I must be crazy because I'm still trying to figure out a way for a loan like this to work (with future prospects) while protecting my interests.
But first, here's what happened in this case. The homeowner's lender had promised to postpone foreclosure by 2 months if he could show them an offer. So I made an offer, he showed it to them, and they postponed the foreclosure by 6 weeks. But the purchase price needed to cover all costs turned out to be higher than I realized going in, and ARP % was high. My lender didn't like that though I could cover the difference with my HELOC, so I stepped aside and let the RE agent & homeowner bring in another buyer. That sale is pending now. I didn't make any money but it has been a valuable education.
So, back to the crazy loan idea. The problems to avoid are:
- If he chooses to keep the house and it goes into foreclosure again later, my lien would be way down the list and I would probably lose the money.
- If he chooses not to pay me the agreed share when he sells, my only recourse is a lawsuit.
- Dodd-Frank. If I loan him money secured by the home, AND he lives in the home, AND I buy the home with seller financing (whether Sub2 or Assumption), then (a) there can be no balloon payment, and (b) I must prove his ability to pay (and I doubt if it counts if his only ability to pay is by selling the home as planned), and (c) there are interest rate restrictions.
- Washington State law RCW 61.34. I want to avoid the "equity skimming" and "distressed home conveyance" buckets defined in that law. If I can't do this in a way that 61.34 defines as the relatively safe and navigable "distressed home transaction", then I'm not going there.
To address (1), make the loan have a balloon payment after just one month (is that possible?). Condition the loan on permission to monitor his other mortgages for new arrears appearing after reinstatement. If, after the loan comes due after one month, any arrears ever appear on any of the other mortgages, begin the foreclosure process (and if my ability to monitor those loans disappears or never appears, I foreclose asap after my loan comes due). In Washington State, this would still give him about 6 months to sell, but it would ensure that I start my foreclosure process well ahead of any of his other lenders, so in the event he doesn't sell after that 6-month foreclosure process, I have time to sell before any other loan's foreclosure auction date once I get title via foreclosure. Of course there needs to be enough equity for this to make sense, but if there wasn't I wouldn't have gotten as far as this with the home.
Or if someone else outbids me at the auction (unlikely since it would be a 2nd?), I get paid my amount owed. It wouldn't be much of a payday even if the loan interest is max allowed by WA usury law, but it wouldn't be a loss. But because that may be the only money I make, it should be the 12% max APR allowed by WA usury law.
On that note, the only way I see around both WA usury law and Dodd-Frank is if the home is not owner-occupied and I buy the home with full payoff (no seller financing). So I think in most real-world cases WA usury law would apply and it would be 12% APR, no points.
Finally, if he chooses not to sell, I foreclose after a reasonable time, say 4 months, even if there are still no arrears on any of the other mortgages. He would have another 6 months to sell after that before the auction date. But it would protect me from him deciding to keep the home long-term without paying off my loan.
I think that covers (1). Am I wrong?
For (2), I'm thinking a distressed home transaction contract under RCW 61.34 where I charge a fee for my role under 61.34 as distressed home consultant, either a fixed amount or a profit-sharing arrangement. The amount needs to anticipate that he could resell to someone else and refuse to pay me that fee, in which case I would have to work with a bill collector and probably settle for say 50% or less. There could be smaller fee that applies if he sells to me, and a larger fee that applies if he does not, or maybe a big late fee if he doesn't sell to me and doesn't pay.
I think that's about as well as I can do on (2). A lawsuit probably wouldn't be worthwhile. But even if I don't get any of that fee, it still isn't a complete loss because I'm protected against losing my loan amount and the 12% interest on it.
But if he doesn't sell the home to me, the main service I would be providing as distressed home consultant under RCW 61.34 is providing that loan. Would WA usury law consider that fee to count as part of the effective max APR? If so, I can't charge any fee as distressed home consultant.
That's as much as I can think of for (2). There's a real chance of not getting a fee and earning only the 12% interest on the loan for a month or so until he sells the home. If most of them end up here, I probably won't continue with it.
For (3), I need to avoid the clutches of Dodd-Frank because I need the balloon payment and I probably can't prove the homeowners ability to pay (without selling the home as planned). So, if he lives in the home, I won't be able to buy it with seller financing it-- either he'll have to sell it himself and I'll have to hope he pays the fee or collection goes well for me, or I'll have to buy it with full payoff.
For (4), I won't consider providing any mechanism for the homeowner to regain ownership of the home after I buy it. And if the plan is for the homeowner and I to split the proceeds from reselling the home, I won't consider any scenario that allows him to occupy the home after I buy it. If he ends up selling it without my buying it, those concerns aren't at issue.
Any thoughts? Any reason this wouldn't work?
