"Flipping" House Back To Current Short-Sale Owner's...Very Little Risk ...Is this Doable???

[Steven M.]

I have a rather creative investment strategy that I am seeking opinions/feedback on where you can both flip a short-sale and be the bank at a high APR without ever lifting a hammer. I wish for feedback from others to see if this is doable. Forgive the length of this.

CAVEATS: Certain laws in certain states may not allow Contract For Deed (I am in California) but read on anyway.

You locate a home that is a short-sale with the owners still living in the house who want to stay and continue owning the home (and we'll assume they are a borderline/modest credit risk) but can only stay at a lower monthly payment than they are presently paying.

Let's say you offer the owner's to stay in the house and you will "resell" the house back to them at the current market price, and you will now become their "bank" (terms are below). We'll say they bought the house for $400,000 and have a $375,000 mortgage at 5% APR ($2,100/monthly payment) but today the home is appraised at $200,000 (after repair value). They owe the bank $300,000 on the present mortgage. You make a short-sale offer to purchase the house from the bank. You offer and settle with the bank for $150,000 as an example. The bank knows nothing about the owner's staying or the "deal" you have pending with them. You will not be doing any repairs to the house.

-As the new bank with a $200,000 appraised home, the owner's come up with a $10,000 down payment. You write a mortgage to the current owner's for a short 5-7 year term for $190,000. at a high APR of 8.5%. Because they pose some credit risk and have no credit history with you, their rate is higher but get to keep iheir house at a lower monthly mortgage payment of $now 1400/month.

The owners have 5-7 years to clear up their credit history and get a conventional loan to buy you out on the balance remaining. If they do not, you can either take the house back or extend the loan term. You, the bank, also make the Note assignable and may sell it to a Note buyer at a discount, say, $180,000 (you keep/make $30,000 they make $20,000 =$200,000) if you want your cash back earlier than 5-7 years. An 8.5% APR is attractive to most investors plus a $20,000 profit to boot.

-KEY FACTOR: Because the owner's are a higher risk, and the cost to foreclose is expensive, you write the mortgage with a “Contract for Deed” clause(where the owner is not put on title until agreed to terms are fulfilled). So if they default on the Note you can readily evict them without expensive foreclosure procedures because they are not on title (and they are not renter’s either) and you can take the house back immediately. This is where your investment risk is lowered. If after a few years of good payment history, the owner’s can "earn" the right to be put on title if you so elect to do so per your loan terms. Thus your security, in lieu of a big down payment and knowing you are loaning to a higher credit credit risk, is to use a Contract for Deed, plus earning 8.5% on your money.

-I'd also might consider a $xxxx amount Repair/Security Deposit if they are ever evicted before the 5-7 year term. After this time, the deposit is refunded.. Of course, you’ll need to do a full credit check and employment background check of the owner’s.

-Be sure to have the house inspected and lien search BEFORE you close with the current bank like you would with any house you buy.

-Do this is in a good area that has a desirable value/ in demand/good schools in case you have to evict/resell or sell this to a Note buyer who seeks this.

-During the term the owner’s must pay all the taxes, insurance and maintenance on the house just like any other owner would do. Be sure they send you proof of payments as part of the term (or they can pay you with a separate check and you control these matters). Have an attorney write up the terms of course.

In summary. in this scenario above, you are essentially buying and flipping a house to its current owner's; you make a profit of $50,000 PLUS earn 8.5% per annum for 5-7 years on your money and are fully secured by remaining on title in case of default without having to foreclose. You can also sell (flip) this Note to another investor if you want your cash back earlier than 5-7 years. You never have to pick up a paint brush to rehab or unclog a toilet as a landlord as the tenants are long time owners. Any Note buyer may want to see some owner credit history so keep copies of all payments if you sell your Note.

Thoughts, please? Thanks in advance!

Steven