Out of options Dead Deal?

Question

I just finished a walkthrough of a absentee owned SFR

3 bed 1.5 bath

1488sqft

Decent comps imply ARV=$60k-$80k

Rent rates for similar houses in that neighborhood=$950-$1100

Everything on and in the property needs to be replaced. (not exaggerating)

roof, siding, windows, insulation, drywall, electrical work, plumbing work, kitchen and bathroom guts. etc

The owner is asking $35k because he owes $35k

Any ideas on how to make this work?

loan assumption? but at $35k i dont think its worth it

Denise Evans · Answer

Do not be discouraged by the bleak opinions regarding short sales. They are relatively easy to get approved, and depend entirely on answers to the following three very simple questions:

• Is there evidence the borrower can no longer afford the mortgage payments (or will soon be unable to afford the  mortgage payments?
• Does the borrower have sufficient liquid assets or easily liquidated assets that it could bring cash to closing if required?  Easily liquidated assets includes unused lines of credit.  Cash in the bank sufficient to cover up to three months of living expenses is not considered a liquid asset. Retirement accounts are not considered liquid assets.
• Will the bank be financially better off accepting the net proceeds upon a short sale, or foreclosing on the property and selling it after foreclosure?

Once you know these are the ONLY important questions, you understand the goal when you are filling out the bank's forms.

The bank will order a new appraisal for the short sale. Given the expenses, time frames, and uncertainties of a foreclosure scenario, the short sale offer can usually be significantly less than current fair market value and still be approved.  In my experience in Alabama, I usually get approvals at 15% to 20% below fair market value.  The numbers might be different in other states. A judicial foreclosure state means a longer time and more expenses. Alabama has a long post-foreclosure right of redemption, which depresses things. A state with deeds of trust, rapid foreclosures, and no redemption rights, might fall in the 5% to 10% below market range.

Debt forgiveness is taxable only if:

• The Mortgage Debt Forgiveness Act is not extended into 2017, or
• The borrower fails the "insolvent before and after" test. I've written about these in other comments. You can try to find them on BP, or google them generally for more information. Virtually NO homeowner will owe taxes after a short sale, but every situation is different and has to be independently evaluated.

Denise Evans · Answer

The bank will approve a short sale even though the owner is current if the owner can demonstrate it will not being able to continue servicing the mortgage and default is imminent. Those are the "magic words" to be used in the hardship letter, and then backed up by other documentation. For example, the borrower might be living off credit cards, lines of credit, or savings to meet monthly expenses. That cannot continue.  Or, the borrower might have had a second job or a self-employment supplement to income that will come to an end in the near future.

Andrew Johnson · Answer

@Adam Percento Even if they owe $35K it doesn't mean the deal is dead.  Every month has costs associated with the property so an owner might be able to eat $5K to get out from under a mortgage payment, property taxes, insurance, etc.  I've had one deal where I paid less than what was owed but it wasn't for that reason, it was because they wanted out of that property to build on a piece of land they had acquired.  While they may have had to eat a loss at my purchase price, it freed up their capital to develop their new asset which will hopefully made a good deal more money for them (creating a win-win).  Maybe what was more relevant to me was getting the price that I thought made sense.  That have given a huge profit or a huge loss for the seller, neither of which impacted what I thought the property was worth to me, at the moment I was ready to purchase.

Michael Wagner · Answer

Hopefully others will jump in here to better help you. Bank usually require that  owner be behind in payments but thats not a hard and fast rule.  You should call the city and see what thier process is for dealing with delinquent taxes.  You want to find out how far away any potential tax auction might be as that could be another avenue.

Simply tell the seller that X is the most you can pay for the property but you are willing to negotiate with the bank on his behalf (requires his authorization to be submitted to the bank) to get them to agree to accept less.  Note--he would be responsible for paying Income taxes on the "forgiven amount" and you need to disclose that to him at some point sooner than later. If he agrees, then you start the long frustrating process of getting a hold of the right person at the bank and then helping them understand that the property is only worth X and that as it sits, it will be decreasing in value steadily.  The past due taxes are evidence that the owner has no money for upkeep.  Ugly pictures will help your case. ...Its admittedly a lot to take on for someone new to REI...perhaps you can ask around your local area to find an agent who specializes in short sales.  Be warned, people can work months...or even years....on a short sale to have them fall through....you just have to view the whole process as a free (excluding sweat equity) education to avoid being disappointed if it doesnt pan out. Search here on BP...Im sure there is tons of info on short sales!

Hope thats somewhat helpful...sorry I don't know more.

Adam Percento · Answer

@Michael Wagner I believe hes current on mortgage but according to the city website hes behind on taxes owing over $3000.

With a short sale would the bank approve one with the owner being current?

If so how would you present this idea to the seller? and the bank?

I really want to make something work with this one I feel like Its what Im supposed to do.

Michael Wagner · Answer

On a rehab of that size with an ARV of $72 K, I would want to be all in for $50K or so....Why pay full retail and do all the work?  Is the owner current on payments? At risk of falling behind?  I feel like a short sale is the only option right now.

Adam Percento · Answer

@Michael Wagner @Jay Dewberry  Thanks for the quick responses!

As for more in depth numbers. property taxes last year were $1199yr

I estimate rehab costs at around $30k-$35k being that it a gut project (this is the biggest issue)

Im pretty confident in the comps I stated in the post. most recent (retail) sale of a similar house was June of last year for $72k

Jay Dewberry · Answer

Hi Adam. Welcome to BP. From what I can ascertain, even as a fix/flip, a rental, or a wholesale, I think with the right numbers, you may have a deal. I analyzed this as a rental with 20% down and $25k in rehab, which yielded a 13% CoC ROI and a $373 Monthly Cashflow. Depending on the rehab costs, you may have a decent investment. I would love to have more info on the property…ie..taxes, Sales Comps, a more focused Rehab cost analysis, ect. to hone in better on the figures, but it looks promising.Good luck and keep us posted.

Michael Wagner · Answer

Short Sale...if he owes $35K but the house isnt worth that, either he has to come up with the difference (or not sell the house) or you have to convince the bank to "forgive" any shortfall and sell the house for less than they are owed. I'm not all that experienced as I have only done two short sales (and only one was residential) so I'm sure others can give you more specifics than I could.

As a side note, if it is DEAD at this time, just be sure not to throw away the file.  Put it in your "Dead" deal pile and revisit it in 4,6 or 12 months.....Time has a way of bringing Dead deals back to life!!!

Out of options Dead Deal?

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