How would you approach this listed home?

Question

Thank you in advance for any feedback.

There is a corner SF home that I would like to purchase to have as my primary residence. Here are the details of what I am facing.

Couple that owns it are divorcing.

Only the wife and 3 teen children live there now. I don't believe she has a steady income because she told me that she just became a realtor and is hoping to gain an income from it. However she had no idea what the square footage of her home or lot was and she did not know what the comps in the area were (this was closer to when she first listed it over a year ago).

They owe approximately 430k on loan.

Has been listed for over a year now asking 540-550k and has not sold. Mainly because it is probably worth closer to what she owes. Same exact house models on her same block have sold earlier this year (February) for 395k and 445k. Mind you the lot sizes were slightly smaller...

The one that sold for 395k was also a corner lot with a lot size about 1200SF smaller than hers and the one that sold for 445k was NOT a corner home and lot is about 1800SF smaller than hers.

Also important to note that her home has no upgrades from the original build about 10 years ago.

I have sent her a few text over the year asking about it and she was not open to drop it under 500k (that was 6 months ago). Text her again the other day and she now says 550k.

Apparently they defaulted on the loan about 4 months ago so I do not know what their play is at this point given that it is still listed.

My guess is that they figure that to sell it and not make a profit (or very little profit) it makes more sense to stop paying and live rent free until they are forced to leave during foreclosure process. I do not know how long that is taking now-a-days but I have heard of cases where it is hears before that actually happens and the people living there get to save up a fortune during that timeframe.

Any ideas on how you would approach this if you were interested in purchasing this home at no more than fair market volume?

I have had my eye on it for some time now and I want to see if there is something that I am missing that I have not thought of.

Wayne Brooks · Answer

@Justin Cabral Well, a few obstacles, and a couple of advantages.  But first, forget about any discussions of a "zombie loan", by which I assume he meant the bank getting a deficiency judgment for the short fall, after a foreclosure.  I see No lenders going after deficiencies.  Looks like a short sale, or regular sale with very little cash to the seller.  Since she is a agent, she can waive most, if not all, of any commissions, since you are working directly with her.  However, she must accept reality at some point.  The 4-5 year long Foreclosures are over....likely 1 to 1 1/2 years.  Of course, the husband has to be on board too.  She will Not be able to collect any commission if you go the short sale route.

Justin Cabral · Answer

@Tom Mole

Thanks so much for your write up with feedback. I guess if I really put my head to it, I can really get creative and come to some type of agreement with her.

As far as what I want to do with the house, I want it as my pimary residence for my family of 4 (my wife and girls ages 5 and 8). The house itself is 1-story and not exactly my dream home but it is the neighborhood we would like to stay in and the lot is big enough to build a pool in the backyard and still have some decent space arount that pool. Plus it has a nice size gatedside where I can roll in a small booat or recreational offroad quads or buggies which I would like.

Could you elaborate what you meant by me potentially taking over payments? I am not sure I have ever heard of this or how that would work.

To fill in some of the blanks I may have left out, I met her in person about a year ago when she first put a for sale sign outside (right before listing on the mls) and she expressed how she wants to get the heck out of there. Sounded like that would help with closure for her. I remember her being fixated on payong off the loan and walking away with 100k. I'm guessing again that living rent free for however long she can has become her best option at this point. However I was not aware of that "ghost loan" you mentioned and I am pretty sure that she is not aware either.

Tom Mole · Answer

Oh, I do love a challenge!

@Justin Cabral, I trust this property is in FL, right? Florida is a judicial foreclosure state, so the process can take for-ev-er, but they do happen eventually and once they do things move quickly. A time frame of years is not atypical in that part of the world. So, let's stick a pin in that for now.

You mentioned trading texts with the wife. Have you talked to her face to face yet and gone over the options with her? If not, great, you could be working from a clean slate. If you have spoken with her, did you find out about HER situation as she sees it?

If you sat down to a cup of coffee and asked her what are her plans with the house, what would she say? Is she able to decide on the disposition of the house, or would her husband have to weigh in? Does she "just love" the house and doesn't really want to move, or does this place remind her of her failed marriage? Is she still in love (with her husband) and is hoping that he'll come back so they can put this mess behind them and live happily ever after? I mean, really, what does the world look like to her?

So, let's make some assumptions and climb inside her head for a minute. Most folks facing divorce are delusional to some degree. Most folks facing foreclosure are as well. Folks facing both divorce AND foreclosure would be positively psychotic if they did not show some signs of living in La-La Land. Therefore you will be working with an impaired seller. Your job, Mr Phelps, (should you choose to accept it) is to get her to open her eyes and face the music (which may be the theme song from Mission Impossible.)

Here's what I expect her price to be based on. She may know that her house is only worth what is owed on it, but she needs it to be worth $550k because after paying the mortgage, transaction expenses and sharing half with her ex, what's left is the money she needs to carry on. She may have heard that she can stay for years "rent free" in the house while the foreclosure process drags on, so she may not be in any particular hurry to sell.

You know, of course, this is just BS. You need to gently and respectfully disabuse her of this point of view. The no-BS assessment is that the market will pay what the market will pay with little regard for her "needs". Furthermore, in a judicial foreclosure a deficiency judgement can track and haunt her for years into the future. Ask her if she knows what a "zombie loan" is. (Make sure you look it up too.) The bank can come after her for all that back "free rent" and other expenses if they don't get enough at auction, which sounds probably in the case.

She may be hanging on because she's just not ready to let go of the "life she had in this house". Hanging onto the good ol' days has held more than one seller in the past until they lost their future. It's best to demonstrate the value of getting on with her life and just keeping the good memories. Remember, if this is the house she lived in with her ex, chances are pretty good the many of those memories are worth forgetting.

Now, you've done your job well. She's willing to sell to you. Her ex is on board as well. You're ready to sign contracts, but wait there's that nasty mortgage to face up to. The house is worth what's owed, so what does your seller actually need to get out of the deal? It's not always money. Maybe she would take one for the team, if only she could stick it to her estranged husband. Would she consider letting you take over payments? This way there's no taxable income. (There still may be profit based on her buying price, but her personal exclusion probably covers that.) With no proceeds she gets nothing, but even better HE gets nothing.

Maybe she just wants to retire the old mortgage, the husband, the memories and everything. She just needs enough to cover the mortgage and transaction costs. You don't need a broker in the deal, so you offer $440k all in and she accepts. Now what? You've just bought a property at comps. How do you make anything on this?

It kinda depends. The first thing that comes to mind is a Sale-Lease Option. What does the rental market look like? Are people dying to own in this area? Could you find someone with a good income, but crappy credit that wants to own instead of renting? If so, great! If not, well, this isn't likely a good short term capital gains project. What did you plan to do with this property, if you got it? You never actually said why YOU would want this property.

I hope this helps. Please let me know if you have any questions or want more ideas.

Cheers!!

Eric Gabriel · Answer

Is there a way to build an additional home on the larger lot?  If not, there is no extra value in the land as far as I'm concerned.