Seller Finance in foreclosure, should I help them or...?

Question

Scenario -- seller has foreclosure sale date in a few days and they are 25K behind. Their payments are $1650 per mo. I was thinking of bringing them current, taking over the payments, and keeping them in the house, under a lease for $300-$500 more, ($1950-$2150 per/mo). Reason -- seller said due to health reasons they want to stay in the home until death. Seller owes 409K (294K ist and 115K 2nd balloon from a previous modification). ARV $430-440k++

1. should I take on this deal?

2. how would you structure this deal? Am I right for setting this up via subject to and leasing it back to these ppl?  I'm second guessing because there is little equity but I am considering due to the fact they can afford and willing to sign a lease for $300-$500 more....

Thanks.

Patrick Menefee · Answer

@Jeff Smith I might be missing something, but how are they 15 months behind on their mortgage yet able to afford a $300-500 increase in rent?

Craig Jeppesen · Answer

I wouldn’t, but I don’t like losing my money.

Patrick Menefee · Answer

@Jeff Smith Brandon and David talk a lot about the COCROI on an ideal BRRRR being infinite because you pull all your money out of the deal. In this case, your COCROI would be infinitely negative when you’re looking at negative cash flow on a property that you’re $40k underwater on.

I know nothing about subject to, just trying to help you with the numbers on this. For your last question I think you need to rethink your thought process...it’s not “how can I make an absolutely awful deal work in the future”, it’s “how can I find a property that will cash flow well if/when I apply this strategy”. The strategy itself isn’t bad, but the deal is atrocious

Jeff Smith · Answer

I'm looking at $25-$35K in repairs to get it up to spec if they defaulted and we had to evict them.

Max rent they would be able to pay would be $2150 per month...if that.

The more we talk through this the more hairy it seems to get --

BUT let me ask...when would these scenarios work out ??  "subject to with little to no equity......" so I know what makes a deal and what doesn't. I know we will run across this scenario again and want to make these deals work. Have you done any and when have they worked out for you? Again thanks for the help...

Patrick Menefee · Answer

@Jeff Smith not quite sure I understand how that deferred portion works...as in all interest is due in 15 years? Is there a prepayment penalty? Would you be selling the house before then with hopes of selling for enough to pay it off before the balloon? What is the tax bill you’ll be hit with on top of the $114k you’ll owe on it if you pay it off?

None of this sounds good. Your cash flow calculations should take into account the amount required to save for that second mortgage plus interest, as well as vacancy, repairs, capex, and if you plan to use one, a property manager.

You also said $440k after repairs...how much would it cost you to bring it up to that value?

Jeff Smith · Answer

Thanks...this deal is all over the place...

They have a modification in place...the only thing due right now are the payments on the $240K portion -- the latter second is due in 15 yrs as a balloon...... they lender deferred that portion -- PITI on the 240K is $1650.

so yes, right now total they owe 409 -- house, fixed up is worth 440 -- they are 25k in arrears  -- no go right?

and again thanks....helps me think through these deals and risk, etc...thanks

Patrick Menefee · Answer

@Jeff Smith ah ok haha. The red flags were flying all over the place, and they still are unfortunately.

First, cash flow: besides coming nowhere close to the 1% rule, assuming a $409k mortgage at 4.5% makes your PI (w/o tax and insurance) over $2100. So you’re cash flow negative.

Second, equity: To simplify things, essentially you’re buying a property for $434k with $25k down. Is your “ARV” of $430-440k truly representative of after repairs you’d need to make? Or is it simply the market value?

If the latter, you’re buying a property at market value with negative cash flow.

If the former, you probably have negative equity and negative cash flow.

Unless there’s something else I’m missing, there is no world in which you should touch this deal with your worst enemy’s 10 foot pole...

Jeff Smith · Answer

@patrickmenefee lol great question...they received a modification and immediately had some other health problems...they couldn't get caught up, etc...now they are here. Not enough money saved to get caught up. Went over their  total household income  with them...they make about 5K per mo....

Jeff Smith · Answer

@patrickmenefee lol great question...they received a modification and immediately had some other health problems...they couldn't get caught up, etc...now they are here. Not enough money saved to get caught up. Went over their  total household income  with them...they make about 5K per mo....

Seller Finance in foreclosure, should I help them or...?

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