All Forum Posts by: Katharine Chartrand

@Wendy Black

Then just put it on the market. That's how you find out what it is worth.  

The best thing for those specific folks, and that community, is to have an engaged local landlord.  This is not an easy property to deal with. You need someone local who can roll up there sleeves and do the work.  It will take time and at least weekly attention to deal with this situation.

I absolutely agree that you cannot put a restriction on the property that will require the new owner to keep the tenants.  You can only trust the universe, and the market, to take care of things.  I know that is not what your brother seemed to advise, but I suspect when the dust settles on this situation, that is the truth.

From my experience, there is a possibility that the property is worth less than the either appraisal or cannot actually be sold, regardless of what the probate appraiser found in the MLS. These difficult properties are what I deal with. The appraisals are a major source of amusement. There is no comp for a home with a non-compliant septic system, for example.

Your sister may want $20K for her new condo, but there may not be $20K in the property.  You won't know until you sell. I am concerned about giving her cash you don't get back and then, at the end of all this, you take a loss.  From the information I have in this post selling, if you can, will be the best move financially for you and you sister.

However much your brother cared about the tenants, I sense that he cared about you more. Don't get hurt taking care of his business.  I assure you that was not his intent.

Thank you all for your thoughtful replies. They've helped me look at the situation from a number of perspectives.

That's the key.  The right solution will be the one that presents itself to you as simple, just as @Rick H. suggests.

>KNC<

I respect your brother for caring about people, so I would start there.  If you made a promise, you'd like him to respect your decision and why you made it.

But our brother's business sense may not have been good (possibly absent?).  He's gone and you are in charge.  Make every effort to realize his intent to provide low income housing for this community ... but almost certainly not the way he would.  And you may find that you are simply not the person that can do it.

What these folks need is a sustainable housing options. Only something that makes business sense for a professional landlord will work in the long term.  

To get to the truth, you have to get the facts. Your own rambling about appraisals suggests that you know that an appraisal on a marginal property is meaningless.  

Try to sell the property to the tenants.

The first thing I would consider, because it realizes both your interest in income and the spirit of the promise to your brother best, is to try to sell the property to tenants as an owner finance deal.  Price it at the lowest reasonable value 45K (don't be greedy here, from what you have described to me the value of this property may be zero), loan them the total amount over 10 or 15 years (they can't do a down payment) @ 5% interest, split the payments with your sister. The tenants are responsible for maintenance, taxes.  You split the mortgage payments free and clear with your sister.

I honestly think that is the best deal here for everyone involved.  The worst case scenario is that you get the property back because they don't make payments.  Done right, you can structure the deal so you get the property back if they don't pay without going through foreclosure (send me a second question on that if you go that route.)

If not, put the house on the market

The only way to know the market value today is to put the property on the market.  Realistically, that option has to be on the table, therefore, I think it is fair to ask assistance of some realtors and just do it.  I would ask 2-3 realtors how they would price this property.  Ask them for the analysis and data they used to get there. Pick a realtor, put the property on the market, see what happens. 

Simultaneously, try to turn it into a viable buy and hold rental

The actual value of the property is the cash on cash return from the property as a buy and hold rental.

If only to evaluate the work of the realtors, imagine yourself in the position of considering buying this property and do some research and calculations on your own towards an offer on the property.  Develop your plan and your price from this perspective.

First, look on craigslist or wherever people post rentals in that area and find out what it costs to rent a beat up trailer in that area.  I suspect your tenants are paying market rent, but market rent is the key data point here.

 The value of  a rental property is a function of the cash on cash return, assuming market rents. Appraisals are meaningless. What an investor wants to know is ... what return to i get if i put my $20K here as opposed to in some other investment. The  basic principle is that an investor will want 8% or 10% or 12% return on the cash they put into the deal.  You assume the property was purchased with borrowed money.

You have to back out the value you need to get a 10% cash on cash return, making reasonable assumptions about what you can borrow, interest rate, the life of the asset, taxes and maintenance costs.

The key difference with mobile homes is the amortization period. The impact is only apparent in an analysis of the cash on cash return. HUD will allow a 20 year term on mobile homes, where they allow a 30 year term on regular homes.

The first thing that jumps out at me are the maintenance costs, which are equivalent to the payments for a year on a 60K loan, 15 year loan, and the interest payments on a 150K 15 year loan. 

How I would look at this property as a potential buyer

If I was going to come in and try to take this property over, I would guess that the current value is only the land. Given the maintenance costs you describe, the mobile homes need to be scrapped, and that will cost money.  If you say that the land is worth the value of the land minus the cost of scrapping the homes and maintaining the property (taxes, utilities, dealing with the tenants) while you do it.  That is about zero. 

However, the land has some utility. If you replaced the mobile homes, maybe the homes could give you a return.

I would research the cost of replacing the mobile homes with something lightly used (like cars, mobile homes lose 30% of their values the day the leave the retailer).  I am guessing you can entirely replace those mobile homes for 20K each. 

I suspect you can find a zero down deal on mobile homes.  Even with a slightly higher interest rate, zero down does wonders for your cash on cash return.  

I would look into the one time cost of scrapping those homes you have.

I would look into putting more mobile homes on the lot, to increase the potential rental income. 

You may find that, since the land is essentially free to you, you can actually make a decent return renting mobile homes in good condition to low income tenants. I believe you can borrow money to update the mobile homes for about the maintenance costs you are paying. The newer homes may bring in a higher rent with much lower maintenance costs.  

And now you are providing decent low income housing in that area, which fulfills the spirit of your promise to your brother. And you can sell the property for something because it has income that exceeds the mortgage payments and the maintenance/taxes etc.

I would get the tenants ready for what it will cost them to rent a newish mobile home, based on market rents.  They have to make their own decision about whether to stay or move down the road to farmer bob's mobile home slum.  

As you have figured out, running a slum is not a good business and not sustainable.  Slumlords are just too lazy to pencil it out.

Your sister

Your sister may not make it possible for you to be in a position to realize your promise to you brother to use the property to serve low income residents.  You may need to sell that property.  Your best hope is that some smart investor comes along and does what is necessary to turn that into a decent low income housing situation. 

Therefore, even as you explore whether you could turn that into low income housing and whether your sister will work with you on it, you need to be trying to sell it.  Only the process of trying to sell it will show you, and convince your sister of the real value. Which may be close to zero.  It sounds to me that if you can sell it for even the lower appraised value, you should take the money.

I feel the pain in your post ... being torn between the promise and the financial facts.  Hope that helps.  All you owe your brother is the best possible, but realistic, outcome for these folks.

>KNC<

using the equity in your home to build your business is a time honored tradition by entrepreneurs.  but it is also why many folks lose their home.  when the business doesn't work out, people lose their home, creating supply for us flippers.  

next time you flip a foreclosure using your home line of credit, it is probably good to take a moment to contemplate the financial food chain to motivate you to make sure you're always on the right side of the transaction.

i've used penfed which is a national bank that operates through the internet.

and i've used the bank of albuquerqe which is essentially a broker for the bank of oklahama, which also operates nationally.  Kevin Moores is my albuqueque, NM broker.  He will likely not be able to help you in Illinois but will know someone who can.

I choose mortgages by one thing and one thing only.  The interest rate.  both penfed and bank of oklahoma offer ridiculously low (<3%) interest rates.  You should be able to find an interest rate today for <3%.

The service that penfed and b of o (I just call them BO, after the body smell) provide is adequate but can be frustrating.  It takes two phone calls to get your automated withdrawl setup, and two more to remove the fees because you had to make two calls. That kind of thing. But it gets done and in the end the rates are what matters ... because it's all about $$ and not ending up losing the house you allowed the bank to put a lien on.

>KNC<

i handle multiple projects with many contractors working together.

first i recognize that scheduling is very challenging for contractors given that they need to stay busy on a whole set of projects which proceed with pace and timing that they don't control.  i recognize that i am only one of many clients and i am as flexible as i can be without compromising progress on my project.

second, when i need a specific piece of my project completed because it is critical to progress, i give the relevant contractor as much notice as i can of the exact timing i need.  i get a firm commitment for that date by e-mail or text. 

third i follow up as the date approaches. if i have any doubts about the contractor's availability, i line up another contractor as a backup.

if the contractor has been appropriately informed of what i need and has agreed to do it and fails to perform, i switch to another contractor.  you have to have a contract/agreements that allows this. 

it's important to throw people off your jobs if they fail to perform in any significant way, including not making the schedule.  it's equally important to be very clear and fair about how and why you do it.  it's also important to recognize that the contractor who failed to perform may for you may have been in a bind he did not control.  i don't necessarily blacklist contractors for schedule failures ... i will use them again.

the key is to maintain a reputation of setting clear expectations and then holding people accountable.  if you do this, your reputation will proceed you and you won't have a lot of problems. you want to be a good client with reasonable expectations.

I am guessing the IRS lien is dated after the mortgage lien and therefore the foreclosure wiped out the IRS lien EXCEPT for this little bit of business:

The IRS has a statutory right to purchase foreclosed property from the buyer for the foreclosure price within 120 days after the sale; this is known as the right of redemption. During the redemption period, the IRS determines if the property could be resold for more than the foreclosure sales price. If so, the IRS will redeem the property and hold a redemption sale. The proceeds from the redemption sale are then applied toward property acquisition costs, and the remaining funds are applied against the taxpayer’s outstanding tax liability. Generally speaking, the IRS will not redeem a property unless the outstanding tax liability is significant and it has a guaranteed buyer at the redemption sale.

However, properties on auction.com are usually more than 120 past the foreclosure sale AND I don't think the IRS will act on their right to redeem given the small amount.

HOA fees incurred prior to the foreclosure should have been wiped out, or paid at the time of the foreclosure. However, once the foreclosure sale occurs a whole new set of HOA fees can be incurred. Some of those properties on auction.com are pretty long in the tooth. Depending on how the purchase contract auction.com is written, and depending on how the bank chooses to read the contract, the bank can stick the current unpaid HOA fees to you. Definitely clarify that up front.

The title company may be able to push the HOA for information on what they believe is owed better than you.

Depending on the locality, the new owner may be responsible for unpaid utilities.  In my county, water bills are the gotcha.  Our county water utility just won't turn the water back on until the bills are paid up and they don't care who incurred them.  That cost me a couple thousand on one deal.

The broad principles governing liens (like foreclosure on first lien.mortgage wipes out second mortgage) are consistent across the country.  The little gotchas can vary by county.  The little bit you pay a title company, as @Seth Nadreau suggests is worth the education. You won't have to do it forever.  I learned how to read most title reports by paying for assistance a couple of times.  I know what to look for in my state and buying through auction.com.

I have also become a very loyal customer over the past 3 years and they'll answer my few remaining title questions for no charge at this point since they are getting all the business I can point to them. So that's a local relationship you need to build.

In any case, please don't evaluate the title report on what I say here.  I am not in your state, and I am not a title professional.  I am just aware of some issues that you need to research further yourself.

I have a bought a lot of properties on auction.com.  Read the purchase contract.  The contracts vary from auction to auction.  Some are like any standard contract, some of them put a lot of risk on the buyer.  The later case is fine if the price takes it into account.  

Look out for owner occupied properties on auction.com. You might drive buy, see no one living there and think you are good. But what that really means is that the owner lived in the property after the foreclosure so the bank didn't really take ownership of the property so any utility bills and HOA fees will be your responsibility.

I've bought through auction.com several times.  They are fine, but if it is a good deal there is a reason.

>KNC<

thanks.  i am all about easy.  wondering about the worst case.

If you own a note and you can't get it re-performing, how much does it cost to foreclose?

@Mike Hartzog @Bob Malecki 

Thank you both. Pondering all options. 

let's say you buy a re-performing note, is the income you receive taxed as ordinary income or as passive income.

if you invest in a fund that invests in notes, is the income you receive taxed as ordinary income or as passive income.

Got it.

Thanks.