Strong Quick Turn Prospect - very little time

[Dejavu]

Hi,


I just had a lead come through which seems to be a "classic Legrand scenario"…the only problem here…the owner is being foreclosed on and the eviction is scheduled for Monday next week (in 4 days from the time of this post).
This is a first deal like this for me and I am not sure if there is anything I can do at all in such a short period of time. Would appreciate any and all thoughts you may have.
The house is located in Toronto (Scarborough). According to the owner it appraised for $290,000 in November 09. (To be verified).

1st Mortgage $142,000 – monthly payment $1150 (3.5% up for renewal in July 2010) – payments are current.

2nd Mortgage $95,000 Line of Credit – Monthly payment $1,000. 18% interest, being called in by the bank. Owner is $8,000 behind on payments and the bank had called in the LOC. If she pays the $8,000 she is behind on, the bank will give her more time.

The family (the owner and her husband) hit a rough patch, had numerous deaths in the extended family, then she got sick and lost her job, the husband bailed and she is now alone and has no income to support the mortgage payments.

She had a consumer proposal in 2007 so her credit is ruined (she figures her FICO is around 400) and it is highly unlikely she will be able to renew her mortgage for the next term in July 2010.

The matter is further complicated by the fact that her husband is on title but she does not know of his whereabouts and she may or may not be able to locate him quickly.


I only see two options at this stage:

1) Talk to the 2nd mortgage holder and see if I can slow down the foreclosure process (never dealt with it before, don`t know if its at all possible). If successful, bring their payments to current, which will buy time, and secure my interest in the property. Then sell the property to a cash buyer and return some equity to the owners and keep some.

2) Alternatively, if successful in slowing down the foreclosure, I can try to buy them out at a discount and either flip the property or keep as a long term buy and hold with my own financing in place or try to get a lease option buyer in.

If anyone could share thoughts on dealing with the bank in this situation, it will be very helpful. On a related note, if there are any other ways that could offer a solution in this situation that I may not have thought of, any and all input will be much appreciated.

Thanks,

Vitaly

 

[Jeffrey2144]

QUOTE (Dejavu @ Jan 14 2010, 08:13 PM) According to the owner it appraised for $290,000 in November 09. (To be verified).
1st Mortgage $142,000 – monthly payment $1150 (3.5% up for renewal in July 2010) – payments are current.
2nd Mortgage $95,000 Line of Credit – Monthly payment $1,000. 18% interest, being called in by the bank. Owner is $8,000 behind on payments and the bank had called in the LOC. If she pays the $8,000 she is behind on, the bank will give her more time.
...
The matter is further complicated by the fact that her husband is on title but she does not know of his whereabouts and she may or may not be able to locate him quickly.
...
Thanks,
Vitaly

Hello Vitaly,

Congrats on your first deal -- Now the "fun" starts!

Here`s what I see...

With the husband absent (but still on title) you`ll need to talk to a lawyer to see how you can sell the property without his involvement. I am not sure that you can and without his cooperation this could get real messy and most certainly prevent the future sale to another party you find with your own efforts.
So, the only way I would be paying $8,000 to bring the 2nd mortgage current is by way of applying a 3rd mortgage to the property to truly protect your $8K interest in this property.

That will only buy you 1 month until she (the non-absentee owner) can`t make the next $1,000 payment and you are back where you started but with $8,000 invested in the property and now you too are at the mercy of the 2nd mortgage holder. Yikes!!!

SOLUTION: Get an appraisal ($250) to verify the property is actually worth $290,000 and have your lawyer do a search ($100) to ensure there are no other liens on the property or prior judgments against the owners. Assuming everything checks out then put a 3rd mortgage on the property for $25,500 @ 12%. This $25,500 will cover the following:

• $8,000 payout to bring 2nd mortgage current
• $6,000 to cover 6 months payments on the 1st @ $1,000/mnth
• $6,900 to cover 6 months payments on the 2nd @ $1,150/mnth$1,530 to cover 6 months payments on the 3rd @ $180/mnth$2,000 to cover your legal costs$1,000 Lender Fee (payable to you for setting up the 3rd mortgage)

This will give you and the owner the time and ability you`ll need to make the other mortgage payments to prevent the 1st and 2nd mortgage holders from starting foreclosure to collect on their money.

BIG CAVEAT: This works when everyone is willing to cooperate. With the husband being the wild card you`ll need to get him on-side. Otherwise, if he`s unwilling to sell then you may want to back away from this one as the first is hard enough WITH everyone`s cooperation.

YOUR OFFER: $5,000 to the owners upon sale of the property. If it`s a good property then you could buy it yourself, finance it for $290K, payoff off the 1st ($142K), 2nd ($95K), 3rd ($25.5K) and owners ($5K) for a total payout of $267,500. That leaves you with $22,500 to use as your equity/down-payment... Et Voila! Your first property with NO MONEY DOWN.

HOWEVER, instead of buying it yourself you may be better to secure your "buy-in" price with an agreement for sale or lease option and just sell it privately and cash-out. Your choice.

Also, keep in mind that you may have to pay Land-Transfer Taxes on this if you have to take ownership (albeit briefly) provided you cannot assign the lease option and collect the spread in the middle. Regardless, it`s still worth paying the taxes to get this deal done. Although, I am hoping the upcoming REIN documents for "Ontario Quick-Turn" (due to be released in late January 2010) will address this issue.

 

[Dejavu]

QUOTE (jvarcoe @ Jan 14 2010, 10:18 PM) Hello Vitaly,

Congrats on your first deal -- Now the "fun" starts!

Here`s what I see...

With the husband absent (but still on title) you`ll need to talk to a lawyer to see how you can sell the property without his involvement. I am not sure that you can and without his cooperation this could get real messy and most certainly prevent the future sale to another party you find with your own efforts.
So, the only way I would be paying $8,000 to bring the 2nd mortgage current is by way of applying a 3rd mortgage to the property to truly protect your $8K interest in this property.

That will only buy you 1 month until she (the non-absentee owner) can`t make the next $1,000 payment and you are back where you started but with $8,000 invested in the property and now you too are at the mercy of the 2nd mortgage holder. Yikes!!!

SOLUTION: Get an appraisal ($250) to verify the property is actually worth $290,000 and have your lawyer do a search ($100) to ensure there are no other liens on the property or prior judgments against the owners. Assuming everything checks out then put a 3rd mortgage on the property for $25,500 @ 12%. This $25,500 will cover the following:

• $8,000 payout to bring 2nd mortgage current
• $6,000 to cover 6 months payments on the 1st @ $1,000/mnth
• $6,900 to cover 6 months payments on the 2nd @ $1,150/mnth$1,530 to cover 6 months payments on the 3rd @ $180/mnth$2,000 to cover your legal costs$1,000 Lender Fee (payable to you for setting up the 3rd mortgage)

This will give you and the owner the time and ability you`ll need to make the other mortgage payments to prevent the 1st and 2nd mortgage holders from starting foreclosure to collect on their money.

BIG CAVEAT: This works when everyone is willing to cooperate. With the husband being the wild card you`ll need to get him on-side. Otherwise, if he`s unwilling to sell then you may want to back away from this one as the first is hard enough WITH everyone`s cooperation.

YOUR OFFER: $5,000 to the owners upon sale of the property. If it`s a good property then you could buy it yourself, finance it for $290K, payoff off the 1st ($142K), 2nd ($95K), 3rd ($25.5K) and owners ($5K) for a total payout of $267,500. That leaves you with $22,500 to use as your equity/down-payment... Et Voila! Your first property with NO MONEY DOWN.

HOWEVER, instead of buying it yourself you may be better to secure your "buy-in" price with an agreement for sale or lease option and just sell it privately and cash-out. Your choice.

Also, keep in mind that you may have to pay Land-Transfer Taxes on this if you have to take ownership (albeit briefly) provided you cannot assign the lease option and collect the spread in the middle. Regardless, it`s still worth paying the taxes to get this deal done. Although, I am hoping the upcoming REIN documents for "Ontario Quick-Turn" (due to be released in late January 2010) will address this issue.

Hello Jeff,

Thanks a lot for your input, these are some really good ideas!

Spoke to the seller earlier tonight and she was able to locate the husband, they will discuss tonight and will call me tomorrow morning to let me know if we have a deal in principle. I will post an update on how things develop following tomorrow`s conversation.

Thanks again,

Vitaly