Homeowner in foreclosure wants loan to cover reinstatement amt

[Greg Lovern]

A homeowner is in foreclosure, with an auction date Friday Feb 8th. I offered to buy the home sub2 for the reinstatement amount, resell, and split the profit, with most of the profit going to him.

I haven't found an escrow agent in the area to handle it because it's sub2 and therefore unconventional, so I've been looking for a real estate lawyer to act as closing agent. But Washington State law makes it difficult to buy a home within 20 days of foreclosure auction date, and I'm being told the seller needs to be represented by a lawyer and they need an extension of the foreclosure date of 30 days.

To make the whole thing simpler, the seller is now asking me to LOAN him the $45,400 reinstatement amount (and lien the property). Is it possible to do it that way while protecting my interests? Here are my concerns:

• If he chooses to keep the house and it goes into foreclosure again later, my lien would be way down the list and I would probably lose the money.
• If he chooses not to pay me the agreed share when he sells, my only recourse is a lawsuit.
• Would my compensation be limited to the maximum effective annual interest rate allowed by WA law? 
• If it makes sense to do it as a loan, why is he asking me; wouldn't it make more sense for him to ask a lender.

What are your thoughts or suggestions?

[Andy Mirza]

@Greg Lovern It's good that you're already asking the right questions and you probably already know the answer.

The seller is grabbing at any lifeline to avoid foreclosure. Once the threat of the foreclosure sale is avoided, he might quickly change his mind as to what he actually owes you regardless of whether you're a lender or a JV partner as you outlined above. I would absolutely avoid both scenarios because the risk is too high for a default or violation of your agreement. If he's in foreclosure, he's got problems and you don't want him as a business partner or a borrower. If you make this loan, you'd be at the back of the line to collect as you mentioned. Are you willing to be in 2nd position? If you become the 2nd lienholder, you'd probably find yourself having to foreclose just like the 1st lienholder.

My suggestion is to buy the property at the foreclosure sale if you have the means and the numbers make sense. I think there's a high probability that the seller will file Ch 13 BK before the sale so you might not even get that chance anytime soon.