You Have To Hear What This Investor Is Doing!!!

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I met another investor who seeks out properties in foreclosure. However, he finds properties whereby the amount owed on the note including any penalties is extremely low. For example, he finds a property worth $200,000.00 with a $50,000.00 outstanding mortgage. He then reaches an agreement with the seller where the seller sells the property to him for $50,000.00 + $25,000.00 just before the foreclosure occurs. He then leases the property back to the owner for a period of 12 months and the owner may purchase it back at the end of the 12 months for $200,000.00, the FMV as of the date of sale prior to foreclosure. In the interim, he borrows all of his equity out of the property and, if the owner does not re-purchase the property at the end of the 12 months, he can sell it on the market for the $200,000.00+. Do you see any negatives with this other than paying capital gains on $100,000.00 in this example?

Comments(27)

  • Dmitry2nd July, 2003

    I happened to be totally agreed with Telemon. Real Estate IS a business and NOT a charity.

    I have several examples myself when I was not sure if the deal I am about to offer is ethical or not. Next thing I new the other fellow would come in and close the deal with even more harsh terms then mine.

    Bottom line is: be fare and make sure every single detail of your deal is well documented in the contract and explained to homeowner. You may also want them to sign waiver form stating that they understand all details of transaction and don’t have any questions about it.

    You have to be aggressive in the Real Estate but not crossing the line by intentionally deceiving homeowner or withholding information about his options or deal details. If you are open and honest people are more likely to trust you and work with you then go with some one else even if your deal not exactly what they have in mind. It is always possible to achieve a compromise for the mutual benefits of both sides.

    Dmitry.

  • joel1st July, 2003

    You will have to look to over 1000 properties to find something like this. It would be a very big rarity to find a property that has lots of equity and an idiot owner to sell it with that amount of money.

    In this case, yes, I think the investor could be sued for taking advantage of the owner.

  • Brisy1st July, 2003

    You think the investor can be sued for what? True the investor is vulnerable but, after all, they are about to lose their property and receive no equity at all. This way, they get to stay in the property for an additional 12 months and have the opportunity to re-purchase it. Otherwise, they lose their property and have a foreclosure on their credit report. I don't see how they are hurt by taking this deal.

  • Stockpro991st July, 2003

    My brother-in-law does this and helps repair the credit of the person who he is working this deal with.
    Though rare I think it is a great deal! If the owner was going to lose the property anyway (due to job loss, divorce etc.) why not take advantage of this situation?

  • kevinw1st July, 2003

    This is an interesting topic. Go to

    They have figured out how to do this type of deal. I'm not affiliated with them but have spoken to them about how to go about this.

    [ Edited by kevinw on Date 07/01/2003 ]

    [ Edited by kevinw on Date 07/01/2003 ][ Edited by rajwarrior on Date 07/02/2003 ]

  • ronjung2nd July, 2003

    "Why not take advantage of the situation?"

    Maybe it might not be very moral. Is it a win/win? Or just taking advantage of someone desperate? Why not help them without taking all they have?

    Sorry, to me Creative REI is helping to make deals when they may not go through conventionally. Creative REI has in my own experience been beneficial to myself as well as the sellers. Where's your soul??

    Yes, he would be an idiot to have that much equity and loose it all for a few thousand, but I don't think it would make it "right" to screw them.

    Just my humble opinion.
    Ron

  • rcharb2nd July, 2003

    The problem is: The homeowner can take you to court and claim that the sale/buyback was really just a disguised loan. (The $25,000) and the cost to get the house back is $200,000-75000 = $125,000.If the court agrees is was a loan , a loan of 25k with the payback of 125k is 500% interest and that is called usury ,which is illegal.
    So there is a problem both ethically and legally.

  • hibby762nd July, 2003

    There are people that do deals similar to this but don't allow the owner to stay in his home and don't allow them to buy it back. Instead they turn around and sell it to someone else for the $200K.

    Is the situation that different if you are selling it back to the original homeowner? Aren't you offering him/her more than he might have received from another buyer?

    One concern I would have is this. If he's not able to make the mortgage payment on a $200K house and it's going into foreclosure, what makes you think he's going to be able to pay it after you've bailed him out??? Sounds like not enough income for a $200K house and he needs to downsize.

  • rajwarrior2nd July, 2003

    You really want to help someone in this situation?

    Take them to a mortgage broker, have them take out a cashout refi for $100K, put $50K in a locked account to draft payments from until they get back on their feet.

    This deal would be outrageously rare because if the seller contacted any mortgage broker with half a brain, they would offer something like I just mentioned above.

    Roger

  • telemon2nd July, 2003

    Its a sale IMO, not a loan. But, I know of someone who put up several properties as collateral for a loan and then defaulted on the loan.

    The lender lent the person $90k and the properties are 5 years later worth 1mil. The lender eventually had to purchase the firsts to gain position in a court battle which is still going on, but when all is said and done he will walk away with a cool 500k profit.

    Is this immoral? Absolutely not. Real estate is a BUSINESS, not a charity. If you want to run a charity start a food program.

    ~My 2cents worth

  • detroit2nd July, 2003

    When you sell it back to the original owner, insist that he/she has the agreement approved by THEIR attorney. This should limit any potential law suits.

  • cpifer2nd July, 2003

    1. A mortgage broker with a brain? That is rare. 2. Lawyerscan tell you if something is legal or not - period. They can point out risks and remedies otherwise they are just deal killers. <IMG SRC="images/forum/smilies/icon_eek.gif">

    _________________
    Curt Pifer and Elizabeth Martin
    [ Edited by JohnLocke on Date 07/17/2003 ]

  • tanya12152nd July, 2003

    I have to disagree with Telemon. You are running a business, but you have to remember that you are in business because of people. If it weren't for these desperate owners, then you would not be in business in the first place!

    If you create a win/win situation for vulnerable owners, then they will help your business by referring their friends/family to you. If you take advantage of these homeowners, then you will pay for it in the long run. Honestly, if you and the owners were in court and had to state your case in front of a jury, then who do you think would win? You would probably be guilty of taking advantage of these folks and the "sale" would be considered a "loan." There are court cases, in which this happened. You should look it up sometime.

    Tanya

  • DerrickAli2nd July, 2003

    TANYA1215 is K-REKT!!!

    The term to 'google' is called:

    UNCONSCIONABLE ADVANTAGE

    And many a down on their luck owner with this kind of dormant equity are just hoping some uninitiated REI comes along and takes the bait , lets you buy/leaseback their home to them and when it comes time to buy...TAKE YOUR TAIL INTO COURT for shamelessly taking advantage of these poor souls!

    I deal STRAIGHT UP with distressed owners by offering them fair-mkt-price less my reasonable discount+fees for any pre-paids,(title, debt-negotiating, appraisal, arrears I pay, etc.)

    Furthermore, on the off-occasion that I do execute a sales leaseback to these hard luck folks... I use a Trust to hold the title to the property and have the owner NAME ME as a co-Beneficiary...

    This way I can get my money, time, PROFITS and PEACE of MIND all compensated for.

    You see the seller won't be able to sue you personally(cus they'll have to HONOR their original agreement held within the TRUST.

    And you can't sue the Trust in which you are also a beneficiary---no standing in court!


    Ask your Atty about setting one these up on similar deals...and I hope this helps!

    Derrick Ali

  • Dmitry2nd July, 2003

    DerrikAli,

    This is exactly my point:

    Deal with homeowner fairly and straightforward upfront. Add here properly executed Real Estate contract protecting your interest. Put on the top of that intelligently set up purchase system (Trust, Etc.) and you will have your satisfaction from the profit and help to homeowner in distress.

    As far as Tanya’s comment, you can equally right down license plate of the guy driving Mercedes on the street and take him to court for taking advantage of the economy when you were not able to do the same. There is a limit to a reasonably based legal case.

  • tanya12152nd July, 2003

    Quote: As far as Tanya’s comment, you can equally right down license plate of the guy driving Mercedes on the street and take him to court for taking advantage of the economy when you were not able to do the same. There is a limit to a reasonably based legal case.


    You can take anyone to court, but what case would you have for claiming someone is "taking advantage of the economy when you are not able to do the same."? The case would most likely be dismissed.

    But, in the case of a owner of a property that has a substantial amount of equity in the home, there is reason to believe they were taken advantage of during a desperate time in their life to save their credit and name. They can claim insanity due to the stress of facing foreclosure. They can claim that they were not in a position to make a rational decision.

    If you want to take the risk of being sued for "UNCONSCIONABLE ADVANTAGE", then you go right ahead. I personally, do not think it is good business practice to take advantage of someone who can make or break your business.

    Tanya[ Edited by tanya1215 on Date 07/02/2003 ]

  • ronjung2nd July, 2003

    Yes, REI is a business, not a charity.

    You are, however, confusing legality with morality. Taking advantage of people is not the name of the game in the free market. It is win/win or free transactions between free people that make the system work. I don't care so much about the legality (that is, how much can I legally get from taking advantage of people), but the morality (how do I deal rightly with this human being). I am not about limiting profits, or (God forbid) adding more legal hoops in REI. But, if too many are INTENTIONALY seeking to take advantage of people, your going to mess it up for the rest of us.

    And one more note: For those who are looking to take advantage of people in your dealings, stick to the flipping and please don't be a landlord. Landlording without personal integrity and just dealings with people and property hurt tenents, communities and ultimately can get you in trouble too.

    IMHO,
    Ron

  • Dmitry2nd July, 2003

    Tanya,

    Don’t put the words in my mouth, please!

    I never said: “to take advantage of someone who can make or break your business”. What I did say, however, is to make an offer that you think is fair and make sure that homeowner DO understand all aspects of the transaction.

    They can claim insanity due to the stress of facing foreclosure; they can claim that they were not in a position to make a rational decision; they can claim whatever they want in fact. But, if you have a legal document signed and notarized by homeowner stating that they have fully understand the terms of the transaction and not being forced by you to sell then they really don’t have a case in court in front of any jury.

    Somehow I don’t think that making an offer to buy at 70 % FMV when homeowner has more then 50 % of equity in the property and lease back for a period of 12 month with option of First refusal to purchase at 90 % FMV at the time of future transaction makes this a Predatory Lending or Bad Practice.

    We may differ in opinions with you, but this is still a good and profitable deal.

    Dmitry.[ Edited by Dmitry on Date 07/02/2003 ]

  • tanya12152nd July, 2003

    Dmitry,

    If you read my post again, then you will see that I did not put word in your mouth. I did not quote you.

    These are my words: "I personally, do not think it is good business practice to take advantage of someone who can make or break your business."

    These are the words I quoted from you: "taking advantage of the economy when you are not able to do the same."

    I do not want to argue about how you do your business. But, I personally, would not conduct business in that manner. If an owner has more than 50% equity in their home, then it is only fair (in my opinion) to give them some of money to help them get back on their feet. I would not feel right taking 100% of their equity and leaving them without a home or money. It is my opinion and you are entitled to yours.

    Tanya

  • ronjung2nd July, 2003

    I am in agreement with Tanya. In the first example- this is IMHO wrong. In what Dmitry does it may not- I don't know.
    Ron

  • loanwizard2nd July, 2003

    First off it is a rare deal. Secondly, if you think that the owner is going to pay you the 200k when they wouldn't pay the 50k, you need to wake up. Thirdly, we are talking about our legal system. The precedent has already been made. When you go to toss them out for not paying, and history doth repeat itself, they, the majority of the time are going to bite and bite hard. And, in this consumer oriented litigious society, you as the big bad investor will, in most cases, LOSE.
    There are experienced investors here spelling it out for you. However, you live in a country where you are free to do as you choose. So go out there, prove us all wrong. It should't surprise us that anyone who believes this is a workable plan, are the same type of people who would not believe the truth. And as this is an open forum, you are free to voice your opinions. To all newbies; this is the time for a check up from the neck up. No, this business is not for the faint of heart. Nor is it for charity. However, this example is very far fetched, and highly calls into question your morals, ethics, and integrity. I live in a small town, and while I certainly believe that profit is not a dirty word, I don't have to worry about anyone I have ever done business with, making me feel guity when I see them at the local Walmart, County Fair, etc... Heck, I sell used cars for a living. People do get angry with me, some don't even like me. But, my wife and children can hold thir head high walking beside me, knowing that I don't screw people for a living.

    Good Luck,
    Shawn(OH)

  • 2nd July, 2003

    I've read all the replies to this post, and this is a somewhat cynical response, but in my experience (life experience, not just real eastate specific) anyone can sue anyone for just about anything.

    If he's a pro at this and has worked those deals before than maybe he feels more comfortable with it, but in my opinion, a less experienced investor may not want to mess with something that is so "on the fence."

  • 2nd July, 2003

    There is at least two individuals in prison that I know from doing this same thing. The courts basic reasoning in this is that by agreeing to sell them the house back (via lease option) in a short period of time for such a large profit woul violate respas. they look as these as a "disguised loan" and if you would calculate interest based on re-payment including profit you will see that the interest rate is outrageous! in one example I seen it worked out to over 1000% APR.

    I would proceed with extreme caution and seek leagal advice

  • Brisy2nd July, 2003

    I do believe that such a situation would be taking advantage of someone. I spoke with the individual in greater detail today about how he carries out his plan. He actually has not attempted to work a deal in excess of $100,000.00. In other words, he limits his deals to $100,000.00 properties and usually takes a fee of approximately $20,000.00, and also ensures that the homeowner has $ from the deal to pay off other debts so that he/she can actually purchase the property back. This sounds more realistic, moral and legal.

  • dzinewise2nd July, 2003

    I think you guys are all a bunch of whack jobs. not really, but the key is to create a win-win. solve the problem, don't create another one.

  • rcharb3rd July, 2003

    Brisby,
    The lower numbers don't matter, If the deal is considered a loan by the court and the interest % is high (usury) it is still illegal. No matter how much you want to believe this is a good deal or the way to do business,your playing with fire. If you find this situation just buy the house and sell it to someone else,not the orignal owner.

  • markoarko17th July, 2003

    This is a common practice in the market I am from, I generalize the term as a "sale/leaseback deal". Having completed several as the investor it has been both lucrative as an investment and I sleep better at night knowing I have given a person a second chance in saving their home when I usually purchase (redeem) thier properties days before they lose it to the bank.

    Having said that, having vast experience of more than a score of deals, the tenants often times default leaving me with the property. As any of my counterparts on this forum will agree I make money when that happens (because any remaining equity is mine) but to say that I reap unconsionable profits is taking things a bit far these places usually have limited equity and need much repair.

    And further, this business entails alot of litigation. I deal with people that are down on their luck and I get sued enough by legal aid, et al that I know their people on a first name basis. Like any other compitent businessman, if they have a good case I settle...but at the end of the day, the business is still profitable and Ive given someone that is losing their home a second chance.

    A side note, another person answered this question saying that the homeowner should get their own representation (attorney) to look things over. I totally agree and have abopted this as a policy on any deal I do. Interestingly more often than not they sign. It has both settled my mind that the customer has gotten a fair shake and it saves me a ton of money in the courtroom.

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