How would you help this homeowner?

Question

Hello everyone!

And Thank You ahead of time for your responses!

A friend of mine has spent the last two months attempting to sell his house through a traditional real estate agent, with no luck at all.

He knows my interests in REI, but I needed some more experienced investors to assist.

Here is his dilemma:

a. Bought a new house for $225,000 back in July and moves in on September 16, 2013- this upcoming monday.

b. Borrowed $47,000 {20% }from his parents for the downpayment.

c. The house he is selling has an asking price of $125,000.

d. He still owes $65,000 on a 10 year mortgage.

d. He and his wife are both employed, but may not be able to afford 2 mortgages for very long, if at all.

e. He was hoping that the sale of his house would allow him to pay off his previous mortgage, pay back his parents, with some left over for new furniture.

* What I am is asking is if there is a creative solution to his problem.

** And lastly, I don't want to sound greedy, but I am in need of some additional funds for my own REI projects... and wouldn't mind getting some kind of compensation in there as well.

Please let me know if there is any additional information needed!!!

Thank You... Shaun

Aaron Mazzrillo · Answer

Kind of a tough one since he's mentally spent all the money before he's even gotten it. Such a shame.

If he wanted to have something for himself when he retires besides a lot of debt (and new furniture), he could refi the other house, use the money to pay off the old loan, pay back a good chunk of his parents, then rent the house out or lease it to you. Problem with this is you don't have any money so this isn't a deal per se, for you, but once you get some money you should try to put together deals like this.

Now, back to your problem; If the house sells at $125K, after he pays off the 1st, pays back the parents, and pays closing costs and commissions (8%?), he might be seeing a check to the tune of about $3,000. Ain't no furniture in his future, at least nothing nice. Not really a creative way to do a deal with greedy people. They might not be exactly greedy, but they're certainly not informed by their agent of what their potential net will be.

The problem comes from their desire to eliminate good debt and take on bad debt (pay back parents and 1st loan then buy furniture). You should buy them the book Good Debt, Bad Debt. Maybe get a used copy and mark it up when you sell it to them, that way they might realize they should keep the old house, even partner with the parents on it possibly, and not buy new furniture to go with their new, more expensive lifestyle (keeping up with the Joneses?) and you make a few dollars. Not enough to do a deal with, but a good start on your financial journey!

John Rooster · Answer

The best way to help him would be to recommend a good listing agent

Jon Holdman · Answer

If your friend has been trying to sell for two years "with no luck" he's overpriced the house.  He needs to cut the price and get it sold.  How much he needs is irrelevant in pricing the house.  Markets determine prices, not seller's needs.  If he's been trying to sell for two years, he's pricing it too high.  Plain and simple.

There's no room for you to get a slice of this deal.

Lynn McGeein · Answer

If your friend really cannot make both mortgage payments until it sells, then his best bet is to lower the price so it sells more quickly, pay his parents back as much as he can after mortgage is paid, work out a payment plan for the rest, and learn that next time if he can't afford both mortgages until it sells, he should sell it first and move into a short-term rental as needed until closing on the next one so he doesn't put his financial health at risk.   Not sure what kind of friendship this is, but it sounds like there isn't much wiggle room for you to make any money without it meaning they go without something, which may sour the friendship, so keep that in mind.  If it is priced reasonably for their market, in good shape, and still within average time to sell (2 months isn't that long), they should try to pay both payments until it sells.  If they've got it priced too high to begin with, it could sit for months so they need to seriously consider that.  Also, I didn't know there were any conventional loans that let you borrow the 20% down  payment, especially if you can't qualify with both payments (although there could be), and I also thought you had to qualify with both mortgages counting against you for your debt-to-income ratios if your old one wasn't already sold, so they shouldn't be qualifying for the new loan if they can't afford both mortgages.     Maybe standards are loosening up, but we had an awful time qualifying because we didn't sell our old home (rented it out and they wouldn't count rental income from it at all).

Jason Dillard · Answer

The 10 yr note made my ears perk up.  Offer to cover the debt service until its sold and give them 125k-10 percent - 65k when it's sold.  So they get a fixed amount 47,500 (which is what they are going to net anyway).   They just get it later. In the mean time, your exit is lease option the house. Your profit is the 10 percent that's left plus any principle buy down.

On another note, if I were the parents I would just take the house, l/o it, and ride out the 10 yr note.

Sometimes the note on the property is more valuable than the equity.

Edward Burns · Answer

Does not appear that he has much room to bargain.  He needs $112K from his existing house ($65K for mortgage and $47K to pay back his parents). If you add in 10% to pay for broker commissions and miscellaneous closing cost, you have $123K that he needs to get.  You can't buy it for $123K and turn a quick profit by reselling as is.  So that leaves the option of upgrading the house, but you kinda indicate that you do not have the funds to tackle that.

Shaun Roberts · Answer

@AaronMazzrillo ---> Thanks for the advice.

Funny part is that someone gave that book to me back in 2008 after college.

Take Care