Stuck in hard money, need a solution

Creative Real Estate Financing
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Stuck in hard money, need a solution

Bob Malecki
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes

I've got a single family home in new condition (near Seattle, wA) that I puchased in May for 60-cents on the dollar and had to use a hard money loan to get it before it went to foreclosure. I've been trying like the dickens to get a conventional rate and term refi with no luck. I have one last mortgage broker work for me right now, but I'm not overl optimistic, since my stated income status is like kryptonite to the lenders. I have a new idea that I'd like to know if any of you think will work.

The house I have is valued around $350K and I owe $240K. Now, I have a relative who is gainfully employed and has around $70K cash liquid. What if I "sell" the house to him for let's say $300K, he gets a conventional mortgage to get the hard money first of $240K paid off and brings his 20% down payment of $60K + closing costs to the table, and then closes on the purchase. I then write him a reimbursment check for his $60K+ from the "proceeds" of the sale. I then purchase the home from him on either a land contract or sub-to and make the monthly mortgage PITI payments on his behalf. Then, of course let the rental income cover PITI.

Does anyone know if any of the above is outside of the law, or have any other thoughts? I know that I will be paying excise tax on the sale as well as potential short terms gains, but I cannot find any other solution to get myself out of this hard money first that is just depleting my bank account!

Thanks,
Bob

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Hmmm. Cash under the table after closing. Sounds like loan fraud to me.

    Takes a LOT of rent to be profitable on a $240K note. $3000+ by my reckoning. Even if you cover PITI with the rent, who makes up the other expenses or covers the note when its empty?

    Can you just plain sell this? That seems the cleanest.

    Will your hard money lender accept a deed in lieu? That would be usual practice if you can't get out.

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  • Bob Malecki
    OP
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    17y

    I'm planning to lease option the property. A $240K note at 7% is less than $1500/mo. and I can get $1600 + additional $300/month towards the option. I had it on the market for 3 months with only one offer and they backed out on inspection. Now I've decided to keep the property and let it appreciate.

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  • Harrison Painter
    Indianapolis, IN · Member since 2008 · 759 posts · 185 votes
    17y

    Looks like this would fit the definition of a "Straw Buyer" to me.

    This is a serious situation that you do not want to be a part of, no matter how great of a deal you might have.

    My advice would be to speak with an attorney and discuss if you can form a partnership with your relative and create a legal situation to achieve your goals.

    If that is not the case, or if there is not enough time, then Jon's suggestion of a "Deed in Lieu" might be your best option.

    You made the mistake of jumping into a deal without securing your back end financing. Nobody will touch a stated borrower, and probably will not for a long time to come. It would be better to lose the deal now and work on a future solution, than to put yourself in harms way by trying to get too creative and force a deal.

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  • Bob Malecki
    OP
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    17y

    Shoot. I knew there was some "too good to be true" aspect of this. Thanks for the heads up. I Googled 'straw buyer' and now see that my plan is exactly that. Looks like it's time for plan D. Wait a minute, I executed that plan a few months ago. Looks like its now 'plan g'....

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  • Dave P.
    Real Estate Consultant · Member since 2008 · 792 posts · 30 votes
    17y

    Now I've decided to keep the property and let it appreciate.

    Bob,

    Don't hold your breath on the appreciation. I suggest that you get out of the deal as soon as possible.

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  • Bob Malecki
    OP
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    17y

    Hmm, I don't see your logic. What do you know about my area and the housing market?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Nothing. Any you may well have reason to think there will be significant appreciation in the years to come.

    However, lending is tight everywhere. That affects demand everywhere. We're just coming off a huge housing bubble where prices nationwide got 50% above where they should have been from any historical basis. See the Case Shiller data. It shows prices in your area peaked in August 2007 and have declined 9% since then. But, could well be things in your specific area that will buck the national economic situation and trends.

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  • Dave P.
    Real Estate Consultant · Member since 2008 · 792 posts · 30 votes
    17y

    Hmm, I don't see your logic. What do you know about my area and the housing market?

    Bob,

    I didn't mean for my post to be curt. I was just trying to emphasize that there really aren't many areas "appreciating" (if any at all). Please study the data that Jon provided.

    In addition, I would look at your property valuation very closely. I have seen many investors buy for "______ cents on the dollar" and have quickly found themselves neutral or even upside down. And, after failing to be able to sell the property, soon realize that it was never "worth" what it was claimed to be worth.

    So, if it's really worth the 350K, you should just be able to sell quickly and cash out.

    No?

    I'm not trying to bum you out....just trying to help. Something tells me this isn't such a hot deal.

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  • Bob Malecki
    OP
    Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
    17y

    Thanks guys, we've got a relatively strong economy here in western WA primarily due to Microsoft, Boeing, and multiple military bases. My county has 2 military bases alone. So our bubble was much less inflated than other areas like California and Florida since our employment base has been strong. Nonetheless, with conventional lending being so tight, I've of course found it impossible to refi my way out of this hard money loan. I've got about $40K invested in this property in both fixup and holding costs, so a deed in lieu is a very painfull option. The house was appraised last month for $341k, so I know that I've got some equity.

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  • Dave P.
    Real Estate Consultant · Member since 2008 · 792 posts · 30 votes
    17y

    The house was appraised last month for $341k, so I know that I've got some equity.

    I promise that I will shut up after this. If you can sell it for 341K, then I would sell it now. Appraisals are useless. If you can't sell it now, then it is an indication of "true value".

    What was the purpose of the appraisal?

    Good luck, I'll be cheering for you.

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