Unexpected opportunity - would this strategy work?

Question

Hello BP Community,

First, I would like to say that I am not an investor but I have a great interest in the subject of real estate investing. I spend a lot of my free time reading and learning about it. I really find BP the best source for valuable advice and information on the NET.
My goal is to start my own real estate investing venture someday in the future.

I don’t feel that I am ready to start in real estate investing just yet but an unexpected opportunity in my family just came up. My sister selling her condo and I was just wondering if instead of just selling the condo straight out could I possibly leverage this transaction for more profit?

I try to make this short.
My sister bought a very nice new condo in Clinton Township MI about 6 years ago.
She lived in the condo for 2 years than rented out to a very nice couple because she had to move back to Europe.
The couple really likes the condo and the location and after 4 years of renting it they made an offer to purchase it from my sister. My sister and couple agreed on a sales price allready.

Facts:
The condo: 2 beds, 2 baths
Built in 2007(?)
The condo Fair Market Value is around 80K (not confirmed, it's only my research)
Offer from couple is 113K as I said they really like the condo and the location.
My sister still owes 90K to the bank.
That would live her 23K cash. Its not bad, but my sister payed 160K for the condo so that still leaves her in the negative territory.

I have an idea where we could get a little bit more out of this deal, but I am not sure if this would work.

My strategy would be:
I buy my sister's’s mortgage Note from her bank for less than what she owns on it.
Let say I am able to buy it her 90k Note form the bank for 70K .
Ones I own the Note, than the couple buys the condo from me instead from my sister for the same price as they already agreed upon.
Using this strategy we could get a extra 20k on the deal.

I understand that first I would need to find out who owns her Mortgage Note.
Than I would need to find out if the Note that my sister holds for the property is is for sale at all?
How much I could offer for the Note?
Also, due to lack of capital from my part, I would need to get a transactional funding to closing. Would that be possible in this circumstance?

Than also one more thing, we are both living in Europe right now. Would that be a problem? (although traveling is not a problem. for us)

Anyway I would appreciate your smart BP community advice, suggestion and any professional help on my post.

Thanks and greetings from Germany!

Bill Gulley · Answer

Oh, well, I was thinking of a little higher counter offer, selling it Sub-to (if the buyer can finance it if needed) take 13K down and offer to finance it as a wrap, say at 6%, making the spread on 90K and 6% on the 10K or more, say for 3 or 5 years, that gets some interest of around 9 to 15K roughly. If you want to mess with it....:)

Julia Chalkidis · Answer

@ Bill My sister currently paying 3% interest on her loan. The couple paying her $ 1150.- a month rent. She was not planning to sell the condo but the couple asked her if she would sell it. The 113K is allready a counter offer that was exepted by the couple. Overall is a good deal, when everything goes well and comes to closing my sister will be happy as is. After this we are planning to get something in the Fort Myers, Fl.

Bill Gulley · Answer

Buying the note is not a viable option for this deal. They made an offer, I suggest you counter at a higher price. What is the interest rate on the mortgage and payment, what's rent being paid?

Jon Holdman · Answer

If she owes $90K and its worth $80K and you have an offer for $113K without any agents involved (i.e., no 6% commission), and the buyers can actually close the deal at that price, I'd take the deal in a New York minute. Your sister's in the hole $10K, but will walk away with about $20K if this deal really closes. That's a $30K upside! That's a lot further ahead than she will be if she sells via an agent at the actual value. The trouble with trying to buy the note is these are packaged, sliced and diced and its hard to even figure out who really owns it. The bank she sends her payment to might be the owner, but it more likely its someone else. Assuming she's making the payments, its a performing note. So, you're not going to get it for much, if any, of a discount.

Julia Chalkidis · Answer

"If you were to buy the note, your sister still owns the condo." That I didn' know. Thanks. I quess that was just an idea that I buy the Note :-( I'm not sure how the couple goes about buying the condo. They realize that it is worth less but they've been living in it for four years now and they like it alot. Just a maybe dumm question: Is there any other way to leverage this deal to get more out of it.

Jon Holdman · Answer

Like Wayne Brooks I'm skeptical you can buy the note at all, let alone for a discount. You have a misunderstanding here, though: If you were to buy the note, your sister still owns the condo. You're just now her lender instead of the bank. This couple would still buy the condo from your sister. The title company would request a payoff from the lender, which is you. You would provide a payoff of, say, $70K. That puts $20K more into your sister's proceeds from the sale. Is this couple paying cash? Because if they're getting a loan, there's no way they will get one based on a $113K sales price if its only worth $80K. The lender will use the purchase price OR the appraised value, whichever is lower. So, the buyers would have to come up with whatever percentage the lender wants for a down payment based on the $80K value plus an extra $33K to make up for the excess they're paying.

Julia Chalkidis · Answer

Thank you Wayne. But she ows more what the condo worth, that is a negative equity isn't it? Still no chance to approach the bank to buy her Note, even if it a single Note?

Wayne Brooks · Answer

Probably not. Banks will selling non performing notes, on properties with no equity, at a discount. Why would the bank sell a performing note, on a property with equity, at a discount. There is no reason for the bank to sell the note at a discount, and buying a single particular note is very hard to do.