwater, How can I help ? Make money ?

Question

A family member is 30K underwater on his 2nd home. His ARM will adjust next year and he wants out.

Is there an opportunity there and a way to help ?

I am pretty new with REI and my focus is on rehabbing, but this situation popped up and I dont know what to do.

Any ideas ?

John M Pierro · Answer

Hello Tom,

Are you negotiating the Shprt Sale

Tom La Rosa · Answer

Hi, so my cousin ended up short selling his underwater house.

He was already in another house that he plans on staying in for a long time, so he did not care about a bad credit score for a while.

Sorry, I cant remember how to do the "@" thing

Justin Fernandez · Answer

If the appreciation works, lease optioning the home would work, @brian gibbons is his speciality and a great resource on that. But I'm no expert in that area.

Rick B. · Answer

Wouldn't they need to bring the difference to the table to refi an underwater home?

I think that is why "they cant refinance the ARM..."

So what happened in the end?

Tom La Rosa · Answer

@Kevin Tran

@Walt Payne, @Brant Richardson

Thanks for your time. Especially Kevin !

The house is rented, at about break even. The kicker is the ARM adjusting up next year and possibly driving the mortgage payment sky high.

So really the ARM will really make this situation worse. This is my family members 2nd house and I wonder why they just cant refinance the ARM. . .?

I need to contact them to get some answers.

Thanks guys.

Walt Payne · Answer

@Kevin Tran  Financing, that is why. If they can rent it at break even and wait out appreciation for example, or find an unqualified buyer who has enough income it can work for them.

Kevin Tran · Answer

@Brant Richardson Maybe in California or other expensive states that I can see someone willing to pay 30k extra for an owner financing home.  I could be wrong though, but when you figure that lease to own candidate must have 5k-10k cash for down payment plus they are responsible for taxes, repairs, and pay 20k-25k more than market, I can't help but starting to question the intelligent of the buyer.  A subject to current financing is a viable option, but again why would anyone pay 30k more than market?  If they have 5k-10k down why not try to qualify for FHA or other federal programs?  If they have bad credits, I don't know if I am willing to take the risk of someone not making the payment and now they won't leave.  It's a double edge sword, remove a problem and buying yourself a new problem.  If someone have done it or have seen deal like this before, please let me know the details so I can learn.  Thank you.

Kevin Tran · Answer

First question to ask is if he renting out the house, will it covers the payment and cash flow?  If it does that is the best option until he can sell the house or pay off the loan slowly until he is no longer under water.

The second option would be to ask for a short sale, basically giving up the right to to property by selling it for less than the balance of the loan.  Caveat to this method is that it's normally takes a long time for the process, also his credit will takes a big hit so forget applying for car loans or credit card.

Third option is feasible only if payment is more than market rent.  Rent out the house for max amount of rent, but do not make the house payment.  Important!!!! Make sure to save that money in a separate account that earn interest.  Wait for foreclosure process, and drag it out as long as you can making sure you collect rent during that time.  After foreclosure, creditors will call to collect the balance.  During this time, they will negotiate pay off amount in exchange they will send a letter to the credit company stating that you have pay off the loan.  The pay off amount will vary depend on how long past the foreclosure.  Foreclosure takes 7 years to drop off your credit report, so the longer it is the smaller the payoff.  Let say you generated 30k before the foreclosure is finalized.  Balance is 60k, and negotiated pay off is 45k.  You can renegotiate the payoff at 30k and make sure that they'll send a letter to you and a copy to your credit company stating that the amount has been pay off.

Third option is very rare and probably the last resort.  Ask for what is called a deed-in-lieu which basically means that the owner will gives the bank back their keys and walk away scratch free.  This method is rare because banks is in the business of generating interest and loans not real estate, therefore they will extremely reluctant to take back the property unless two thing happens.  1.  The loan balance is small and the equity in the house is more than enough to overcome their holding costs.  Example: loan balance is 30k and house is worth 60k, if the bank take the property back and sell it at 55k they still make money.  2.  A local bank with small asset generate the loan in house, which means they are not package to sell to Fannie Mae or Freddie Mac.  They made the loan, and two months down the line the payment stops.  Normally bank average 120- 180 days to send a NOD (notice of default) to the owner demanding those payments or face foreclosure.  In certain state, especially in a judicial state it can take somewhere from 1-3 years for a foreclosure process to complete and the bank ended up with an REO ( normally it goes to auction, tax sale, etc which I'm not going into because I don't have all day).  The longest I have heard is 5 years.  Anyway, it is smarter for the bank to eat that loss instead of writing it off as bad debt in their book and foreclosure cost money.  Instead, they take the house back, turn around and sell the house to recoup most of the cost.  This normally only works with small banks that have little capitals to loan.  National banks have the money, time and people so they can afford to sit and wait.

This is one of my longest post yet.  I have to sit down to type this out.

(Please keep in mind I am not a legal advisor, this is my opinion and reader should follow or proceed with care.  Ask your attorney for legal advice!!!!!!!  )

Brant Richardson · Answer

He could provide owner financing for somebody.  Some people who can't get traditional financing might be willing to pay an extra 30k for the opportunity.  Or you may be able to sell it, subject to the buyer assuming your relatives loan.  It depends how much 30k is compared to the total value.  I have not done one of these deals, just read about and listened on the podcasts.

Darren Budahn · Answer

I'm no expert, but if it's a second home, is there a chance he can rent it out?  Selling for 30k less than his mortgage doesn't sound like a good option.