42% Return in San Antonio

[Rick Pozos]

I have always been thought of as someone who is a little quirky and I do things a little out of the ordinary. I have prided myself on that and especially now being in the real estate game where it has really worked to my advantage.  I see things that most people dont. There are always many ways to do the same thing, but we get in a rut and do them one way. 

I was talking to a lady, we will call her Gloria(my wifes name), about her house that is going to foreclosure. She filed for bankruptcy (BK) a year ago, but then did not make payments and was out of it. She had missed payments to the 1st mortgage and the 2nd mortgage. 1st was about 41k balance, 2nd at 17k. First was foreclosing. Repairs needed for a flip were about 20k with ARV at just over 100k. I offered 60k.

We talked about giving her cash for her equity and do a sub-to, sale and lease back, credit of her equity for rent credits, lots of different options. After talking for over a month, the day before the foreclosure sale has arrived ("manic monday" because foreclosure sales in Texas are 1st tuesday of the month). She wants 10k equity, nothing less. Because of the condition of the house, I could only give her a few thousand $$. She wanted more. I could have just let her lose the house and nobody gets anything, but since I am a nice guy and always doing things so that karma does not bite you when you are not looking, I came up with a solution for her.

I told her that I could give her the reinstatement amount to bring her home current($7175) if the 2nd would work with me. I figured if I could buy the 2nd at half price ($8,500)or less and then pay the arrears, I would help someone and have an ok return. I found out that her 2nd was at 3%(not a good return). I told her that we would have to modify the terms of the 2nd if I was to help her. Instead of 3% it would be 10%, also the term that had 20years left would now be 5 years. She agreed on manic monday. Now this all works if the 2nd agrees to a BIG discount.

So I go to the 2nd, who is a local non-profit, and ask to buy the loan. They already know that the 1st is foreclosing and that she might file bk again. If foreclosure takes place, they get wiped out. If bk, then they wait another year without payments, but they are a non-profit so they are not really concerned about that. I mention that if foreclosure happens, and it will if I dont buy the loan and catch up Gloria, they will get NOTHING. After all of the work I have put into this I start thinking that I need to really make some money here. So I offer 10% of the 17k. After they choked a little and their eyes were wider than salad plates, they agreed. They would rather get $1700 than get wiped out tomorrow.

The executive director was not there to sign the assignment of deed of trust so I would come back tomorrow to hand them the cashiers check for $1700 and get my assignment. So I wired the money to the 1st so that he would pull it from the sale.  

Tuesday morning I am going to drop off my cashiers check and get my assignment of deed of trust so that I will now own a 2nd for total $9k out of pocket, but with a balance of 17k. The final numbers are 42% on my money if she pays on time, or I can sell the note after she seasons for 6 to 9 months for an even bigger return. Someone will pay 14k or maybe even 15k for the note if I need the money. The 2nd was trying to squeeze me on Tuesday morning to try and get more money from me, but in the end, they took the $1700 and the owner stayed in her home. Gloria is really the one who came out ahead if you really think about it. She did not make payments for several months, her loan balance on the 1st is now smaller and she is 100% current on both her loans. The 2nd took a bath because they did not pursue the homeowner and keep her on track.

PS This type of deal would have been perfect for a self directed IRA(SDIRA) or solo 401k.