Short Sale Approach Question
I have a potential deal in process that I'd like some advice on how to approach with the lender (Beneficial). The owners are very willing to work with me on this -- as long as they can rent back from me for a specific time with a potential option to purchase back in the future upon credit improvement. There are some specifics that make this deal harder to short in my mind that I wanted some experienced viewpoints on:
1) They are being foreclosed on by the property tax authority rather than the mortgage company. They owe approx $6k in back taxes. Coincidentally, they received my letter BEFORE they got the case notice from the tax authority! I sent out the letters the day after the Notice of Foreclosure Filing. They tried to make payments, but can't do it because of the exhorbitant mortgage rate from Beneficial.
2) They are not in arrears on their mortgage -- although they wish they were. 12% interest currently on their 20 year mortgage. The loan is setup as an autopay from their checking account and has been good since inception except for two months recently during the bankruptcy proceedings which was made up for quickly afterwards.
3) They went into Bankruptcy in Oct 2002 and emerged in Dec 2002. I hear you can't file bankruptcy again for six years -- so the lender isn't worried about this, right?
4) House is worth approx $126k, they owe $119k and taxes will be $6k.
5) The house is in good shape, in a good neighborhood (although it is an old neighborhood, built in 1958).
Easy deal to make work as a rental at the numbers shown above -- but I want to short the primary somehow to make enough room for me to take some profits when I sell the home back to them at a reasonable price.
I don't want to tell them to stop paying their loan (right?). I can't threaten the mortgage company with bankruptcy (right?). Its not run down so no collateral problems there (right?). So where to start (or stop and just buy it at full price -- plenty of room to make money on the rental due to the 12% loan - I can get 4.25% or so.
My goal is to help this family from being raped by what seems like predatory lending practice from Beneficial. They were told (verbally) that if they signed this mortgage with EZ-Pay and the payments were good for 1 year, they would qualify for a lower interest rate and the loan payment would come down. However, when they called a year later, after all the good payments, Beneficial said they "just missed the end of that program - its not available anymore". Sounds like a load of bull to me.
Nice people, sad story (I won't bore you with it), I want to help (and make money, which they had no problem with during our discussion).
IMHO, the distressed homeowner is not readily forthcoming with full disclosure, is distrustful of anyone and everyone, and will play both sides of the street meaning that of the 60 to 100 'problem solvers' whose letters of solicitation comingled with your's in the mailbox, you probably aren't the only person pitching a deal to them.
Each time you speak with the homeowner, or meet with the homeowner, or send the homeowner a letter, you are being compared, and essentially interviewed for competence, honesty, integrity, and consistency.
The homeowner wants to play the best hand, and won't tell you what cards he's holding.
Hi Dciolek,
Due to the fact that the mortgage loan is not in deafult, it probably would not qualify for a short sale.
From the numbers that you provided, I can't see how you are going to be making money on this deal.
(House is worth approx $126k, they owe $119k and taxes will be $6k.)
If you paid the taxes current, you would have bought a property at retail? I might be missing something, but tell us again how you will making money on this deal?
BAMZ
Dear Dciolek,
If I were in your shoes I would tell them to stop paying there mortgage payment. Then you will be eligible for a short sale, and they will be able to save up some extra funds. Then I would get that tax lien payed A.S.A.P.. Not paying the mortgage until you short sale it will not be to bad on there credit history as long as everything works out. Because when you go through a short sale, you credit history show a few missed payments and then it show that there entire 20 yr. mortgage is paid off. Which will look excellent. You could probably negotiate 15-25% discount on the mortgage depending on the condition of the property. I hope everything works out!
Good luck,
Jorgan Cattin
Oh, I'm sorry I wasn't clearer on the how to make money on this deal. It doesn't make $$ as a flip, just as a rental or lease purchase. It will cash flow very well, even as a retail buy property based on the rental amount that I can get vs. my costs to acquire. They are currently paying something on the order of $1275 per month to their mortgage company on a $119,000 balance. Since I will likely only be holding the property for 3 years or less -- I can get a 3/1 ARM for somewhere in the 4-5% range. LOTS of room between that mortgage payment, recouping the property tax and their $1275 per month.
If the property is in less than marketbale condition (I didn't read your entire post), you might be able to effectuate a short sale. However, once Beneficial is notified of the pending tax sale, they'll pay the taxes and negotiate a repayment plan with the mortgagors.
Dear friend,
May I ask why are you willing to put your good name and credit on the line to acquire a house only to rent it back to people who seem to be unable to handle their finances.
Every story I have ever heard about saving a house from foreclosure or tax sale and allowing the delinquent party to continue to live in the house has a sad ending for the investor.
If you wish to proceed in this manner then make sure you get multiple CYA letters signed by the sellers. Each CYA letter must clearly explain what exactly everyone is agreeing to.
To your success,
www.realestatesolutionspublishing.com
Thank you for the straight talk. I do have a soft spot (unfortunate, but the truth) for real people (but who can tell for sure these days). My risk is much higher if I can't get a short sale on this deal.
Dciolek,
Have you come to a decision on what you plan on doing with this property?
Any more questions that you have?
I am interested to read how it all turns out!!
Best wishes,
Jorgan Cattin
I have delivered a set of documents to the owners last night and received their signature on the Authorization to Release forms. Since I have received no other suggestions on how to approach the bank -- I will likely focus with the loss mitigation rep on the upcoming foreclosure, the arrearage on taxes, the few things I can find wrong with the house and the overall age of the home. Of course in addition to mentioning that the owners need to focus on paying their taxes now to the detriment of their mortgage until the foreclosure.
If I can get the short, I will still entertain the rental -- with my eyes wide open. The owners have made their $1272 mortgage payment religiously for 18 months (even through the bankruptcy they only had a blip and are current now). I hear the short will be hard because of this though.
I'm new to the investing part of foreclosures but from my daily learning, as I understand the bank has no incentive to do a short sale if the mortgage is current My belief is they coould go to foreclosure and the bank would take back the property unless they had a higher bidder.
sounds like a tough one for the owners w/ little equity.
Let us know the outcome
Status report: I had a meeting set up to go over the documents to sign and negotiate the numbers with the buyer. The husband called about 4 hours in advance to say that they want to think it over some more. A bit further probing reveals that his wife is having wild mood swings and can't discuss it right now -- he will try to get back after things "calm down" a bit.
Anything else I should do other than let them know I available when they are ready? I want them to have a sense of urgency, but I don't want to put them through any more hell than they are already going through.
Financial hardship is an unfortunate situation to be in. Many times, homeowners in foreclosure are in disbelief and perhaps sit on the hope that Santa Clause will come and bail them out sometime soon. I don't say this to be harsh, but in my area, it is very consistant.
The only thing that you may find caution in is the reluctancy for BOTH homeowners to be motivated to get out of this situation. Sometimes confusion can stall a short sale with the owner, but when you walk them through it and show them how you may be able to help them, if they are motivated, their motivation should go through the roof. It would be a bad deal for you if you spent a lot of time, energy and perhaps some dollars on this deal, only to have one of them back out at the last minute.
Make sure that there is motivation with BOTH of them before you spend too much energy here!
Best of Success!
BAMZ
I found out tonight when calling the homeowner that the deal is at least on hold and potentially dead. They are exploring another option to pay off the $6k in back taxes that eliminates the immediate foreclosure proceedings -- and this was primary to them.
I asked what they were going to do about the 12% mortgage that is killing them and his reply was this was secondary at this time (stop the pain of the foreclosure first, then worry about the high mortgage).
This one will get filed in the tickler for a month and we'll see where they are in a few weeks. It might be worth me sending them an offer summary in the mail...
Thanks for everyone's interest and advice.
Now I am working on a doozy -- $170k mortgage, home is only worth $140k, they are about 18 months in arrears since a bankruptcy was filed. Second of $9k. Back taxes of $5k. Sounds like a lot of hoops to jump through -- although the foreclosure hearing date is 12 months out -- that's a lot o' money and time for the banks to wait!
dciolek,
Sometimes bad news can be good news because it allows you to mentally move forward with other deals that have better potential.
That is great news that you already have another candidate that you can help! Keep keeping on and Best of Success!
BAMZ
So obviously I've been working on this one for a while. But here is the update:
The first mortgage holder's loss mitigation department has been easy to work with. I sent a killer package with every detail I could think of -- and their first response was to send out a local realtor to do a BPO and confirm the damages I've claimed. The homeowners are working with me, so they left the house while I walked the agent around for the appraisal (I am honored by their trust). Every way I figure it, the first will net about $70k if they wait to sell at auction -- they net $90k if they short through me. Still an $80k loss, but better than $100k loss.
After I get confirmation that the first is playing -- I move on to the second ($10k). They KNOW they will be wiped out, so I hope they will release with minimal consideration.
A lot of work left to do -- but very encouraging for the effort invested so far. The nice part is thinking that I am doing a WIN - WIN - WIN deal. The homeowner is ecstatic that he is being helped out of the foreclosure and getting some consideration for it. The bank can't be happy, but at least can move on with their loan reserves and come out $20k to the plus vs. the Sheriff's sale. I get a great rental property for $100k that is worth at least $140k.