Reinstating mortgage and taking over a Pre-foreclosure/short sal

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Reinstating mortgage and taking over a Pre-foreclosure/short sal

Rufus McLaren
Member since 2018 · 6 posts · 1 vote

I am a broker in Ft Laud, Florida. I'm also an active investor. Florida is notorious for foreclosure scams and modification scams.

I was wondering, however, if any one has had any experience with approaching a distressed homeowner with the following proposal: If they don't want to do a shortsale, and they have little to no equity in the property, I would be willing to take over the deed and the mortgage. In essence, I would bring the mortgage current. Guarantee the payments, and use the property as a rental. Of course the potential rents have to exceed the mortgage, otherwise, the property would not make sense.

Here is my logic... Where I live in Fort Lauderdale, there are a lot homeowners that bought properties in 2004-2005 that are just now worth what they owe. In fact I have a client right now that is almost at break even, but does not want to bring money to the table, and does not have enough money to catch up the mortgage. So basically if they sell, they either have to short sale, or bring money to the table. I wanted to propose taking the property off their hands as follows: I'll bring the mortgage current, which will save their credit. I would take over the property and remaining payments for the remaining 17 years.

Here's my logic. Right no the owner is losing. The owner doesn't want to do a short sale, and there is no equity in the property. MY REAL INTEREST is in the 4.75% mortgage that has only 17 years left. Most of the payments at this point are toward principal. I could bring the property current for about $10k. The property will rent for about $1,350 and the total of the monthly payments are about $1,000.

It's clearly not a cash cow, but the equity is building rapidly because of the age of the mortgage.

Has anybody done this before? I want to fully disclose my intentions to the owner. It appears to be a win-win.

I welcome any help. Thanks.

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Sal Castaneda
Flipper/Rehabber · San Diego, CA · Member since 2018 · 36 posts · 22 votes
8y
@Rufus McLaren I have been doing exactly this for just over 10 years! However my focus is on properties with equity. I negotiate an equity split after i reinstate the loan eliminating the foreclosure, help them transition with a portion of their profits up front, and pay them either cash upfront to walk or a percentage of the profit after I rehab the property. It is a win win! Most have already tried to find a way to remedy the foreclosure by working with the bank, tried Mofiication Gurus, explored bankruptcy, and even shortsales. Unless the bank offers an option this is usually the best way they can salvage the situation, their credit, , get a fresh start and the money to do it with!!!
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  • Alexis Adams
    Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 44 posts · 16 votes
    8y

    Hi Rufus, interesting idea. I negotiate short sales full time professionally and have for 10+ years. The way that I look at it is.. you are going to find many people who are emotionally attached to their home and will want to try to save it and attempt a modification to stay in their home. You will also find the people that want to walk away and put the situation behind them. 

    For the people that want to stay in their home, how will this benefit them if you are looking to rent the property out to someone else?

    For the people that want to put the situation behind them and start fresh, I can’t imagine many homeowners who would want to sign over the deed to you and continue to have the mortgage in their name while you promise to make the payments. Way too much risk especially when they could do a short sale and genuinely be done with it and move on without the possibility that you may default on the mortgage and then they’re back in foreclosure again... 

    Unless I’m missing something here, overall I personally don’t think many people would agree to something like this unless you were trying to help them stay in their home... but most of these people can’t afford to which is why they aren’t paying in the first place.

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  • Rufus McLaren
    OP
    Member since 2018 · 6 posts · 1 vote
    8y

    Alexis, 

    Thanks for your response. The properties I am targeting are non-owner occupied properties. Usually they are rentals where the tenant stopped paying and the situation dragged out long enough for the owner to be too far behind on the mortgage to catch up. Obviously they can short sale and walk away, but I've heard that lately it is becoming more and more difficult to get a "complete release" of all debt obligations. So, they could potentially end up with already bad credit, worse credit after a short sale, and a possible creditor waiting to strike. (Note: judgment liens in FL can last up to 20 years.)

    On the flip side, I own a brokerage that has been around for over 25 years, and can guarantee the mortgage will be paid. Obviously they assume the risk that my guarantee is good. I suppose I could lease-option the property for a shorter period, lets say 3-5 years, but I would still want to take over the mortgage, so that I can benefit from the rapid pay=down of the balance.

    Thanks in advance for further thoughts.

    Bill

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  • Alexis Adams
    Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 44 posts · 16 votes
    8y

    I would be interested to hear what other professionals on BP have to say regarding taking over the payments so that you would have their interest rate and can pay it off faster. 

    Regarding short sales specifically, not sure where you’re getting your information about it being harder to obtain a waiver of deficiency lately. My properties are here in Florida (I’m in Fort Lauderdale as well) and a waiver of deficiency is what the overall goal is. Out of 100+ short sales closed each year, I would estimate that 1/100 does not have a waiver of deficiency and that is because the homeowner had no true documented hardship. And they were warned going into the process that because there was no hardship, they should expect for the lender to come back without a waiver or asking for a contribution. 

    There may be a lot of fraud (especially here in South Florida) but for a homeowner who has this vacant property that they don’t know what to do with, I would still think overall that completing a short sale (with acceptable terms from the bank) and having their credit reflect a settlement on their mortgage would be the more safe route. At least here, they have a guaranteed path that there will be no further credit impacts associated with the home. These people are emotional and over it. The last thing they want to think about is whether or not that stranger they signed their deed over is making the payments, no offense. If homeowners knew they had this option to wash their hands of the property for good, I don’t see why they would want to assume the potential risk of you not paying in the future.

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  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    8y

    If possible I'd almost always rather buy the home as a short sale as I want equity in the home from the get go. I've done similiar things to what you are suggesting but when homes have equity. I've thought about doing this with an underwater home but have yet to see any real reason to do this.

    Yes, if you disclose things properly and have a proper agreement it is possible.

    The tricky part is what if you miss the mortgage payments or no longer want the home. Are you going to give the property back to the borrower in this case or are you going to be obligated to pay on an underwater home or risk other repercussions?

    What are you going to do on an underwater subject-to home with big capital expenditures pop up? Are you ready to put 5,10,15K into a property that is underwater to fix it up while paying a mortgage on an underwater home for minimal cash flow?

    If you have deep pockets and want to speculate on appreciation then I understand why this may make sense in "certain" situations. 

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  • Rufus McLaren
    OP
    Member since 2018 · 6 posts · 1 vote
    8y

    I appreciate all the feedback. I certainly agree that if a property is underwater, I probably would not be interested.

    One of the properties I plan on acquiring happens to be an old friend who at her age, has no interest in purchasing a new house in the future. I calculated that she wouldn't walk away with much money. I was going to give her more, because I'm interested in the 17 years left of a 30 year mortgage. The way I look at it is. I could get about $300 a month positive cash flow, and I own the property free and clear in 17 years.

    So I guess the real question is, besides rare circumstances like this - what would be a reasonable reward, payment, etc. to make it beneficial for me to dig someone out of a hole and make it worth their while to trust me for the next 15 years. Or perhaps... how can I give them a powerful enough guarantee that I will make their payments.

    Because if they were guaranteed, the mortgage payments would actually build their credit back up, but may hold them up from being able to do future financing. (Debt to income ratios)

    So no doubt it's a tough question. But have any of you seen how fast a balance gets paid off after about 13 years into a mortgage? Even if I did a five year lease option, where I give them money up front, dig them out of a hole, and pay off the only the REMAINING BALANCE of the mortgage 5 years down the line, I would either take over the property at a steep discount, or I can re-lease the property (I think that's a sandwich lease) and make money.

    I appreciate any thoughts.

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  • Jayson T.
    Investor · New York, NY · Member since 2017 · 11 posts · 0 votes
    8y
    @Rufus McLaren Just got on this thread.. you are describIng a “subject to” strategy. You assume their mortgage “subject to” the existing mortgage. Meaning they sign the deed over to you and make the remaining payments.
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  • Sal Castaneda
    Flipper/Rehabber · San Diego, CA · Member since 2018 · 36 posts · 22 votes
    8y
    @Rufus McLaren I have been doing exactly this for just over 10 years! However my focus is on properties with equity. I negotiate an equity split after i reinstate the loan eliminating the foreclosure, help them transition with a portion of their profits up front, and pay them either cash upfront to walk or a percentage of the profit after I rehab the property. It is a win win! Most have already tried to find a way to remedy the foreclosure by working with the bank, tried Mofiication Gurus, explored bankruptcy, and even shortsales. Unless the bank offers an option this is usually the best way they can salvage the situation, their credit, , get a fresh start and the money to do it with!!!
    1Reply
  • Jesse James Watson
    Member since 2018 · 1 post · 0 votes
    8y

    @Sal Castaneda This is exactly what I'm trying to do. How do you present your offer to them? I find people are just too hurt to talk about it and most just give up and don't want to listen. I'm just starting out so I don't have much experience. I also know I should probably start with a different strategy but I feel passionate about helping good people out of the mess of the foreclosure process.

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  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    8y
    @Jesse James Watson I ask, Would you let me catch up your payments and cover them for you? If they say yes, I explain that I have get ownership. I warn the seller they are risking their credit with my ability and integrity. I will buy subject to even if there is no cashflow just to jump the amortization schedule like you're describing.
    0Reply
  • Phil Z.
    Real Estate Broker · Orange, CT · Member since 2013 · 951 posts · 218 votes
    7y

    You do not want to take over a house that is under water.  Subject 2 is best for properties that are behind on payments, but still have equity.

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