Can I make a deal out of this?

Question

Hey everyone!

Here's my issue.  I met a seller a couple weeks ago before I had much knowledge about the business.  I was interested in wholesaling his house for a small profit or around $4,000.  He owes 68k on it and is asking 71k.  The house needs a little bit of work... around 5k.  It is a 3 bedroom, 1.75 bath with a nice back yard a 40' x 10' shed in the back with electricity.  I only have one comparable sadly enough and it is about 103k on a similar home right across the street.

Now that I know a little more, I know that this isnt going to be a home that investors would want simply because his asking price is too high.  BUT THE HOUSE IS ABOUT TO FORECLOSE!!!  The seller seems to be thinking more about how much it sells for over keeping it from foreclosing... his choice IMO.

My question is... is there anything I can do with this?  He seems to be motivated to sell but I think the lowest price he will sell for is 68k.  How can I capitalize here?  Is it possible?  Or do I just have a motivated seller but a bad deal?

Thanks in advance.  And please don't say "go read more".  I have been readin my butt off... I jus't can't figure this one out simply because I'm not creative in the REI game yet.

Sean Davis · Answer

Thanks a lot Mike!  You know as I was saying that he was motivated... I started to feel silly.  I was thinking in my head "is he really motivated?"  lol... I guess I will give him a call and see where he stands now.  He is living with his wife's grandparents so pride should have made him more motivated by now.  Thanks for the advice and for the quick responce!

Sean Davis · Answer

Understood.  Thanks John!  I'm trying to develope my creative real estate mind and I keep running into road blocks lol.  I will learn the game soon!

Account Closed · Answer

Wheatie provide a lot of good info re: short sales.

There is a mistake below. At a minimum it will not appear right to a new investor so I want to clarify the point.

The sentence starting with strictly speaking... is not literally accurate.

If the lender has agreed the short sale they will have formally accepted receiving less than they are owned. They will require a draft HUD-1 to show what is being paid at closing. If the closing then takes place and the numbers are ask the lender expects the loan is retired and the remaining debt the borrower owed is forgiven. The borrower does not owe the difference. Assuming there was no fraud, not side agreements to pay the seller some cash and other forms of fraud the deal is done and the lender  has no legal right to expect more cash from the borrower.

If the lender wanted to ask the borrower to make up the difference personally after the sale completes they will make this request before agreeing the short sale. There will be paperwork to sign. No request for a personal loan for the balance (or some lessor amount)l, not obligation.

Most short sales show the lender writing off the balance as money lost on the loan and nothing further owed by the borrower. The lender is not being charitable. They just know that if they do not accept the short sale the foreclosure process will likely cost even more than the loss on offer from the short sale.

In all cases, not matter if there is a 1099 or not, the borrower owed taxes on the money they no longer have to pay. The forgiving of debt is treated as income to the borrower. A lender is supposed to file a 1099. Failure to do so does not change in any way the obligation the borrower has to the IRS.

The IRS has a page on its website where it describes how to petition the IRS to have the taxes waived. The taxes might be forgiven by the IRS if you meet the criteria. People losing their home have a tendency to qualify. Check the IRS site.

John Corey

Account Closed · Answer

Sean,

1. It can be very hard to assign a short sale deal. The lender is taking a hit. They are approving a specific price on a specific deal with a specific buyer. They do not like to see assignments or otherwise. Any such assignment will imply they accepted too little as the next guy paid more than they agreed.

2. Some will buy in the name of an LLC and then sell the LLC. Hence the LLC is still buying the property but a different person owns the LLC.

3. You can do a double close. You close as agreed and then resell.

Lenders are closely looking for fraud and do not want to see changes to the HUD-1 or changes in the deal structure.

John Corey

Sean Davis · Answer

All of you guys constantly amaze me with how much you know about this business.  Thanks a lot for the info all of you.  I think I'm going to have to start writing stuff down because I never expected to see so much good information in each thread.

I have a couple more questions but I'm not going to be the annoying new guy.  I think I'm going to go and do some research on short sales now.  I do have one last question though that I feel I might not find in my readings.  If the lender agrees to the short sale, I'm sure I still need to get a great deal on it... but can I go under contract with the lender and assign the contract to someone else?  Basically can I wholesale the property or do I have to buy it?  Thanks again everyone.

Sean Davis · Answer

lol... I didn't say not to tell me that because I didn't want to go read more.  I said not to tell me that because I have no creative real estate thinking yet.  Therefore... how would I know to look towards a short sale?  My little knowledge would not have led me there simply because I didn't comprehend that a short sale was an option.  What I meant was please don't tell me to go read more about if it is or isn't a deal.  I can tell that there was no deal there from a quick glance.  So basically I as asking for a helping "creative" hand from you seasoned veterans that would open my eyes to other less obvious options.  Get what I'm trying to say?

Anyway thanks for giving me the answer I was looking for which was what is possible here.  Now that I know... NOW I will go read more on short sales!  :wink:

Sean Davis · Answer

Good advice John I appreciate that. I have a question though.  When someone's home is about to foreclose, and they owe for example 50k, how will accepting an offer of 30k help them?  I know it keeps the home from foreclosing but do they still owe the lender 20k?  If so, won't they mostly still be in the same position?  Sorry if this is a silly question, I'm just pretty young and I have never had a mortgage loan before.

Jon Holdman · Answer

Under normal circumstances, with an offer of $30K and a lien of $50K, a seller would need to bring $20K to the table to pay off the existing lien.  Actually, a bit more than that, since there are other closing costs a seller normally pays.

What you could look at doing in a situation like this is a short sale.  Get the seller to allow you to talk to the bank on their behalf, and see if the bank will take less than the outstanding loan balance.  If they take the short sale, the bank will not allow the seller to get any money out of the deal, but they're not going to get anything if it goes to a foreclosure sale either.  Strictly speaking, the seller will still own the bank the difference between what the bank took and what they owed.  The bank can send the seller a 1099 or file a judgment for the difference.

If the house is on the market and listed at $71K, then its value in its current condition is less than $71K.

I know you said "don't tell me to go read more", but there is a lot of material on short sales on this site.

Account Closed · Answer

Sean,

Some people are not very rational. They do not want to lower their price yet they stand a real chance of getting nothing after a foreclosure.

You need to better understand the position of the owner. What does the debt and all liens add up to at this point? It could be they have no equity at their asking price. That means in their mind that if they go lower they will have to bring cash to the closing just to sell. Few sellers want to do that if they really do not have the cash.

There could be lots of other things. It could also just be denial as to the real choices and the timelines.

Consider yourself lucky for finding this seller. You are realizing that having 1 comp at $103K does not make a deal at $68K a good one. Though you say the repairs are minor you are talking about repairs that are represent 7.35% of the purchase price. There are also closing costs. If there are no buyers out there then either the marketing has been bad or the values are lower than the 1 comp implies. Granted a messy place does put off retail buyers.

It is good to learn that people who are not motivated kill the deal even when they have every reason to be motivated.

Make your offer and move on. Keep tabs as the seller might have a religious moment just prior to the auction.

John Corey

Michael Rossi · Answer

You don't have a motivated seller.  If he's not willing to sell for less than he owes, that doesn't sound motivated to me.  I usually deal with desperate sellers.  A desperate seller will do ANYTHING to get rid of their problem, including bringing money to the closing.

If you want this property, just wait for the forclosure auction or you could even try a short sale.

Good Luck,

Mike