How can an investor help in a foreclosure?

Question

I'm trying to better understand how a real estate investor could help a homeowner who has received a NoD under two different scenarios:

1) The homeowner has $10K in credit card debt and wants to stay in their home if they deal with an investor.  The home is worth $220K and the home is appraised at $200K.  He is in an ARM that has just readjusted and made the home unaffordable.

2) The homeowner has a $15K second mortgage, $150K first mortgage, and their home is appraised at $170K.  The homeowner also has $15K in medical expenses.  She is willing to move, but would prefer to stay in the home under any deal with an investor.  She is in a 30-year fixed mortgage.

Thanks!

Account Closed · Answer

Hello,
In north Minneapolis, where there are blocks and blocks of foreclosures, there have recently been a few non-profits that have formed, and also Habitat for Humanity is involved - they obtain funding through grants and relationships with banks, in order to buy up foreclosed (mostly REO's ) houses and apartments, so they can then sell to new families (which may also be some of the same old familes who were foreclosed on). The issue of where the foreclosed families will live is a real problem. Most have to down size from a house into an apartment. I know this doesn't relate directly to the issue we are discussing, which is lease back to the foreclosed family, but I thought it was interesting that maybe an investor could use the same humanitqarian philosophy and shift the foreclosed family from their house to another house in the same neighborhood.  Mike

Mitch Freed · Answer

Yea I have no problem with the lease option while they build up their credit..I was just saying that working deals that allow the homeowners to stay in the same home after they were foreclosed on is a bad idea.

The post I quoted stated "reselling to current owners."  Which I am sure most people agree is a bad idea.  Mainly because if their lender took a discount to sell the home, then the previous homeowner probably can never come back into possession of that home...I would imagine any Jr. Lienholder whose lien was either wiped away via trustee sale or released via short sale would be pretty unhappy if the previous homeowner bought back the home from the investor at a later date...would be mortgage fraud I believe.

But, different home, lease option, no problem.  Higher risk factor, but if they weren't in trouble due to consumer debt and you confirm that their income supports the monthly rent, then I'm sure they would be a good lease/option tenant.

Account Closed · Answer

Mitch,

Look yes people overinflated the value of the homes in areas, but hey, the buyers didn't do their homework either. CAVEAT EMPTOR, right?

So the buyers, must accept the fact they over-extended themselves, just like the lenders these days need to realize they did some really stupid loans.

Here in Chicago we had a ton of people buy these sprawling tract homes in the far suburbs of Chicago that had HUGE kitchens and master suites, etc. In reality these people should not have bought those, but rather maybe a nice starter home.

How about investors get nice homes these people can really afford and they buy them on lease/option while they work with credit counselors to repair their now damaged credit?

We all must accept personal accoutability. What is keeping us from turning things around is the ongoing Finger Pointing of blame. We were all to blame, so let's move on!

Mitch Freed · Answer

I'm curious to know how this could ever happen?  If you are buying a home from the lender, the previous homeowner has already been foreclosed on and the bank owns the home.  How are you going to sell it back to them?  Who will give them financing?  Overall, any foreclosure situation that puts the previous homeowner back in the home, you should avoid like the plague.

Jon Holdman · Answer

Jeanne,
I totally agree that a lot of people have bought houses in the last few years at very high prices.  In some cases, there was out-and-out fraud with inflated appriasals.  I know of at least two neighborhoods in this area that were devastated by that activity.

I know there were people who bought houses at the peak.  Some of them just plain needed to buy a house and could afford to do so.  Some of them were convinced prices would go up forever.  You only have to look at the Cash-Shiller data and compare the last few years to last 100 to see what was happening.  Some of those people were persuaded by builders, mortgage brokers, friends or relatives to jump into the American dream.

I would guess the vast majority of those people are continuing to make their payments, even if their loan balance exceeds the value of their house.  Just like almost all of us continue to make our car payments even though the loan balance is almost guaranteed to exceed the value.

I know there were also lots of homeowners who refinanced and HELOC'ed their properties over and over, extracting every bit of that inflated equity.  Where did that money go?  Into the owner's pocket.  Some of the refi'ed into ARMs where they could barely afford the teaser rate, let alone the payments after two or three resets.  But, there was no "lucky seller" or "poor schlep" involved.  Nobody was "ripped off". Just financially naive homeowners.  I don't like it, but this whole economy runs on financial naivety.  If it didn't, you wouldn't get a stack of pre-approved credit card offers every day.

By definition, rent is higher than the payment on a house.  That's because the rent includes a bunch of expenses that the house payment, even a PITI payment, does not.  Maintenance, property management, vacancies, evictions, etc., etc.  The rule of thumb is that 50% of the rent goes to the expenses (including taxes and insurance.)  Plus, any investor in any investment wants a profit.  No profit, no investment.  Simple as that.  So, even with a huge discount from the banks, its very likely the new rent will be greater than the former PITI payment.

And, you can be assured many of these situation mean the homeowner was doing little maintenance.  That may be OK when its their house, but there are standards and laws that cover property conditions for rentals.  I buy REOs.  I've looked at some where there was vandalism.  But most of them are in the condition they were in the day the previous owner moved out.  If a landlord tried to rent them in that condition, the authorities would be on their case the next day.  So, an investor will, in many cases, have to make some immediate improvements to the property.

Further, the situation I describe of having a sale/leaseback/repurchase agreement converted into an equitable mortgage by a judge is real.  It has happened.

So, I'll stand by the answer that buying a house from a lender, then leasing it back to the previous owner is a recipe for disaster.  Putting that previous owner into another house you own is perfectly fine.  But, it better be something affordable for them, based on their current income.

To answer your first question about my experience level, no I do not have a huge portfolio of investment properties.  I do own two houses, part of a mini storage, and do loans to rehabbers.  I am now trying to build a rental portfolio.  But, i stay away from pre-foreclosures just to avoid these high stress/high emotion situations.

Jon

Jeanne Michael · Answer

Jon, are you a very experienced investor? Reason I am asking is this is the answer that anyone who has been doing this a long time say "If they can't pay the house payment, they won't pay the rent."

My issue are the people who got caught up in the "must buy" craze at hyperinflated prices, paid some lucky homeowner or builder waaaaayyy too much due to the hype. The lucky sellers walk away with a mint and the poor schlep who paid the overinflated price is now stuck with mortgage loan way over value and a house that is worth $100k or more less than the loan.

Why isn't some group putting together a fund to buy these houses from the lenders and reselling to current owners at a fair market value while making money on the loan interest?

Imagine if the Bear Stearn funds went to the ripped off homeowners or the suckered home owners who bought in on the loan officers who promised the moon and sold them the bad loans.

Just my humble opinions, no improper content was intended if anyone reads it that way.

Jon Holdman · Answer

Can't help.  If the owner insists on staying, move on.  They're looking for a sale/lease back/repurchase situation.  You negotiation a short sale with the bank, and buy the house.  The owner leases the house from the investor with an option to buy it back later, often at a higher price than the investor paid.  The idea is they pay rent until their credit's better, then they can buy the house.

In reality, what happens is that they can't pay their rent any more than they could pay the payments.  The rent is often higher than the payments, since the owner of a property has more costs (they did too, that's the source of all the deferred maintenance) and wants a profit.  The owner tries to evict.  The tenant buyer finds a lawyer and takes the owner to court claiming they're actually buying the house, not renting it.  The judge looks at the paperwork and agrees.  He says the whole lease/purchase deal isn't a lease at all but an "equitable mortgage".  He looks at what the investor paid, the "rent", and the "payoff" (what they have to pay later to buy it) and does the math to compute the interest rate.  He calculates its a "loan" of the amount the investor paid for the property, with payments (rent), and a balloon payment (purchase price) and gets a 60% or some such interest rate.  Usury in most places.  He unwinds the deal.  The people get the their house back, the investor gets nothing.

Don't do it.

Negotiate a short sale with the bank and buy the house.  The owner gets nothing, or at best a little moving money.  She moves out.

In either case, those credit cards and medical expenses are moot.  The lenders are taking it in the shorts, and aren't going to be willing to let the owner have anything.  You might get away with buying their appliances (for example) for enough for them to move.  But they aren't going to walk away with $10K or $15K.

Jon