Someone going into foreclosure...

[Shannon X.]

A friend told me of someone that will be entering foreclosure soon and had a question in regards to this. Let's say he owes about 200K on the house; now how do you go about on trying to purchase the house? do you buy for much less then what is owed? or do you figure out the ARV and then subtract what is owed?

Let's say someone brought it for 150K, now that mortgage he originally owed is now your problem, correct? so now you pretty much have a 350K mortgage right? now do you fix it up and try to sell it for much higher then 350K?

The house has Tyvek all around the house and has been for about a year it also needs some updating..

Also these numbers don't reflect the actual house/market, I was just trying to understand the idea and how it all works out.

Now hypothetically speaking, if I wanted to make the guy an offer what should I do before making an offer? what kind of research should I do on the house first? and what would be the best way on asking him if he would like to sell? yellow letter?

Thanks

[Dion DePaoli]

Originally posted by Shannon Xerri:

So what happens if you want to buy the house from the owner and the owner owes 200K to the bank; are you now reliable for the mortgage of 200K if you buy the house from him? and in order to make a profit do you just do a complete low ball offer?

Just to recap briefly, a borrower is upside down in their mortgage. The borrower owes more to the bank than the real property is worth in market. The real property has encumbered title by way of the mortgage on the property.

The borrower is always liable to the bank. Unless you become the borrower, by way of a mortgage assumption, you are not the borrower and not liable. A mortgage assumption is a process of approval by the current lender allowing a new borrower (you) to assume the debt owed to the mortgagee by the old borrower (Seller).

This does not preclude you from taking an interest in the real property, which can be granted by the Seller. The Seller can give you interest by selling you the property or selling you an interest in the property. Your interest in the real property would be Subject To the existing mortgage. Your interest is inferior in rights to that of the mortgagee. In this case, the Seller's conveyance of interest to you can be done with a deed with minimal or no warranties such as a Special Warranty Deed or alike. (Quit Claim works too, but that is not what they are intended for)

If you do not assume the mortgage, then there is no liability to the mortgage from you. However, a mortgage is the borrower giving an interest to a lender for money borrower and intended to be paid back. In the event of a default, the mortgage provides the mortgagee the right to seize the collateral offered to secure the loan.

So, your inferior interest can simply wiped out via a foreclosure on the real property by the lender. This is the danger of a Subject To transaction. The buyer does not gain clear and marketable title to the subject property.

In regards to the level of your offer, well this is a bit broad. The real property is only worth what the real property is worth. So if when you say, "low ball offer" you mean an offer less than what is owed on the mortgage because the property value is less than what is owed, yes, that would be how that works. If you mean a low ball offer in relationship to the market value of the real property, there is more to the situation than that.

If you want to clear title up, the loan from the bank will need to be satisfied. Satisfaction comes from the lender themselves when the unpaid balance of the loan is paid in full. When a lender takes less than what is owed on the loan, that is called a short pay. A short pay and a short sale are the same net event to the lender. They took less than what is owed either by way of short pay (refinance or payoff) or short sale (property sold to another buyer).

In this case, the real property value is less than the balance owed on the loan so a short is in order. There is no duty for the bank to accept anything less than the full balance of the loan. In the event, they are willing to accept less, how much less...well that is the answer that will tell you how much profit is in the deal.

The number you offer to the bank to short themselves will need to make sense to the bank. They are not just going to give the real property away without sufficient compensation. Again, no duty to do so. If the real property is decent repair and is close to median home price, steep discounts from the mortgagee are likely going to be difficult.

So you can make "low ball offers" in that sense, it is the same as throwing mud against the wall to see if it will stick. More often than not, it will end up on the floor and you will simply have gotten your hands dirty in the process to just watch if slide down the wall to the floor.