Curious how this works

I met an investor who finds people who are in forclosure, buys their home from them and lets them lease it back from him in a year. He pulls out enough cash to pay off most of their debt and pay himself a nice profit. Could someone run down exactly how this deal works?
Lets say you have a person in forclosure who has a $200,000 home what type of profit would you look for? I want to know what percentages would make this deal profitable.

Hi Movistar:

I’m curious about this one myself. I’ve heard of investors doing this but what puzzles me is if the person didn’t/couldn’t pay their mortgage, then how would I ever expect them to pay their rent/lease? Hmmmmm.


It seems that you get paid in the begining when you refi, so you have money for rent plus your profit and at the end of the year they either buy it back from you or you get another deposit. I have a basic idea how it works but just don’t know how to make the numbers work.

u will probably not find anyone on here to tell u ‘how to do it’. u will have to do ur own research and then most folks here will help u work the numbers in ur scenario.

the 2nd poster was correct though, if they got behind and are close to forelclosure that is a sign that it may happen again in ur lease. since a forelclosure usually happens after more than missing 2 pmnts, they have to be behind quite a bit. too much to recover so what happens if it happens in ur lease?

Simply how this works is that the homeowner would quitclaim the property to the investor. There are variations after this but I’ve seen where the homeowner rents it back for a year. In the rental agreement, there is a clause somewhere that if the homeowner is late on one payment… the investor can have 100% ownership and all refinance/selling proceeds during/after that year. If the year is up and the homeowners have made the payments on time, the investor may do a refinance and split the proceeds in half. The investor may then quitclaim it back to the homeowner and he moves on to the next foreclosed home.

You’d have to see the process for it to make better sense…

Lets say it rents for $700 a month so brings in $8400 per year to pay off the mortgage. If the mortgage was very small, that might work and leave you a very small profit.

But most likely, your going to need to rent it for maybe 3 years to pay off the mortgage, and have a small profit.

But, lets say you can get the bank to forgive all or part of the mortgage so you can afford to be a buyer, then your profit might be fairly good, as you would get the rent, or most of it.

At the end of the rental time, you might take out a small mortgage on the property, and they can buy the property back, but you got your fee from that mortgage.

Since its a much smaller mortgage that the original, the payments per month are much smaller, maybe they can afford to pay that amount?

Now where in the world are they going to live for those years? If you have campgrounds in your area with laundry, shower facilitys that allow all year camping for a small membership fee maybe that would work for them. Might need to pick up a travel trailer if the family is larger.

They probably would qualify for a real estate grant at this point, but these are only available in certain areas, so if they could move into such an area, and establish residence which would take 6 months to a year, then they could qualify for such a grant, and maybe you as developer could make a deal with them that if they get the grant, you help build the place or rehab it or what ever, and then they sell the place to you for an agreed on price. Usually grants have a time restriction on sale of the property – the person that applied for the grant must live on the property for 3 years or the grant has to be re-paid. Grants usually are not all that big, Maybe $7000 but could make a down payment on a place that you filip after the 3 year time limit on sale of the property.

The USDA (United Statess Dept of Agriculture) has grants available in almost all states and countys.

See and do a search on real estate.
They also have grants for would be developers to create mutli family housing in rural areas.

 I have an associate that does this quite a bit. The way he does it is... He finds the homeowner that is about to go into forecloure, then he goes in and basically negotiates with the bank a "shortsale amount" ex. if the exsisting loan is 150,000 then he will offer say 120,000 and if the banks accepts, he refinances the home and the deed is put in his name. The new loan is 120,000, thus making the mortgage payment less than the original (unaffordable amount for the former homeowner). He then makes an agreement to lease the property back to the old owner for an amount that with bring a + cashflow for him. There is a strict contract made that states if the tenant(old homeowner) misses or is even late on ONE payment, ADIOS! As weird as it sounds, this may be the best scenario for the new owner because now they can either sell the property then or anything else they wish, as well as pull the equity out to put somewhere else. I don't know all the details to these transactions but, you get a basic understanding hopefully. 

Hope this helps

This is more about credit improvement for the owners in trouble, where the people in trouble use a lender to help with their finances, enough so that they, the owner, can turn around after 12 months of repairing their credit, and refinancing their home.

The lender helps by setting up automatic payments on the loan for 12 straight months.

Investors on the loan, make X% for the year, like an IRA or some other type of investment vehicle - earning X% for the year. After owners refi - investors get their original investment back.

so, if investors earn 12% on the loan - and they invested 50k.
For the year, they made - 500 a month (6000 for the year) and as a result of the owners repaired credit, they can take the equity out of their homes, to refi and the investors get their original investment back.

owners equity = at least 50%

LTV on the loan = 65 to 75%
owners credit before = under 600
owners credit after = over 700

We do similar transactions, however we do not lease back to the homeowner. But we do know people that do. What they do is buy the house, which is normally in foreclosure, and then they pull some of the equity out to cover any misc. expenses not covered by the rental income, and then they have a very strict lease agreement which specifically states the results of falling behind on the lease payments. Depending upon where you live the laws could favor the tenant over the actual homeowner so it is important to educate yourself and learn from the mistakes of others rather than from a mistake that could cost you thousands.