The following was written by user DFWMENTOR - I was asked to post his response:
Everyone who posted replies to this thread all make very good and very valid points. The MAIN question is: What state is the house located in???
I am a teacher and foreclosure mentor in Dallas, Texas. One of the reasons I have turned down speaking offers outside my home state is because of issues like this. I am NOT an expert nor do I claim to be educated on the laws of the other 49 states. That said, here is a basic outline of what I teach in Texas that is directly applicable to the question at hand.
(Also, all of this SHOULD be a moot point because Minna is right on.... it lacks the equity to do the deal.)
I will reinstate a homeowners mortgage by paying all arrearages (find out if taxes/insurance are included in their payments).
I usually give the homeowner 24 months and at that time they can buy the house back. Here is an example of the numbers.....
ARV: $100,000
Payoff: $65,000
Reinstate: $5,000
Profit expected: $5,00
Once the mortgage is current, what is the payoff?
($65000 plus $5000= $70,000)
* I set the payment at the amount the lender has established (ARMs will rise)
How much will I sell the house for in 2 years? (Most say $100K but that is stealing their equity only waiting 2 years to get it and owners are NOT that dumb)
Answer: $75,000 (breakdown)
$65,000 for the payoff
$5,000 for the reinstatement
$5,000 for my profit (100% of reinstatement amount)
= $75,000 - Homeowner benefits as follows:
- They re-claim 25% of their equity
- They establish 24 months payment history
- There is no foreclosure added to their credit
- Credit will actually show a paid mortgage
What I need to as security:
- Signed Warranty Deed (I like to have an attorney prepare and
notarize it)
- Signed 24 month lease
MAKE SURE the lease is ONLY a lease. NOT with an option to purchase! That would
be considered a lease option (heavily restricted in Texas).
If they ask for written documentation of the $75000 price in 2 years, you will have to tell them that they have to trust your word and remind them that you have $5000 reasons to hold up your end of the deal. (This is where you check state laws)
THIS PART IS CRUCIAL......TELL the LENDER WHAT YOUR INTENTIONS ARE!!!!
ASK them if that is acceptable to them!!! (only one lender said, No)
THEN... ask them IF you do the deal.... will the invoke the Due on Sale clause.
Do you see what I have done? I eliminate ANY fraud suspicion on any level by obtaining the lenders "blessing." Homeowners are very unlikely to cry foul when they know the lender is behind the deal.
[b]THEN....
AS SOON as you have the title..... Apply to get a new mortgage [/b](it is not a refi because the original loan was not in your name.).
What this gives you
Legal ownership of the house
A binding, legal residential lease (IF sued, you show a lease on a house they are renting and then warranty deed proving ownership)
Very low risk of being sued since you have all documents and lender blessing.
After refi- Gives you the mortgage in your name as well.
In fact, the chances of losing a law suit are nil because everything is in your name and the previous owner would have to explain why they signed a lease on a property they claim to own. Oh, and the previous lender signed off on it? "NEXT!"
Bottom line
"If the owners couldn't make the payment before.... why would they with you?"
[size=18]Answer- They won't AND I hope for that![/size]
Think about it..... You end up getting the house at a good discount. When you get the new mortgage, you have it cover the payoff AND the $5,000 you put up for the reinstatement and include closing costs.
The previous owners get a great deal because they avoid a foreclosure, their credit shows a paid mortgage, I give them a $1,500 cash for keys deal to have them move while leaving the house in a clean condition and I give them 30 days rent-free to move after they default.
PLEASE PLEASE PLEASE check local & state laws on top of what criteria the lender may have.
"DISCLOSURE" If you disclose everything to all parties involved, you show an ethical, honest approach and people DO recognize that.
I ALWAYS use a real estate attorney who is familiar in this area of real estate and offer to the homeowner to consult an attorney as well.
Lastly... the numbers on the end payoff are different than I listed (actually better) but for the purposes of explanation, I simplified it.
Hope this sheds some light on the matter and maybe even turn a few light bulbs on.
-Jim Watkins
www.dfwmentor.com