Complicated deal for rental. Thoughts?

Question

I had a owner contract me about doing a BPO, long story short I may buy his house, but it is very complicated.

He has a 1st loan with Citibank with $46,000 owing and $440 payments including taxes and insurance. He is current with this loan.

He has a 2nd that was assigned to SLS from Green Point that was $75,000 Heloc that is in foreclosure, balance owed is around $80,000

He has negotiated SLS to take $13,000 on the 2nd as pay off, but they won't sell or assign the note.

ARV is about $140,000 with $25,000 in repairs needed.

He has a $12,000 credit card judgement against the home, but he is going through bankruptcy and my lawyer said that will disapear off the house once his bankruptcy is completed.

He wants me to pay him about $3,500, pay off his 2nd for $13,000 and take over his first. He then wants to rent place back for a year for $700 a month and then for a second year for $900 a month. It would rent for $1100 to $1150 after repaired.

He doesn't want to sell the house until his 2nd is paid off because it is supposed to got the foreclosure sale soon and he may not have time. He wants to me to pay off the 2nd then buy the house from him so he walks away with $3,500.

My thoughts are to pay the 2nd off and in turn have him sign a Deed of Trust to me in the amount for the payoff that goes against the house. Then buy the property from him for $51,000 or something, pay off the first, get a new loan 20% down, pay title insurance, recording fees, and leave him enough to get $3,500 back. I can rent it to him for a year without making any repairs and then reconsider after that first year.

Is my thinking correct or am I missing something or a better option? I have not done a deal like this before.

Jon Holdman · Answer

You're making it overly complicated. You simply buy the house from him, subject to the first, and pay off the second at the same time. That is, you write up a purchase agreement for $16,500 plus the balance of the first. You get a payoff statement from the second. You bring the $16,500 (plus costs) to the closing. The title company sends the payoff for $13,000 to the second, $3,500 to the first. Get title insurance at that point. Include the two year lease agreement, if he insists. Avoid it if possible.

Be sure the lender on the second doesn't have any restrictions. Short sales commonly disallow any benefit for the owner, and living there for two years would be a benefit even at market rents.

I wouldn't put a penny into it for repairs until he's out. He has a track record with not maintaining the place.

I'd definitely get some legal advice regarding that credit card lien and the bankruptcy. If he's already started the bankruptcy process, I think he'll need approval to sell the house.

Dawn Anastasi · Answer

Having someone live in the house you're buying is bad news ... read the Bigger Pockets article about it. I tried searching for it but could not find it, maybe someone else can give me a hand?

Wayne Brooks · Answer

It would not be a short sale, in the traditional sense. You get an Approval letter from SLS for the $13K which will offer a lien release. The seller's concern will be if it contains a release for the balance also. With the aproval letter in title co.'s hand, you close a sub2 the 1st mortgage transaction, and the title co. sends the $13K to SLS as per the Approval Letter. Do not pay them off in advance. You bring $16,500 to closing, with $3,500 going to seller. Try a 1 year lease deal period. As far as BK removing the judgement, I don't know, make sure you talk to a/the BK attorney. It doesn't remove a mortgage, even when it removes the underlying debt to the debtor, personally.
And, verify that SLS will actually allow the short pay off, without an approval letter from the first. The Approval letter from SLS will be the key, and your first step.

Bill Gulley · Answer

I'd just ask about the terms of the short with the second, they may not care, depends on it's securitization and holder. :)

Mark Ferguson · Answer

Thanks for all the info. I'm not sure how much I like any of the options now. I will have to check with my lawyer again and see if there is any issue with buying it subject to the 1st. My biggest concern is it would be considered a short sale and short sale fraud is the most investigated crime by the FBI right now. If there is any chance it could be considered fraud or illegal I don't want any part of it. If everything was disclosed to the 2nd maybe it would be okay, but again I need to check with the lawyers to make sure.

Bill Gulley · Answer

[b]

You can encumber title to cure the default, but that's not why I said you don't want to be a lender.

You make a loan, now you're a lender.You want to buy, you can't just forgive the debt, before you can take title the note has to be paid or deed released. Release without payment is a forgiveness of debt issue. Want to show that money toward the purchase? Pay it off in cash (another 13K) or put your required down and you can borrow form a new loan.

Trying to credit a loan to a purchase you'll need a HUD-1 showing the loan made or sufficient docs in funding the loan and paying off the other note. Basically, if you make a loan, first you are a lender, then you are a proposed buyer, they don't mix well. Buy it subject to your loan, paying yourself off? Where is your basis in the property if you don't pay or assume it? It becomes a tax issue as well.

Could make a loan and accept a deed in lieu, but that will stick with the seller, a DIL.

You could do it, being a RPITA, but it's the wrong route to go. IMO. Don't lend when you can buy.

As I said, buy Sub-2, (or CFD) pay 13K down and payoff the second and take title, you should be able to take out the first if necessary, usually, plenty of time for that. If the tenant keeps making payments as part of the rent and insurance stays the same, I don't see any immediate problem. I was thinking this was only for a year anyway. And, since you are in title, you could have work done, contract, get permits, etc. Can't do that as a lender. :)

And check with the second as to conditions as to the short payoff as Jon mentioned.

Scott W. · Answer

my head's spinning...but seriously...

I thought there was some law that a person cannot benefit from a short sale/foreclosure cuz the govt is trying to avoiding everybody doing that.

if there is not law, heck, I'll just SS my house & live here for free for awhile & then rent from the next owner at half my mortgage.

Fran Flanagan · Answer

Structured increases like this with family or friends often result in them asking to extend the lower rate of payment when the changeover date approaches. People tend to be optimistic about their future ability to make payments. It's the cornerstone of the 0$ down / 0% interest IF... Industry

Steve Babiak · Answer

But you will be paying off the second at the agreed settlement amount, and by the second releasing the lien - there is no longer a default to cure. So maybe the DOT is OK then.

Mark Ferguson · Answer

Another good point about the foreclosure act. That makes a deed out of the question. THe NED has been filed.

Complicated deal for rental. Thoughts?

Complicated deal for rental. Thoughts?

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