Possible Deal?

Question

I've found a possible deal where I could stop the home owners from going through foreclosure, sell somebody a house at a price well below FMV, and make a little profit for myself.  The property has just gone to foreclosure, but the sale isn't until Jan. 7.  The amount due on the mortgage is $124,000.  Including missed payments and interest the total amount due is at most $135,000 (haven't talked with the owners yet).  The home value is estimated at a low value of $155,000 and a high value of $175,000. What I'm thinking is to get the house under contract for something around $140,000.  That way the owners walk away debt free and with a little bit of cash.  Then I would assign the contract to either an investor or someone looking for a cheap home, and charge a couple thousand dollar finder's fee.  I'm curious what you all think of this deal and if there's any error in my logic?  I'm also curious what you think the best way to sell would be, finding a buyer myself or sending it to an agent splitting the profits with them?

Daniel Francis · Answer

HI Chris.... You'd have to find out exactly what "rights of redemption" mean in your state... In Texas we used to be able to do that on taxes owed, but not on mortgages.

Regardless, I think the numbers are a little skinny and too bad the loan is so new.  Still more attractive to a buy/hold guy if you can keep that loan in place, but it didn't help the low equity position the new landlord would be in.

Buy hey, you don't know if you can wholesale it unless you try!

Chris Salveson · Answer

Thanks for the reply Daniel, it was very informative.  I have a little more information to help evaluate.  Rents in the area range from $1,200 to $2,000.  I know it's not the smallest range but there are no nearby rental properties; it's in a residential neighborhood.  There are no repairs needed on the house, it is in very good condition.  Maybe a new home buyer may want to paint the walls or something small like that, but I can't see an investor finding it worth their time or money to put anything into it.  The house was bought in 2006 for $145,000, the owners refinanced their mortgage in 2011.  So the amount due is from the mortgage in 2011.  The appraisal estimates I gave earlier are for the house as is, with no repairs, that's why I was thinking a price around $145,000 would appeal to many people.  I'm meeting with the owner's later this week and can get some more detailed information.  One investor has suggested I get the rights to redemption under contract, but I don't see how this is the best strategy?  Could you maybe explain why this is a good approach?

Daniel Francis · Answer

There is nothing "unsound" about the logic.  Putting it under contract and wholesaling it certainly is something you can try.  Without all the details (like what is market rent for the area),  I can tell you that MOST investors are going to find that deal way too skinny.  So you might struggle finding an end-buyer for the property outside of the traditional route of listing the property.  Investors have different criteria, but a good rule of thumb is that its safest to take a buy/hold property at 80% and a flip at 70% of value (minus the repairs).  I'm no saying that's the only price people will pay, just that its a good rule of thumb.  I make exceptions all the time :)

Where that might be MORE attractive to an investor is if the home owner is willing to keep the current financing in place and an investor can come in with a little cash just to take over the note.  Their cash outlay, then, would be limited to reinstatement+closing+your fee+repairs.

This is even more attractive to a buy/hold investor if the note has some seasoning.  In other words, if they bought this house and originated the loan 13 years ago, that become a very attractive deal as over 50% of the interest on the loan will have already been paid and principal buy-down is going to accelerate.

If its a pretty new note or they won't let you take over payments, then probably you best bet to make money is to list the property.  Or you can try wholesale for a couple of weeks, then move to a listing.  If you're not an agent, maybe you should consider that?  Sucks to not have a license and leave money on the table.

Good luck with it!  Post more information and I'll see if we can't do a little more evaluation.  Like Market rent, age of loan, will they keep it in place? etc.