Can you give me your thoughts on this preforeclosure?

Question

Tell me what you think:

New custom home by well established and respected builder is going to foreclosure 9/1. Spec home completed a year ago was originally listed for $1million. Over the year builder has dropped price several times to current offering of $799,000. He did not react quickly enough to the downturn in the economy to get out. New subdivision is the prettiest/most expensive/well thought of in market. Bank is willing to take a short sale, he says 5% discount. Here's the numbers:

Current Bank Debt: $570,000
Bank 5% Discount <$28,500>

Highest Probable Appraisal $700,000

Buy Home from Bank for $541,500
Closing Costs $5,000
New Loan at 70% of Appraisal $490,000

Equity Needed to Close $56,500

Monthly Carry Costs of Taxes/Interest/Maint/Ins $4,000

Mkt Value: $750,000
Max Sales Closing Cost <$60,000>

I think a nine month time frame would be enough time to sell. That gets me through May of next year. I don't think there will be much activity the rest of this year (at this price). That would net approx. $107,000

Tod R. · Answer

So, is it still possible for the homebuyer to take a conforming loan for $417K and a second upto 80% LTV (about $143K)?

Tod R. · Answer

Thanks Jon for your insight.  I'll let you know if anything new develops.

Jon Holdman · Answer

I would want to be very confident about the value before jumping in.  It would be worthwhile to pay for an appraisal yourself, and to be sure your appraiser knows you will be selling it to a conventional buyer and subject to HVCC rules.

Hard money on a $500K loan would run $5000 a month at a minimum.  The only person I know here who would be that cheap would want you to have 30% of purchase price, $162K of your own cash in the deal.

If I was absolutely certain I could turn this in six months for $700K, I would pay, at most, $490K and hope for a profit approaching $100K.  Realistically, I'd know it may take a year, and would expect less.

I don't think this is worth, retail, a penny over $600K.  Why?  Because if it was, he could list it for $600K and make enough to pay off the bank in full.  That's MUCH better than having a short sale on your credit report.  The fact he's willing to do the short tells me he thinks it not worth this.   If you think its really worth $700K, $600K would be a great deal, and it would sell very quickly.

I wouldn't have the stomach for a deal of this size.

Tod R. · Answer

Thanks for the insight.  I will analyze  using your suggestions.

What would be your minimum return to make this investment worth the risk?

I'm thinking that if I can make $100K, it makes sense for me.  If it's closer to $50K, then probably not enough margin for error.

Tod R. · Answer

Builder has kept the house in good condition in order to show it.  He stopped the maintenance last month saying he was tapped out (money and pride).

There is a house on the same street under contract for $680K.  It's a smaller home that doesn't have the same view of large pond, however, it does have a pool so I'm calling it a wash.  This home is not a foreclosure but is a distressed sale.  Homeowner lost much of his personal wealth and needs to get out of the house.

So I think the bank appraisal would be around $700K and a $750K sales price if given time and effort.  You may be right that $700K would be the best sales price now, reducing the net to approx. $60K

I just heard today that there are two homes under contract greater than $700K in this market.  I do not know how many homes in this price range are on the market, but I will find out.  Good thought.

What is reasonable to expect on Jumbo loans?

Jon Holdman · Answer

I'd say you should not use the highest possible appraisal as an ARV, but the lowest possible appraisal.

You're in jumbo loan teritory, and those are hard to get and expensive.

Inventories at these high prices are very high.  What's the inventory at $700K

Why are you bumping up from your highest possible appraisal of $700K to a market value of $750K?

How much work is needed?  Even if was perfect a year ago, it will need some work after setting empty for a year.

Jon Holdman · Answer

I'd guess high sixes with 20% down and 700+ credit.

Appraisals are becoming a real issue.  If this house shows being sold $540K, and you have a "wash" comp at $680K, its going to be hard to justify $750K.  The appraiser just won't, and you won't have any chance to influence the appraisal.  I have a hard money loan right now the borrower is having a hard time getting out of because the appraisal's are coming up much lower than expected.

This is sort of a fix and flip.  So, apply the 70% formula.  If you buy for 70% of value, use hard money, and sell within six months, you'll net 10-15% of ARV.  So, at $700K, 70% is $490K.  Buying at that would give you a $70-105K profit.  If you buy at $540, you take away $50K of your potential profit.

I've heard, though not verified, that in Denver we have over 10 years inventory over a million bucks.  Inventory below $100K is almost non-existant, maybe three weeks.  Sort of ramps in between.  Even if your inventory there is just a year, assuming a six month sale sounds pretty optimistic.  These high end homes are REALLY taking it in the shorts.