Diary of a creative investment deal
I'm going to blog the details of a deal from start to finish and layout all the numbers throughout the deal. I will keep the actuall address and name of seller private. The seller has given me permission to do this, however I feel it's important to keep the seller protected as going through this as a seller can be mentally and emotionally straining.
Today I spoke with the seller which we'll call BOB about his property we'll say is on Ocean Ln. After the intial pleasantries we got down to business. Bob discussed his situation and gave the property information I would need to properly analzye the deal.
At first gland it looks like a great deal as an investor. There are two mortgages on the property and the two combined is absolutely over the market value of the home. Initially instead of focusing on short selling both loans I brought up the fact that I can short the 2nd mortgage and take over the 1st loan. This is indeed help Bob as it's a sure fire way of being able to assure Bob that I can perform as promised.
The mortgages are as follows:
1st position equals 80k
2nd position equals 60k
Bob had received an appraisal about a month ago and I received two separate comps from Realtors before I was even off the phone with bob. All three support a resale price of 120k. Shorting the 2nd and purchasing the 1st "Subject To" will not only help Bob but it will also create nearly 40k of instant equity for myself. I'll have to subtract my cost that I'll incur by paying off the short 2nd leaving me with nearly 35k of equity and potential profit, as you can see it's a small price to pay to instantly create something that is currently not there.
I'm currently waiting on more interior pictures to be send by Bob to get a better ideas of the condition inside the property and have already contacted a few Lease/Option buyers and informed them of the deal so there is a good chance I'll already have a buyer before completing the short on the 2nd.
I'm leaving on vacation here very soon so I'll probably have to recruit some of my team members to help out with some of the tasks as I'm away. I've got a great team so I'm sure it won't be a problem and they'll take care of Bob very well while I'm gone.
Stay tuned and make sure to subscribe to the blog posts to stay updated.
Comments (38)
This was two years ago? lot's have changed in 2 years especially concerning Short Sales with B of A or should I say BANA. I here they can't talk to you unless your Licensed or an Attorney as of April 2012. So how did your deal turn out? Are you still doing Shorts?
Bryan Patterson, about 12 years ago
This is a great! I can't wait to see what happens
Alison Feliciano, about 14 years ago
Was the POA really critical? I am wondering if this could not still have been done w/o the POA--the seller could show up to sign, and insurance gotten at moderate cost? Just want to be sure we don't lock into an m.o. just by habit and leave money on the table?
jason, about 14 years ago
Good so far!
Myka M., over 14 years ago
Forget the sympathy . . . send them my way. =) I have some sympathy for the sellers, because they are getting so many mixed messages. I see a lot of people on Trulia (sellers, agents, buyers, etc) who are absolutely frustrated with what's going on in the current market, and many of them are missing out on the opportunities out there, because they're looking at the wrong side of the coin.
Dory Peters, over 14 years ago
"Jose, this was several months ago. I had to actually read back through it just to remember it LOL!! I stopped blogging about deals in the process because every time I did, I'd end up losing the deal. This deal was a lock up. I already had the buyer in place and it would have easily been a home run for everyone involved. The seller on the other hand was 'steered' in the wrong way by an ignorant agent that said I was the devil. It worked because that agent ended up getting the listing from the seller. I wouldn't be surprised if it didn't work out for the seller, but as is life." I know what you mean. This happens to me all the time. For some reason homeowners would rather take the word of a so called "professional" over me. Little do they know these Agents wouldn't know what a deal was if it jumped up and bit them on the ass! Then the homeowner calls me months after the fact saying: "I should have listened to you!" I have absolutely no sympathy for them whats so ever!
Jose, over 14 years ago
Man sorry to hear it Nick. It was still a great idea to share the experience though. I re-read your ebook twice, and I'm ready to rock and roll with it. For anyone else reading this, you should check it out. Best sub2 info I've seen to date.
Joseph Ziolkowski, over 14 years ago
Jose, this was several months ago. I had to actually read back through it just to remember it LOL!! I stopped blogging about deals in the process because every time I did, I'd end up losing the deal. This deal was a lock up. I already had the buyer in place and it would have easily been a home run for everyone involved. The seller on the other hand was 'steered' in the wrong way by an ignorant agent that said I was the devil. It worked because that agent ended up getting the listing from the seller. I wouldn't be surprised if it didn't work out for the seller, but as is life.
Nick J., over 14 years ago
Very excited to see how this will pan out
Jose R., over 14 years ago
Thank you for the effort involved anyways. I need to hear from people to learn, I have difficulty reading hypothetical scenarios and making sense of them. Perhaps if you feel up to again, I know I would be very apreciative
Account Closed, about 15 years ago
Well apparently the deal got sour for the seller, here's the blog post update regarding it: http://www.biggerpockets.com/blogs/355/blog_posts/2023-and-that-s-all-she-wrote- It's unfortunate to have a perfect exit plan in place and see it dissolve. I'm apologize to those of you following the updates. I was hoping to create an amazing real life learning experiment while at the same time helping not on a fellow BP member but a dismayed homeowner at the same time.
Nick J., about 15 years ago
Thanks Dory! I did hit a snag today. I informed the seller that I will be having the contracts drawn up including a POA. The Power of Attorney form is only used to allow a 3rd party to sign for the seller at closing and to use to deal with the current insurance on the property. When a seller says they're motivated but they're really not, they usually object to it and pull the, "I need to speak with my attorney" line which is totally fine with me considering this transaction is anything but illegal. The POA form was drafted by the title companies attorneys so I'm not worried that the "attorney" card was pulled on me. This sometimes is a tactic used by the seller to "call me out" and test me, wondering if I'm going to run and hide. Since I'm not trying to pull a fast one I will continue to work with the seller in whatever he needs to feel comfortable with moving forward. I can only hope he makes his decision quickly because the results of waiting only deteriorate the successful outcome possibilities. As it stand right now, I'm going to have the paperwork drafted in hopes that we'll be able to move forward. I informed the buyer that I had locked in to search for another home and my negotiator to stop the short sale process until further notice. All we can now is wait until the seller sees the light and is willing to move forward. Hopefully that happens fast otherwise the strategy changes completely and the outcome is not so favorable to the seller.
Nick J., about 15 years ago
Nick, First, congrats on the deal. Second, I'm so thankful that you posted this blog, because I'm in the middle of structuring a deal with similar--but not exactly the same--characteristics. Not that I have any second doubts about my deal, seeing that you're in the middle of doing it too is quite encouraging. Third, I've also read a post (http://www.realtor.org/rmodaily.nsf/pages/News2009051805) awhile ago that confirms your claim, "I've been hearing BofA is starting to take 5% instead of 10% on 2nds. . . ." Finally, we've both shamelessly borrowed/stolen a few goodies from one another lately. :) So, I hope you don't mind me borrowing/stealing this goodie too. ;)
Dory Peters, about 15 years ago
that is a myth that the owner/seller must be behind, anyone who tells you otherwise is probably "faking it till they make it" type of person. The seller is anticipating a hardship and will not be able to keep up the payments any longer. That will be addressed when shorting the 2nd. We will do this by showing in the financial information sheet his reduction of income and the savings he's used up trying to stay current. His hardship letter will address the reasons in which he's had a reduction in his income.
Nick J., about 15 years ago
From what I understand, the owner was current on payments, correct? I thought he'd have to be behind X amount of payments, kinda like a hardship, and prove that to the bank via a letter and bank statements etc...that he's having trouble? Was the seller anticipating problems?
Norm Chrostowski, about 15 years ago
2nds are usually HELOC's and they're worked the exact same. I just present a normal short sale package, whatever the lender requires to complete a short sale. I don't have or use a magical letter or document, there are some out there that hype a special secret if you give them a bunch of money. The truth is that's all crap.
Nick J., about 15 years ago
Nick, Awesome post. I have a couple of more questions for you: 1. Do you have certain documents/letters that you use for presenting a short sale offer? 2. Does the game change if the owner has a HELOC in 2nd position? Can you short sale a HELOC?
Loc R., about 15 years ago
exactly, that's the premise behind short sales. You get the first to take a discount and tell the 2nd to kick rocks or else. Now it does get better, the 1st and 2nd are with the same bank however they are dealt with usually by different departments and almost always different lender negotiators. I don't expect this to be a problem as they haven't in the past. Of course I'll keep everyone updated as I move along. I have made some updates already in different posts, make sure to check those out as well.
Nick J., about 15 years ago
In away it does make sense since if the property goes to foreclosure, the 2nd would most likely get nothing, so it's better to settle for something.
Eddie Ziv, about 15 years ago
It's not uncommon, matter of fact that is the biggest way to create profits when doing normal short sales is getting the 2nd to agree to such a low payoff amount. You can easily get the 1st position to accept a lower payoff but its never 10%. Shorting the 2nd position will be the easy part, seeing if they'll take 3.5% will be kicker, knowing that I'll probably end up paying 10% which is still fine, there will be plenty of profit margins even at 10% There is nothing different between executing this strategy then there is executing a normal short sale other than I'm not shorting the 1st only the 2nd. The method is the exact same, paperwork and contracts are all the same. Once I get the acceptance letter I'll post an image of it so you all can see what my negotiator ended up getting accepted for.
Nick J., about 15 years ago
Yes. Much much better. If you can pull it off, all the power too you. I am, though surprised that BofA would settle for so low. I have my two mortgages with them, three business accounts and my personal financing and they are great to deal with (As oppose to Wells Fargo whom I have another business account with.) But going that low is quite surprising, but GO NiCK GO....
Eddie Ziv, about 15 years ago
My bad, shorting the second means paying 6k to knock out the 60k. 80k 1st + 6k 2nd = 86k total house is worth 120k as is = 34k equity I will be going in on the second @ 3.5% of balance and testing what I've been hearing about this BofA taking 5% on 2nds understanding that worse case scenario I'll pay them off at 10% which is fine, still plenty of room for profits. did that explain it? I apologize for not catching what you meant and appreciate your questions and comments
Nick J., about 15 years ago
I, like Norm still don't understand the math. $80K 1st +$60K 2nd = $140K House worth $120K - That's $20K negative equity. If you keep the 1st intact and you short the 2nd by 10% ($6,000 less of the total 2nd) the total owed is still $134K. You still at negative equity of $14K. Am I crazy? What am I missing here?
Eddie Ziv, about 15 years ago
a referral from a website.
Nick J., about 15 years ago
Did he call you? Via bandit sign, website, referral, word of mouth? I think that's what Rao was asking. Thank you for bringing a lttle light to my "darkness"
Norm Chrostowski, about 15 years ago
Wooosh...that's better
Norm Chrostowski, about 15 years ago
I have to write something to get that"subscribe to comments thing out of my way I can't see the one line of the reply
Norm Chrostowski, about 15 years ago
Norm - yes, there is that real possibility of coughing up 6k. yes again on the Option money, I'll sell the property via L/O and collect an option fee upfront and charge a predetermined amount above my PITI costs. Justin- both mortgages are current. Once I close on it the payments will be my responsibility. It won't "affect" my profit margin simply b/c I'll easily get a L/O tenant in the property paying me an option fee and a premium monthly payment. Locatelli- distressed sellers are everywhere! you probably stand next to at least 1 everytime you're in the grocery store check out line. The trick is letting them know who you are and not what you do but "how you can help them" This seller made a decision and luckily for the both of us it included me in the mix.
Nick J., about 15 years ago
Sounds like a good deal, Nick. My question for you is, how did you find this particular distressed seller?
Loc R., about 15 years ago
Nick- Great start on the property, and its great to see another homeowner helped out. Let me ask a few questions, which I know you thought of, but its more for community help since your strategy is more advanced. You mentioned the homeowner has already talked with the bank, which gives you confidence that the short will go through on the second mortgage. What about the first mortgage, is it current or does it need to be brought current? If so are you paying it or is the homeowner? How will that affect your profit margin? If the first mortgage company filed a NOD, how much time do you have to bring everything current and short the second? Thats all I'll pester you with now. Nice job again, looks like I learned from the Sub2 Master!
Justin S., about 15 years ago
So you'll have to come up with (probably) $6000? Having lease option buyers, this is something you've already lined up via marketing for them? So if you find a lease option buyer, "Bob" moves out, the new buyer moves in, you collect an "option fee", and the new buyer makes the current mortgage payments or whatever you set the payment at to make a little more per month if you choose, since you now control the property? Just trying to see all the options here
Norm Chrostowski, about 15 years ago
The seller has already contacted the bank attempting to get help from them, they told him there was nothing they could except for to short sale, so I feel confident in that respect. I've been hearing BofA is starting to take 5% instead of 10% on 2nds so I'll be going in at 5% with the understanding that I have a good chance at settling at 10% which is fine.
Nick J., about 15 years ago
Great start. I'll check back to see how this deal progresses. Thanks
James Ward, about 15 years ago
Short meaning your giving them less than owed. How do you know it'll be accepted? What amount would be fair? Do you pay that out of pocket? Or after it sold? Where does that payment come from? Sorry about all the questions, just trying to grasp what you saying
Norm Chrostowski, about 15 years ago
Nick, How do you know that the 2nd lien holder will take the 5k short?
Jason Dolinski, about 15 years ago
naw! I don't mind :) what that means is I'll be offering the 2nd position lien a "short" payoff amount for them to go away thereby leaving only the 1st position lien against the property. then I'll purchase the property while keeping the original mortgage in place hence the term "Subject To". In easy to understand terms I'll basically "take over payments" Does that help?
Nick J., about 15 years ago
"Shorting the 2nd, and purchasing the 1st "subject to" will not only help Bob, but will create nearly 40k of instant equtiy for myself. I'll have to subtract my cost that I'll incur by paying off the 2nd leaving me with nearly 35k of equtiy and potential" ???? WHAT THE HELL DOES THAT MEAN!!!!!!!!!!!!!!!!!???????? Completing the "short on the 2nd????? I don't want to sound like an idiot here but.......(I guess I am if I have to ask...huh?) Please explain SLOOOOWWWWLLLYYY, and with detail (if you don't mind)
Norm Chrostowski, about 15 years ago
It's nice to start learning about the daily real estate adventures of Nick! You've joined a great club of folks who are doing a wonderful service to others by sharing the in's and out's of your real estate life. I can't wait to see how this progresses! Sweet! BTW - Rumor has it that Mr. T has already subscribed! ;)
Joshua Dorkin, about 15 years ago