House with Equity, Paying off arrears and creating a 2nd mortgage

[Jonathan B.]

Here's a case

in FL - Seller in foreclosure has 120k principal @4%, Shes 10k in arrears,
house is worth about 250k, good condition.
She wants to stay at the house, but doesn't mind selling it if needed.
She will likely not qualify for a loan mod at the moment, good amount of equity.

She works in the medical field, just took sick and fell behind.

I was thinking of offering to pay her 10K in arrears and creating a 2nd mortgage @ 10% interest.

if she defaults, i can foreclose,  as there is a bunch of equity there.

any thoughts of a better scenario that i can make more of this situtation?

[Derek Dombeck]

Please don't advise bankruptcy, as that should be a last case resort.

I had 1 very similar to this before. I caught up a couples defaulted loan which was 15K in arrears, which I paid directly to the lender for security reasons, in exchange for an Option to purchase their house. The price was negotiated and we all agreed on a 10 year term, but I could not exercise my Option for the 1st two years unless they fell back into default. Also, they could buy my Option back within the two years for 30K. If that happened, my yield would be minimum 50% ROI. Furthermore, I had the right to purchase for cash or subject to their mortgage balance plus some cash for the remainder of purchase price at the time of closing.

So, they got to stay in the house and fix their credit for 2 years while they fixed their credit and could then refinance to buy my Option back. If I had given them a loan with payments, it affects the debt to income ratio. Instead I hedge my returns by saying to them, I don't want you to have to worry about more payments right now, but I will need a better sale price in exchange.

I like to do these deals in a retirement account that's tax advantaged. 

Ultimately they failed and I did buy the house subject to, but they had a couple more years in the house and I gained all the equity over those years without the holding costs.