Innovative Sales Strategy – Precedent, Problems, and Pitfalls

[Robert Paxton]

Hi all, I'm new to BiggerPockets. I posted this in a separate thread, but didn’t get any responses. Maybe this is a more appropriate place to ask about it. Thanks for any input!

I’m curious if this is a feasible sales strategy or not, and whether or not it’s been done before:

An LLC owner solicits a distressed homeowner who is facing foreclosure. The LLC purchases the home from the distressed homeowner for a below-market price before the house enters into foreclosure, with a caveat. The LLC will front the cost for any renovations on the home while the previous owner rents the home as a tenant. The LLC will then sell the home and split the profit (if any) with the previous homeowner. The profit margin could be an agreed upon amount beforehand. The contract would be structured so that if the home didn't sell or there was no profit, the LLC would not be liable.

The initial offer on the home covers the mortgage and any tax liens on the property, so the transaction is not a short sale. The LLC allows the previous homeowner to rent the home for a period of time while the home is being renovated for a credit against any profit.

Is there a precedent for this kind of deal? What problems or pitfalls do you see in this scenario?

I’m not as familiar with lending laws, as this could possibly fall into a refinancing type deal. I’m also wondering if there are any issues when it comes to soliciting homeowners for this type of deal. I appreciate any input or experience you can lend!