Rental Property Investor · Boca Raton, FL · Member since 2014 · 1k+ posts · 713 votes
A seller is attempting to do a short sale, as they owe more on the property than what the property is worth. However, the sellers are up to date on their payments and not in default. For the sake of argument, lets say the house is worth $120k, and they owe $150k.
Now, if the bank won't give them a short sale because they are not in default, could I take over the payments and purchase the house for the $150k they owe? I would essentially be overpaying by $30k in the long run, but I would also be purchasing the house with no money down. The sellers are forgiven of their debt and off the hook for their mortgage, the bank gets the money that they lent out, and I buy a house for $0 down.
You're describing a sub2. The sellers are not "forgiven of their debt" until that loan is completely paid off, as it's still in their name. If it's an FHA loan, it is possible for you to Assume the loan, if you qualify, and go through the approval process.
You're describing a sub2. The sellers are not "forgiven of their debt" until that loan is completely paid off, as it's still in their name. If it's an FHA loan, it is possible for you to Assume the loan, if you qualify, and go through the approval process.
Many investors like short sales because it really is the only way to get a greater then 10% discount on property the still in good shape. If the buyer is willing to stop payment and move into default you could negotiate the loan down even more. If approved by the blank then you have a wholesale or fix and flip deal. You could sale it to an investor or get a hard money or private money and do a fix and flip.
The land contract scenario could play out the way you scenario describe. What would you do with the property; rent it or move in?
If you thinking about moving in then your scenario really makes sense. If you are thinking about renting it, make sure you know your rent rate in the area and make sure you will cash flow ( if that is your goal).
Wayne is correct. Why would you pay 30K over the value today? Could take you 10 years to break even.
Why not let the seller pay that 30K's worth?
What do you want the place for? Live in it, flip (LOL) lease it?
I believe FHA assumptions are for owner occupied, better check, but it may be available to NOO.
You could also partner with the seller, since they are moving out anyway, in a Sub-2, you have control of the property and earn any income, allowing the % of sale say in 10 years to be split for them keeping the overage above market value. This is done from the "basics of RE" as to title interests, but no one studies that stuff (LOL). :)
75% of your profit is determined by the price you pay for the property. If you are over paying by $30000 then you are bound to lose money unless the market shoots up.
You are better off to find something that makes more sense cost wise.
so, I should probably add that I haven't heard how much the owners owe yet. Hence me saying "for the sake of argument" when I presented the numbers. I am trying to determine the number I am willing to overpay for not needing to pay a downpayment. I mean, would anyone else pay a $10k premium for 100% financing? I would. 15k? I'm not so sure.30k? Absolutely not. Also, I do believe the property to be in an "A-/B+" neighborhood in the NYC metro area.
If they are willing to let you take over payments via "sub2" then I would look at the numbers more closely. What repairs are required in order for you to lease home? Is payment fixed or on an ARM? How many years are left on note? What could you lease home out for? I took a property over sub2 in my neighborhood in 2011 which required little repairs and cashflows over $300/month. At the time they had negative equity but it is now at or slightly above market value. I would definitely do more of these if the opportunity arises.
Jon, free houses aren't always free. You're going to have to come up with closings costs to purchase, which may mean covering the sellers closing costs as well if they can't pay them. In my state, that will mean about 4% of the sales price in closing costs, it might be different in California. What kind of cash flow could you get on this place? It would have to be a helluva positive monthly cashflow to consider buying in my opinion, and I would probably rather just sandwich lease-option the property.
Not sure that those that have any obsessive compulsive disorders should be in real estate. Paying 10K for financing is fine at about 500-750K, financing on that shouldn't be bout 2 to 3 points. (In the sale price, can't pay points on seller financing)
Seems you found a property and you want to buy it come hell or high water, that's not investing, it's more like foolish buying.
If that deal gets called by the lender, you're sunk unless you have the cash to make up the difference and can obtain a loan. If they are underwater and can't get other financing, how would you pay it off?
Before you begin thinking of how anything can be done, if anything can, you need the numbers.
You'd probably be better off buying a property close to being an expired listing at the asking price. There are thousands out there. :)
I, like you @Jon Huber am willing to pay a premium for getting into a property easier. My limit would be about $2k for a SFH provided I didn't have to qualify for yet another loan. The seller also has to be knowledgeable enough I don't have to hand-hold every step of the way. If they are in enough financial hardship they can do a short sale, they should stop making their payments and go through the process. As you know, that will be a 6-month process involving an apathetic and incompetent bank most likely. I would need a significant discount to subject myself to that!
DO NOT ever, ever, ever tell a homeowner to stop making payments!!!!!!!!!!!
Never!
Talk about liability and getting smashed by federal laws, you can tell someone the rules, that they must be in default to do a short sale, but you don't advise them to default!
Bill, I am not sure that creative finance is "foolish buying". Of course, any Sub2 purchase can be called by lender. And if ti did, luckily I already do qualify for another loan. I was only considering the scenario to make things easier for the seller. They owe over 100k more than the purchase price, and owuld have to pay taxes because if the bank rids them of the debt, the government sees this as "income". They don't want to cut a $30k+ check at the end of the year. I was trying to be creative to find the win-win-win...
Seller wins, bank wins, looks to me like you lose.
When I said you get a loan, the property has to appraise out, if it's underwater, it won't which means you have to come up with the cash.
This isn't a big deal, most investor types don't overpay for a property, what I meant by foolish buying, Overpaying can trickle through to other issues, taxes, insurance liability, ability to finance or refinance, ROI, COC, it just throws everything off and takes time to make up for the amount overpaid.
Doesn't sound like your seller is highly motivated.
That is not "creative financing" first, a Sub-2 is not really creative, it's an alternative, not all alternative financing is creative and secondly, overpaying is not creative.
Sounds like you want to make this work, you can drive a square peg in a round hole, so you can make it work.
I'd be concerned too about any vacancy, any uninsured peril could leave you with several months of lost rents, so make sure you have reserves going in. Good luck :)
What town in NJ do you think of as A/B where you can get a property for $130k?
We need to know how much they actually owe, how much its actually worth. Without that information there is no point in debating over what to do because we don't have all the information required to make an educated decision.
Be smart. Don't overpay on a property not worth the value. It doesn't make financial sense, unless this is the only way you think you can own property and you really want it. Find out what the equity. You can make the deal work any way you can think of. You can even ask the buyer to pay you at least half of the amount you lose when you buy the property. If they are motivated you shouldn't run into too many difficulties. If they are not motivated, you might want to move on. That is, unless you think the property is worth that to you. In the end, only you can decide what the property is worth to you. Also, what type of area? Do the properties appreciate in that area? Can it pay out over time? All these are important to know to determine what kind of value you get for yourself. Nonetheless, will the bank let you transfer the mortgage to your name? If the mortgage is non transferable there are still other solutions.