Forclosure bail-out, then rent back to the seller...bad idea?

Question

Hi everyone - this is my first post.  I've been hunting for a deal and I may have just found one.  I need some advice because there may be ethical & "bleeding heart" flaws in my plan.  Here it is:

I'm a mortgage loan officer.  Today I got a call from a man who has been out of work for a year, his credit score is now in the 400's, and he is 3 months late on his mortgage. The foreclosure process starts in 3 days!  He wanted to know if there was any way I could help him refinance.  Sadly (of course) there is no way.

He said his house is worth $160k (that's probably a "rosy" ARV...he owes $105k + arrears on a 1st and 2nd)  I haven't seen the house, but I'm pretty sure it's a mess - he said the basement flooded and he hasn't fixed it. I told him that he needs to do what he can to avoid foreclosure, and sell FAST!  He's going tonight to see if his church can help...

I then told him that I have been looking for an investment property to buy, I can close fast (as fast as my hard money lender can move I guess) and I asked if we can meet at the house in the morning to see if we can come up with a win-win situation that would allow me to purchase the home and RENT IT BACK TO HIM.  (I'm planning on using hard money+my HELOC to Buy, Rehab, Rent, Refinance, Repeat..)

He won't pass any tenant screening tests, that's for sure, but I feel like I could probably structure a deal that gives him enough cash at closing to put 12 months of rent into escrow up front.  This gives him time to find a job and start paying rent, or move out.

So here are my questions.

1. Do you see any ethical or legal problems with this plan...

2. Is renting back to the same guy under these terms a terrible idea?  I don't really want him as a tenant, but if I want him as a SELLER I probably have to offer to rent back to him too...plus, I kinda' want to help him out...

3. Do you have a better suggestion for doing this deal smarter?

Will G. · Answer

I think you would be better off applying a rubber mallet to your head repeatedly, cause that will be an easier headache to get rid of. Dude, do you want to have to evict someone and wonder how badly he is going to trash your house?

Ruth Bayang · Answer

If he couldn't pay his mortgage, do you think he can keep up monthly rent payments to you?Proceed with caution.

Joel Owens · Answer

Based on what you said there is no money in this property whatsoever.

You take 105 and add in arrears, legal fees, and all other kind of stuff a lender tacks on and then add on repairs the property needs there is no money.

Might could do a short sale on it. Your resale target will vary depending on if you want to rent it out after rehab or sell (flip) the property.

Would not touch renting back to them with a ten foot pole. I doubt your HML would go along with such a proposition either. Just refer him to a HUD counselor for free and move on.

These rent backs from the former owner the Feds have been going after investors and prosecuting for stuff like that. The owners claim they were duped and had their equity taken away from them etc.

No legal advice given.

Matt Motil · Answer

1. You're teetering on the edge here, but I think you're OK.

2. This is a horrible idea. The guy has no job and hasn't been making payments. Sounds like an awesome tenant that you're going to ultimately have to evict.

3. Offer to buy the house for what they owe, or what it's worth, so they avoid foreclosure and if you want to be a nice guy, you can help them move out.

Chris Walters · Answer

i would never rent it back to him. You hard setting yourself up for disaster. You will be renovating to have him enjoy the improved unit while he continues to struggle to find a job. It is a tough world and I sympathize for him. Unfortunately, he's not in a situation to hold that mortgage and he won't be able to pay rent either, unless if your plan is to have negative cash flow. The best thing you should do is to evaluate the average value for similar properties in the area. If the ARV will be higher or similar to comparable properties, then acquire the property with the condition that he walks away from the property. Offer to pay his move (with a max price) and  maybe offer him a 1k  to start fresh (only with the comdition that you successfully acquire the property). One Way or another he's losing the property. Might as well do it that way.

Good luck to you and good luck to him! It's not fun hearing stories like this. But reality is that shit happens. One thing i do know is that i doubt a hard money lender would lend you momey to eventually let the old owner become a tenant. You'll be shooting yourself in the foot.

Brian Pleshek · Answer

Absolutely not.  This person has shown he isn't good for it.  His 400 credit score says it.  If you, as a loan officer, would not loan him money because he's a bad risk, I wouldn't try to fix him.  He won't pay you either.

Brian

Joel Owens · Answer

The problem with short sales is often after the previous owner or tenant moves out there is damage that you couldn't see very easily. So take your estimate and increase it by 10 or 20%.

You don't want to invest in thin deals especially with an HML lender. The extra carrying costs and high rates will suck out any profit you possibly will have. The HML lenders add on increasing costs for any extensions because the most money for them is typically made on the points charged on origination. So the HML wants to recycle capital as fast as possible to increase overall yield on their money. If an investor is taking longer to pay them off the HML generally doesn't like that as it traps the money.

Matt Motil · Answer

As long as you are paying more than what he owes for the place then he will be in a position to pay off the lien. At the end of the day, if they have the money to pay off their mortgage, the bank isn't going say or do anything to stop it.

You need to provide a win-win situation. If they continue down their current path they will end up homeless and their credit will be destroyed for years. At this point they are just behind on payments, and that can get cleaned up pretty easily with credit repair. If the guy got a new job again, they could be homeowners down the road in as little as 6 months (assuming they clean up the credit). If they let the foreclosure happen, it will be years before they could buy again.

If they aren't in a position to stop foreclosure or pay their back payments, you are providing them a way to cut their losses, stop the bleeding, and salvage their credit. If you present it in a way to help solve their problems, you're going to have your best chance of getting a deal done.

Ultimately, you need to listen to them and find out what their biggest pain point is and then solve that problem for them.

Mike Hanneman · Answer

He hasn't had a job for a YEAR!!!! Why would any able-bodied person not have a job for a whole year.....He is a LOSER! You can still look at the deal but get away from this individual as fast as you can.

If you want to help someone out, I need some extra cash for financing another property to set up my two beautiful daughters for success later in life.

Forclosure bail-out, then rent back to the seller...bad idea?

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