Creative strategies for wholesaling Probate deals?

Question

I do wholesaling from probate and absentee owner leads. I have a probate lead where the property's ARV is $200k but there is a $160k mortgage. Obviously the wholesale formula does not work in this situation but I wanted to know if anyone else has had a similar situation and used a creative strategy to contract and wholesale the deal.

Thanks for your input.

Grant Kemp · Answer

(apologies in advance for the wall of text, I just wanted to explain exactly how this works)

A couple of questions:

1. Was the home willed to a family member?
2. was the will probated?

If the property was willed to a family member so they are now the proper owner of it, this is how I would structure the deal: if you think you can sell it as owner financed at 200k, offer the family member a note at 6% over 20 or 30 years for maybe 20k in exchange for them selling you the house subject to the existing mortgage. This means you would be buying the house with no out of pocket money, giving them a note for 20k, and promising to take over the existing payments on the house. You could then turn around and sell the house as an owner financed house for 200k, collect a 10k down payment, and finance $190,000 to the end buyer at 8.5%. There's the wrap. You're financing 190, but you owe the seller 180 (their original 160 mortgage, plus the 20k note).

SO let's put numbers to that:

Let's say their mortgage was at 6% and they have 20 years left on it (just for the sake of this argument...if you get me real numbers I'll change this): their PI would be 1146.29 a month

Now you've also promised the seller 20k over 20 years at 6% (this is their incentive to not let it go back to the bank, and rather to let you have it). That would make you owe them 143.29/mo for 20 years.

So now, you essentially are "in it" for $1289.58/mo

But then you turn around and sell the property as a wrap. you owner finance it to someone for 200k. They give you 10k down. That's immediate money in your pocket. Now you're financing them 190 @ 8.5 for let's say a 30 year note (you can do whatever length you want here). They would then owe you $1460.94/mo for 30 years.

So what does that mean? You've put 10k in to your pocket right up front and you are getting 171.36/mo of residual income for 30 years (or until the buyer refinances).

The risk here being the "due on sale" clause which gives the mortgage company the *option* (but not the obligation) to call the mortgage due whenever the property sells. In our experience though, as long as the mortgage gets paid, the banks are not calling the loans due.

Jerry Puckett · Answer

Grant Kemp,
Wow, thanks for that detailed explanation of a wrap. I don't think it's ever been so fully drawn out here before.

Kelly P..
This is an excellent option, and the advantage to your seller is the 20k note as opposed to foreclosure. It's like saying 20k is way better than a sharp stick in the eye.

Account Closed · Answer

Grant:  have you recently done such a wrap with the end buyer being an owner occupant?  How are you dealing with the Safe Act?

Kelly P. · Answer

Grant Kemp The clarification made by Steve Babiak is what I was referring to.  I do not believe a PR or member of decedent's family would want to finance the sale of the estate property.

I would love to hear input from anyone who has actually faced this situation.

Steve Babiak · Answer

Grant Kemp - I think you misunderstood.  The heirs want ALL of their cash ASAP, because they don't trust others - so they don't want to be stuck in financing the property.  The third party servicer is certainly the way to go when they do offer to owner finance.

Grant Kemp · Answer

Also safe only applies to you if you do 5 or.more transactions in a rolling 12 month period. It's still just a good idea to go ahead and comply regardless

Grant Kemp · Answer

@Steve babiak one option is to use a third party payment processor. The end buyer pays them, then they pay the bank and each other person that's owed money. I always use third party processors for mine.

@k. Marie poe - yes, this is my main strategy at this point. essentially safe act and Dodd frank just dictate that you have to do your due diligence in approving the end buyer. I always run my buyers through an RMLO in order to comply.

Steve Babiak · Answer

Because the heirs to the estate might want to be paid in cash today, this solution might be rejected by them.  but it is a way to work this sort of deal given the circumstances that @Grant Kemp specified - one heir getting the property deeded to them.  But multiple heirs will almost always want to get their cash, because they often lack trust in the other heirs.

Kelly P. · Answer

Grant Kemp I can see how this strategy would be effective if the property was owned by a family member outright; however, standing in the shoes of the PR in this case, where the property is within the estaet, I don't see an advantage to the estate.  Perhaps its my ignorance and lack of experience dealing with probates and wraps, but what does the estate get out of financing a property for 20-30 years?

Grant Kemp · Answer

We always structure our acquisition contracts to give us a 60 day option period for us to find a buyer. If we find a buyer we close on the property to purchase it then immediately turn around and sell to the buyer. If we don't find a buyer we just part ways no harm no foul. Of course disclosure to the seller is of paramount importance here up front. Be honest with them and let them know exactly what your plans are. Ultimately though its usually a win win win situation. Everyone's back gets scratched.