There’s a property here that we have been interested in. It’s a somewhat complicated situation (seems to me) and I’m not sure how we should approach it. Sorry for the long post but I want to spill all the details now if possible.
Owner has it on the market thru an agent. They have a first mortgage with a bank and a second held by the previous owner First is about 65% of value and second is 35%. It appears to us that a default is likely–the current owner has said they can no longer pay due to changes in the household structure, and the second holder has said the money is starting to come late.
We don’t think an asking-price offer is likely. The previous owner had a helluva time getting what they got (took quite a while to sell, and they went low AND provided the second mortgage just to get it to happen). With an offer below asking AND realtor commissions involved the seller would have to bring a check to closing, and we don’t believe they can do that, or would…
We have been told that they will sell for the amount they bought for, no realtor commissions involved. But… it is a little higher than we really want to go, about 10%. So, question 1, what is the potential wisdom of waiting for a default and trying to buy then? Never done anything like that, although I have seen notices of cash auctions on the courthouse steps.
Question 2 is about the type(s) of loans that might work for this. Property has two legal dwellings, the main one being a modular home which apparently no one lends on, the second being a stick-framed apartment-over-garage structure. The mortgage broker I have used says it’s an ugly situation… the modular is a no-no and the stick-framed structure is not a typical SFR and hard to value.
Ideally, this would be an investment/rental property for us. It actually pencils out in terms of rent vs. payments for some minor net cash flow. I know that a loan on property that is not a primary residence is more expensive. We do not want to live there. We do not want to commit mortgage fraud.
Interested in any comments, up to and including “you’re insane, walk away now”.
Replies
David,
You ask about buying at an auction. I have not done much of that, but from talking to others, it's pretty tough to do. One problem with that is you run the risk of losing it to somebody else. Another problem is that the seller will likely have additional costs (such as legal charges, bank fees, research fees, etc.) that will raise the potential cost (amount really needed to get the property from the seller). I would probably try to stay with the direct purchase.
But, you also mention that the price leaves you with a modest net positive cash flow. Unless there's something special like future development, or this is a really special property, I don't think I would be anxious to risk any serious money on a situation like this.
FWIW, four years ago, I did a 1031 exchange for several rental properties in VA. I'm now in a different position and considering selling some. I have found that properties that were not selling easily when I got them aren't going to sell any easier now. It was to my advantage then, because I was able to get better deals, now the shoe is on the other foot. Whether the issue might be the type of home (doublewides for example are hard to finance) or the size, or the location, these issues don't typically go away. That leaves you potentially with the option of keeping it as a rental forever - not an option that you want.
I once heard someone say, "Don't fall in love with a house. Fall in love with the numbers." Based on what you seem to be saying, I would probably pass on it.
If you do go forward, as far as the mortgage, I would think about trying to get an assignment of one or both of the existing mortgages. It keeps the fees lower, maybe by several thousand dollars. Your mortgage broker won't be happy about that, but who cares? If you have leverage from another property, you might think about using it for the purchase.
Don K.
EJG Homes Renovations - New Construction - Rentals
EJG Homes Renovations - New Construction - Rentals
being in real estate... I see the market heading lower. Don't buy it... doesnt seem like a steal.
Thanks Don and bc. The market may go lower, I dunno, but it has held up well here. It is hard to find anything here, especially something that is not upside down as a rental from Day 1. There are other things for sale that are cheaper and/or more distressed, but the payments would exceed the rental income. The property in question is one that has long term upside, in that the modular/doublewide could be replaced with a stick built home and then would be on par with the area. It is adjacent to a property we own and currently live on and could serve as an in-law, and we expect the need for that sometime down the road.
I do see the attraction of just holding on to the downpayment cash and investing it elsewhere. I have a great stockbroker, he always seems to know what to do. If the market fell out here after we bought this place it would be a big problem. But I still come back to the fact that we would like to own more property and this one seems like something we could buy that would not be an immediate money-bleeder.
I bought the house next door and have had good and bad tenants But at least i have control on who lives there, imagine the neighbor from heck moving in next to you and forcing YOU to move, If i could go back in time i would have been better paying one third more the going rate and dealt with tenants then have these jerks near, They gave me many a upset stomach
A little more on this one, if anybody has further thoughts:
We've been approached by the second mortgage holder asking if we would like to buy their note. Obviously a discount would have to be a part of this if we were to move on it, but I don't know if it's wise even so. The bank would still have the first. We have been talking to the bank at this point and they actually allow some possibility that they would accept a short sale. It seems like they are motivated to avoid foreclosure and are interested in the fact that a possible buyer (us) is in the picture. They basically said "make us an offer" and we may do so.
I've set a meeting with our attorney for next week so we can get some further perspective on how to proceed, if at all.
You're looking in the right direction, but I'd pursue the bank first. If you can buy the note, you can foreclose and have an auction. Assuming that's the procedure there.
OTOH, IIRC you wanted to pay 90% of the total debt. The second holder could swallow that loss, considering what he'd be facing with an auction. No wonder he wants to unload. Has a major potential problem. Far worse than the bank.
Them's the risks with seconds and further. Not something you want to buy in this case.
You already know to get it all in writing.PAHS Designer/Builder- Bury it!
I haven't followed the entire thread and I am no expert so take this as worth what you paid for it.
Why would you buy out the second lenders debt? What benefit do you recieve and why would they be willing to sell their debt unless they were worried.
You'd end up being second in line to the primary bank and I can't see you being in a better position holding that note then in the situation you are in regarding the property.
I guess there is a slight chance you could by the debt at such a discount that in the end you wind up with the property for less then the 90% you've offered but is it worth the risk? Would the secondary lender take such a little amount of money to make that possible?
If you were to buy the debt and force forclosure and take the house to auction as mentioned above can you be sure you would be able to "win" the auction for less money then if you worked a deal with the primary lender, and if you didn't "win" the auction can you be sure you would at least get your money back after buying out the secondary lender?
If you were to buy the debt and force forclosure and take the house to auction as mentioned above can you be sure you would be able to "win" the auction for less money then if you worked a deal with the primary lender, and if you didn't "win" the auction can you be sure you would at least get your money back after buying out the secondary lender?
Assuming that you're referring to my suggestion, the auction was caused by foreclosure on the first. Has nothing to do with the second, certainly no "buying out". Which I was discouraging.
The auction's simply a foreclosure on the first note. At the auction, the purchase price pays off the auctioneer, taxes, the first holder. If there's further money the second gets it. A high enough bid will also let the owner (also the first note holder in this case) get the remainder.
Apparently there's low probability that the second holder would get much if anything. If a miracle strikes and a high bidder emerges (higher than what David would bid), David gets all his money back as the first holder. He needs to be prepared to bid high enough to protect his note, and get a bargain beyond. Not a problem given the size of the second and his aim of 90%.
The one time I foreclosed on a first, it was 30% LTV. There were a handful of other liens. No way for me to lose and possibly a great deal to gain. No windfall for me, but I got paid in full. Unfortunately for the HO, a refi shark took all the equity in short order.
Learned that "deed in lieu of foreclosure" signed at the loan closing was legal. Miss 1 payment and you're out. No auction. Nothing I'd consider, but legal here. PAHS Designer/Builder- Bury it!
So, what's the happs?
Bought it, lost it?
Joe H
Nothing much has happened yet. The current owners may leave at the end of this month and may or may not be trying to find a renter. We've been in touch with the first mortgage holder and they know we are interested but since they are not in default yet there is no motivation.
My opinion is that there will be some major bargains to be had in the next year. I think the mess is just getting started. Those with stones and cash can probably cut themselves a very nice position in the next 12-24 months. Hell, there will probably be a lot of good deals on bank headquarters buildings, given the big increases in credit card and mortgage delinquencies we're seeing right now.
I remember the sell off of the Savings & Loans.
Need a $30,000 humidore? $50,000 desk? By the hundreds, Picassos by the dozen.
Maybe I need a bank building.........
Good luck to you, maybe it will fall into your lap yet.
Joe H
man those were they days,property every where and guy only had to pay 14% intrest on loans. i had a good time just going to auctions and trying to guess how low they would go. a guy i knew bought a building in 81 290k. 4 years later i was high bidder at auction 42,500. i can see days like that coming again,maybe sooner than later. larryif a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
David,
I'm not sure which way you are thinking of going with this deal, but I don't like buying notes in anticipation of foreclosure. There are too many risks. One, that the property is going to go down in value, because of maintenance issues or a falling market. Another risk is the legal system - costs and delays in foreclosure are undefined. You could wind up with tenants in there that are trash, and you know what that's about.
Another problem is that you don't want to be a banker, you want to own the property. Buying the note is not what you want. It just gets them off the hook.
OTOH, if you could negotiate a short sale as part of a purchase to bring the numbers down where you want them, that's a better way. Negotiate with the first and the second. Do what you need to do. Unless the lawyer's special, I wouldn't let them do the negotiation. I might ask for their input and opinion, but when it comes to getting on the phone, I want to do it myself.
Tread carefully.
Don K.
EJG Homes Renovations - New Construction - Rentals
Don, I haven't talked to the lawyer yet but I would only do so in order to get clear on how things work. There must be lots of legal technicality in a situation like this, and I know nothing about it. With the apparently total lack of subprime loans available right now I am pretty sure we cannot get a new first mortgage from anyone other than the existing first holder. If they get so motivated that they want to write us a new note on the place then we'll talk. I don't want to buy either of the existing notes, I want a clean sale with no dangling participles.
First: determine what happens in foreclosure in Washington. In Va, the auction on the court house steps is exactly what you pay. There are no other fees. The bid price pays 1) the attorney handling the foreclosure, 2) encumbrances, 3) owner's equity, if any.
Then you'll understand the sellers' and note holders' positions. I've been through this, as a mortgage holder who always comes out smiling.
Once watched a foreclosure auction by a guy who bought his own defaulted note and foreclosed on himself to beat the second holder out of 30%. The second holder (an acquaintance) attended, to see how much he was going to lose- everything. Presumably got a discount price on the first to boot. I was advising the only other bidder, who didn't raise enough cash. As a spectator, it was a hoot. And potential for you if you want to try that route.
As a foreclosure bidder, you need to have your financing lined up in advance. Easiest is to use other property for equity.
Modulars aren't difficult to mortgage here, perhaps you should shop around. But nonetheless, as the buyer it's your duty to come up with the cash. Always a potential to leverage previous mortgages, but difficult if the note has a due-on-sale clause. Not all notes have that, check. Second holder may (should) be very accomodating in this case. Difficult in foreclosure, better as a direct sale. I've done this, as seller.
Given your preference to pay 90% of debt, working with existing mortgages seems unlikely. Foreclosure auction with pre-arranged financing appears the best option. Leveraging another property works best. Solves the Realtor commission problem.
I asked our credit union about equity loans, that I was previously denied (oddball property, minimal verifiable income). The credit union offered 60% LTV, no doc, no appraisal, no fees, based on tax assessment. Wow, $460k on a signature. And we qualified for EIC last year (which says considerably more about that program than our situation).
Good luck.
PAHS Designer/Builder- Bury it!
you do have the option of try'n to buy the current notes...
all parties would need to agree...
you can help save the current owners credit
and save the 1st holder have'n to forclose but they are in the strongest postion... but you still might get it for 95cents on the dollar
the original owner that took the 2nd... they have the most to lose... i'm say'n an offer of 50 cents on the dollar might be the best they can hope for...
never hurts to ask... I've asked for more and gotten it at times... so you never know
p
you have 1 big problem for making a good buy,your emotionaly attached,it's next to your property.that sucks for getting a great buy ,but that said sometimes you pay more than you should for one reason..YOU WANT IT! and thats fine as long as you have a clear vision of what you trying to accomplish.
next thing is to think about is living next door to a rental.it's not much fun,been there and done it.[after i served eviction notice he rides a motorcycle into the house,it was hard to stay out of jail that day]if i had the choice of a rental 2 miles away and next door i wouldn't even hesitate,2 miles.
now as far as buying it do you understand the way it will sell on the courthouse steps? lets say first mortgage is 65,000 2nd is 35,000. they will open the bid and the first mortage will bid 65k and he's done. now if the guy holding the 2nd wants to protect his intrest he will bid 65,001.00 .now if no one else bids he has to write the check for 65,001 and go home.now if your standing there and start bidding it's like any auction with the 2nd mortgage holder being the wild card,is he willing to bid clear to the point that he gets all his money back or only half before he bails?????????????????
here's my 2 cents worth,sounds like for a rental it is a right on the fence,it has to cash flow with taxes,insurance,10% vacancy and at least a 5% maintanence and repairs.if it does and you want to live next door to tennants.it's a green light. if you feel it's a asset to own this property next to yours i think i'd talk to the 2nd mort. holder and see if he would discount his note or another option take a 2nd on you.
and if you feel good about owning it ,i'd give the 10% to much and not worry about it.[you didn't say how much but if it's under 200k thats 20k just to know it's yours]
as far as loans you will be getting a loan for a investment property and intrest will be a little higher. you might roll your own home into the deal since it would be a continuos property and call owner occupied but thats a whole new thread.talk to local banks that hold there own paper and let them base it off you as a person with good collateral instaed of "guidelines" let us know how it goes. larry
if a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
Thanks again for all the advice. It had occurred to me to try to "buy" the first mortgage from the holder, or rather just get them to assign it to us. That might be attractive to them if they start getting paid late. I know for a fact the second holder would assign to us, because they know they might get badly screwed in this situation. Obviously they made their deal and financed a marginal buyer... oops... and obviously since they lived next to us for four years we know them well.
Living next to a rental is not so much of an issue. It's at least a couple hundred feet away, this is not city living.
it's not the noise factor it's the ,they haven't mowed,who's junk car is that,when did they get a dog etc.or you buy a new truck ,so you must not need the rent and the very worse thing you become friends with your new neighbor, and then they get late on rent...... i would go tslk to the 2nd leinholder see if he is willing to discount and carry it,with him knowing you it would be a big plus.larryif a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
Ponyt is thinking the same way I would. I would talk to the first mortage holder and ask them to discount 10%. They might do 5 or none at all. Then go to the second mortage holder and offer them 50%. They will lose if it goes to auction anyway so they should want to cash out on what ever they can get. Selling it to both based on business facts will make or break the deal.
I also would not live next door to a rental that I owned. Tennant mows every 2 weeks instead of everyweek like the neighbors (you), gets drunk and loud once a month, once or twice a year has the police called for minor domestic violence, changes brakes on his brothers car and it takes 3 weeks. I have had tennants with all these issues and they were good paying solid, clean tennants. But I would not have wanted to live next to it and it would have driven my crazy to watch especially in my property.
I told my brother the same thing when he wanted to buy the house across the steet. He tells me about every other month how he wished he had listened. Good luck! DanT
You mentioned that it wasn't city living. If the property has a septic system, ask the local health department if you can build there without re-doing the septic. Here a 3 bedroom stick built home can replace a 3 bedroom singlewide without modifying the septic/well if the systems are in good condition. Anothing thing is to check on value of the doublewide, for example 15 year old singlewides in clean living condition are MLS listed locally at around 10K. Sell the doublewide at a wholesale price and build something you want to live next to (Minus the cost of the doublewide, septic and well). I would research the above, when considering the what is it worth to me.
Everyone's already given you some great advice.
The one option that is available, but probably won't happen is for the seller to take a loss and roll it into his next mortgage. That is happening now but it doesn't sound like he's the right candidate for this selling technique.
The other option that I would strongly investigate would be using a lease option. This particular strategy would be useful in this situation because you could effectively lease the property for his payments and postpone the realtor fees until you close.
The advantage of the lease option would be significant because we face an uncertainty in the housing market. If the property drops in n value by 80%, you simply don't exercise the option. If the property rises in value, enough to cover the realtor fees, you make the buy. The risks are minimal because it takes only one dollar to make the option document legal and every month you would be breaking even or making a little on the rent.
If you were attempting to make money in the lease option market, you would have the option of finding someone to sub lease this property with an option to buy too. YOu would set the terms to capture the expected appreciation and pay the realtor. Of course, you would take a non-refundable option payment and structure the lease terms to have them doing all the minor repairs because they would look upon themselves as owners rather than renters.
Buying the property, subject to the existing mortgages would be a stronger way to go, but the lease option is a worthy second choice.
By the way, if he's still current in the first mortgage, you have less of a chance to get that note discounted. If he's missed a couple payments, you probably could pick this dog up on very nice short sale, given the condition and makeup of the property and the current market conditions in the banking business. Getting a substantial discount on the second note seems like a given. You probably could get the terms restructured even if you lease option it.
FKA Blue (eyeddevil)
Ill try to offer some thought you dont have just yet . Youve got some solid advice.
You may be able to abandon the rules if thats what you want to do. Think it over long and serious . If you need to control he property next to you for some good reason then you might need to go into battle . 10 percent high doesnt sound like a deal breaker if its going to benifit your own property. Ive got one I paid too much for and Ive never regreted it . Here it is :
There was a subdivision that was only 5 yrs old with only 5 houses in it . We already owned one. This was a very nice subdivsion in a culdasac. Very low traffic where the kids could throw footballs across the street. Its one bock away from the univerisity.
It had one property owner that was a trash slut. The rest of them were very well kept. The house repoed and I went to the sale . DW told me to bring that one home since we had one next door . I also paid 10 percent too much but now have two very nice houses in a nice addtion. If I hadnt done it , it might not be a nice place to live. It commands top rents as Ive been able to increase the rents considerably.
Now a couple things have happened that werent there at the buy. The properties have increased in value by about 40 percent but that wasnt a given at the time . It was a gift over time . Thats somthing you cant count on but its normally happened here. That makes the 10 percent too much moot.
The rents are bringing in a higher value because I helped control the tiny community. Thhose higher rents have paid way more than 10 percent on one house .
I paid too much for a nice little house close to the school Ive already told about and its paid out nicely. no complaints.
I bought another house on the lake here and Ive held it for rental. Its gained the most value of all my rentals . I paid about 10 percent too much for it since I was going to rent it . I bought it several years ago for 56,000 which was right under retail but it did command a very high rent so I broke even. I dont like breaking even at all but I had a vision with this house at the lake. The renters have it paid down to 12 grand and its worth 136,000. Thats an example of what owning properties can do if you are not the one shelling out the green. Let the renters pay for them and the value increase . It beats the H^ll out of IRAs or anything Ive ever known.
Another point Ill make is that you might not ever be worth anymore than you make . Thats two people working and saving primary taxed income . Once you look at it like that its hard to save a good percentage because you are trying to save taxed money and that includes SS and insurance thats taken off the top before you get it .
Now if you sit back and think about this one ;
Youve got 10 rentals that coast along month to month, year to year with only a very small amount of work from you . Those rentals are on 15 yr notes. Every year the renters are paying a large portion of money towards principle . Hey its a lot more than you were able to save ! As the years go by rents go up and it gets to really looking great ! Not only are they paying you more money on the same notes but you wake up one year at tax time and they are half paid for and have increased in value . WOW! Thats the American dream. Then a few years later you make the last payment on the first one and the next year the second one you bought pays off . Now you are getting all the money the bank and yourself shared. Crops are still comming in to be paid for every year so life gets very good 15 yrs down the road.
That was a better sounding deal than some worn out tools and a broken down back to look forward to so I made the choice and my commitments. Thats how to make your knowledge and your tools really pay. Ive always looked at working for the public a bad deal. It is comapared to rentals . You only get paid one time working for the public .
Tim
Thought about somthing else that was true with me ;
The first few rentals were easy for me at the time .
I was healthy,had two incomes , financially able to handle the first few buys with the banks help. I made down payments and fixed them with my own money. There wasnt a lot to do only having a few and allowed me to work full time . Those were easy for me .
4 through 7 was a rougher deal as money wasnt flowing from the rentals to buy more when I bought them. I bought about three per year and kept one for rental inventory. So that added one rental per year. It took a lot more money and time through that stage.
After that was of course years later and the first ones were making pretty good money to buy more to feed the habit . Speed forward a few more years and the middle ones were really paying from higher rents . The first ones are comming off paid for and its now a living I depend on after health problems . The rents keep climbing . They will as long as is harder to own and build.
I often wonder where I would be now if I had not done it . Thats scary.
Tim
What did you decide?
Tim
We are still considering. A "short sale" seems most favorable. The current owners said they are going to talk to their loan officer and let them know that trouble is brewing, and that they have found someone (us) who may be interested in stepping in. Whether or not that will aid things is unclear to me, but it's what they are doing because they want to stay out of trouble if possible, I guess.
From what I have read a short sale won't occur unless payments go 90 days late. So, we might have some waiting to do.
We are also considering doing nothing, sitting on our capital and waiting to see if the housing decline/credit crunch etc. leads us into a significant downturn. Last thing I want is to have blown a bunch of dough on an investment property and then have prices fall while renters are having a hard time getting by. My outlook on the next 1-2 years is fairly dim, actually.
Can you just offer them what you feel it's worth? You mentioned the %10 percent. It can't hurt to offer. My mom bought properites like that. Sometimes she would bring all her kids with her for sympathy from the seller. I think we might have made the seller a little nevous as well. They could smell touble.
I know exactly what they owe, and they do not appear to be positioned to sell for less... voluntarily... i.e. they cannot bring a check to closing. If they could we would make a standard offer. Only possibility of a price reduction appears to me to be once there is distress and the lender is motivated, if it actually happens that way. No telling. Like I said I am 50/50 on this, part of me says keep the downpayment money as liquid capital and let's see what next year brings. I guess all of the bad press about the economy is having its effect.
The only time my mom bought was when it was a really good deal. It sounds like you shouldn't buy.
If you can't get the current owner to pay money to you to get out of it, see if they will carry a 'third' note for whatever they have in 'equity'. the other lenders should let you assume the current note....maybe.
after you had it a while try to renegotitate for other terms or a new loan and possibly buy out either the second or third mtg holder for less than the face value.
no money down out of your pocket.
"What's an Arkansas flush?......It's a small revolver and any five cards."