How to proceed with pre-foreclosure

Question

Hi all,

This is my first attempt at buying a pre-foreclosure house. The first step went amazing well, but now I'm not sure how to proceed. I thnk it's a deal, but please help me to decide.

I saw the notice of default and drove to the neighborhood and talked to the owner who happened to be in the front yard getting his paper. The conversation went great, and I was clearly the first one to talk to him. I know from the notice that the first mortgage is $144K and that the house would sell for about $215K so there is lots of room. He knows, as he said in the conversation, that his house appraised for $179K 3 years ago and that there are other houses in the area in the $210K+ range. But he's in default, so... I think a fair price for both of us is about $185K. He gets out of trouble and pockets $40K (I don't know if there is a 2nd or 3rd position or back taxes at this point) and I get a house with $30K in equity. Now that I just typed that, I suppose $180K is a more fair price!

How do I proceed to get this property? I figure there are three options:

(1) get an agreement from him, get it inspected, buy it for cash - that would be ultra-fast and get him out of trouble - only of course I don't have $180K lying around

(2) help him get paid up for all his debts in exchange for him selling the house to me, and then I get traditional financing - what are the exact steps here, though?

(3) I get him paid up, and then we have a legal agreement that we "co-own" the house and he has to keep making payments, and if he doesn't, I can buy the house for a pre-determined price if he gets behind again - I read about this somewhere, but it's not clear how this would work to me

I'm leaning toward (2), to draw up a legal document saying that he is selling the house to me, and at the same time, pay off the bank for him and get everything level so that the sale can go through and I have time to get conventional financing.

Any ideas? And does this look like a good deal?

Thanks- David

(I posted this first in the deals forum but then found this forum, which is much more appropriate for my question.)

Matthew Giegerich · Answer

James-
The exit strategy is key to buying investment homes. I wanted to help the poster realize that the seller may not only be concerned with " only money".Death, job loss and being without a roof are also concerns. I have had deals that got me in the door without discussiong the 70% rule but more what was going on their lives and how I may have an answer. I have seen so many 1st timer not get off the fence and jump in because it didn't fit the "70" rule. the rule doesn't fit every where and situation.

Jon Holdman · Answer

So, at the risk of further hijacking the thread, I don't understand these costs. In particular, the hold and sell costs. Show me where I'm estimating incorrectly:
$6,400 - purchase closing costs (assume 1%)
$13,600 - points (2%)
$40,800 - interest (12%, 6 mo)
$3,000 - insurance, taxes, utilities
$64,000 - sales closing costs (assume 8%)

$127,800 - purchase, hold, and sell costs. $7,800 - net loss

Now, maybe you could cut 3% off the sales closing costs by doing it FSBO. But you're still going to have to pay the buyers agent and title insurance. If you had your own money in the deal instead of hard money, you could "save" 54,400. But, I'm not loaning my money to anyone for free, even me. So, I would figure at least $20,000 cost for the interest I would have gotten on a CD leaving the money in the back.

If you really do buy it, fix it and close the sale in two months, you cut out two thirds of the hard money interest, which gets it back to profitable. I certainly wouldn't want to rely on that in my area for making a profit.

So, what calculations are you using that bring this down to $30K? I've seen a lot more deals that look like this (85% with the rehab costs) than 70% deals. I just don't see how to make a profit on them.

Jon

Matthew Giegerich · Answer

James-
With the flood of foreclosure due on the market by early spring "08 its essential "speculators" understand how to make the most of it. Its manna from heaven. I made a small fortune in the 90's 125 equity debacle. I am not opposed to competition but this business is not for everyone!

Matthew Giegerich · Answer

Yea thats reasonable for Cali or South Fla :)

Matthew Giegerich · Answer

James-
I'm not knocking you or the others but have to say that any exit strategy that makes a profit is a good deal. Its not about 1 deal,but the many that make you money and experience. I have(knock on wood) never lost money on flipping property. I'm from the old school,I learn by doing not writing stories to sell them. I have gone in at 100%, financed the deal and made money. I know you have look at each deal and not generalize everything,then again those who generalize tend to pass on deals that make me money. So not everyone should Jump at the chance but I've experienced too many sitting on the sidelines because of it.

Matthew Giegerich · Answer

I know everyone uses the rule of 70% but in some cases that flies in the face of reality.You were the first guy on the scene and he spoke to you,CONGRATS, now get him on paper.The owner right now has options and if you low ball him you lose! if this house doesn't need much you will lose. I have flipped a lot of homes at higher percentages, 80and 85 cents on the dollar.Its all a numbers game- the more you do the more you make! if you don't give the seller a fair offer,he will list the home. that is going to be your competition.take for example, he has had the home for a few years, 144k vs 215k value?!!. He is a human being and has a brain.You have got to find his hot button-what is his situation? what will it take to sell to you. I used to tell my new salesmen, sit next to the client not across. People don't sell/buy if they can see the GREED in your eyes. DON"T BLOW IT- you only get the shot once- after that he will talk to others.

Greg E · Answer

David - You don't say what state you are in, sometimes that helps. An NOD was recorded and you met with the owner shortly thereafter so I assume you have 60-90 days before the property goes to trustee's sale. Why don't you just offer him 180K and go through escrow like any normal purchase? You get financing, he gets his loans paid off and walks away with cash.

Now if the sale was a week away you'd have to get creative but if you've got time go the safe route, get title insurance, etc.

David Alyea · Answer

Thanks for the reply. I should have clarified options (2) and (3) to indicate that there is a legal document - this obviously wouldn't be a handshake sort of thing! But regardless of that, your point is absolutely taken and understood about how things could (and might verywell) go down given that he already isn't paying the bills.

The best thing is the 30% less than lower end of comps suggestion for
a ballpark figure. I see now - and in consideration of all the things that could go wrong even though the house is pretty prime right now - that I ought to help solve his problem, put a little $$$ in his pocket, but make it a deal for me since I'm the one stepping in. Assuming clean title and no other positions and no back taxes and no pending lawsuits tying up the property in any way (lotta research...), his $144K first might be worthy of a $160K buyout tops, with him covering legal fees. Then 70% of $210K (lower end estimate) is $147K and is ballpark, given all the other variables in play.

David

How to proceed with pre-foreclosure

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