Extreme newbie here looking for a little advice. I’m trying to help out a couple in foreclosure with a large sum of equity in the home, somewhere around $50,000. My plan right now is to buy the home from the couple for the redemption amount, and then lease back with an option. I am wondering if there is a way to do this without consideration for the option, as they are low on money and there is so much equity in the home. Also any suggestions in this scenario as far as how much the buyback amount should be for a 2 or 3 year lease in a very slow market in Michigan. Thanks!!
You may want to try posting this in the right forum – the one that says, “Foreclosures”.
my questions are concerning the lease option, hence my post in this forum
Just be sure you know the laws in Michigan re foreclosure consultants as many states are cracking down, especially when the owner remains in the property. Here is a recent case:
The London v. Gregory Decision
In an unpublished decision, the Michigan Court of Appeals upheld a trial court decision declaring that a deed given by an owner in foreclosure would be treated as an equitable mortgage, where the facts indicated the parties had unequal bargaining power and there was inadequate consideration for the conveyance. The case is London v. Gregory, No. 216473 (Mich. Ct. App., Feb. 23, 2001).
Here’s what happened. Virginia Gregory was the owner of real property against which a mortgage-foreclosure action had been filed. Two days before foreclosure would be final and the owner’s equity of redemption period would expire, Ms. Gregory entered into an agreement (without the assistance of counsel) whereby she conveyed the property to Leslie London by a warranty deed for $1. In consideration for this transfer, Ms. London agreed to redeem the property (for the redemption price of $38,231) and lease it back to Ms. Gregory for eighteen months at a rental of $400 per month. The agreement also provided Ms. Gregory with an option to repurchase the property at the end of the eighteen months for $48,239. This purchase option could be exercised only if Ms. Gregory made all rent payments on a timely basis. As it turned out, Ms. Gregory made only one rent payment, which was late. At the end of the lease term, Ms. London served Ms. Gregory with a thirty-day notice to quit, and commenced eviction proceedings.
But the trial court (the district court) declined to evict Ms. Gregory, instead ruling that Ms. Gregory could remain in possession of the property and that the deed would be treated as an equitable mortgage – presumably requiring Ms. London to enforce her rights via a new foreclosure action. In so holding, the court noted potential inequity in allowing Ms. London to acquire this property, which was worth (according to the court) approximately $120,000, for an outlay of only $38,231 (the amount paid to redeem).
Ms. London appealed, and the circuit court upheld the trial-court decision. Ms. London appealed again. On appeal, Ms. London argued that the lower courts erred by refusing to hear testimony about the intention of the parties in entering into their agreement. Specifically, Ms. London claimed that she was not a mortgage lender, that there had been no loan application or discussion of a “loan,” and that there had been no discussion of Ms. Gregory’s financial condition or ability to repay.
The Court of Appeals affirmed, again. Acknowledging that “(t)he controlling factor in determining whether a deed absolute on its face should be deemed a mortgage is the intention of the parties,” the Court nevertheless said that “(s)uch intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale. Under Michigan law, it is well settled that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price for the property, is sufficient to establish a deed absolute on its face to be a mortgage (internal citations and quotations omitted).” Id. at *4-5. Commenting that “(t)he facts of Koenig are remarkably similar to those of the instant case,” the Court found that in this case there was inadequacy of consideration, unequal bargaining positions, and an apparent intention on the part of Ms. Gregory to obtain “a loan that would enable her to redeem her property and extend the debt for eighteen months.” Id. at *5. With that, the Court held the deed would be treated as an equitable mortgage.
Just make sure you cover all your bases.
Thanks for that. Do you think that avoiding the warranty deed transfer and just making an outright purchase on the property for the redemption amount would change anything? If we wrote the lease with option and the Purchase agreement at the same time, but dated the lease for after the closing on the sale of the home?
It seems that if they are willing to sell the home for what is owed that the lease option would be a seperate entity.
Thanks for your help.
if they couldn’t make their own note before, what makes it different this time around?
The above is only one reason I will never consider buying a property and letting the seller lease or buy back or anything else. When I buy, the seller is done permanently. The new laws and scrutiny, plus the above comment are more than enough reason to not let a seller stay.
The main reason I’m considering this is the substantial equity in the home. In the event of a default, I’m actually in much better shape than if they buy back the home.
Being they have equity, it opens more options for you to purchase.
I agree though…don’t let them stay there, even if they default your looking at costly eviction/foreclosures to get them out. Or worse if your state even allows something like this.
Buy it outright, or sub-to, owner carryback to get their needed amount of equity, then take over the vacant property.
Take it sub 2 and agree to pay them a percentage of the equity–whatever you negotiate–at the time the loan is paid off. If they are motivated to sell, you won’t have any problem doing this. Agree to pay them a certain percentage or amount above the price that you eventually sell for, but don’t pay now, or the deal isn’t as good. $50K in equity leaves you a lot of room to negotiate, but letting them stay leaves you a bit vulnerable in my opinion.
There are a lot of new issues and laws regarding letting owners lease or buy back the house. You are much better off if they are gone. I would never consider letting them stay for the many reasons listed above.
The main problem here is the fact that their only goal is to stay in their home. They have no interest in cashing out, they would have plenty of redemption time to do this themselves if they wished. I am rethinking getting into this now based on everyone’s comments, but the sad part is another investor in this area will snatch this up in a day and make a killing. But if it’s not a legal practice, I want nothing to do with it.
Like a previous poster said, if they cant pay now, why would they be able to pay later?
And once you do this, if they don’t pay, and you have to get rid of them, that is where potential problems arise, and is also a big reason there are so many laws being drafted.
If some want to, it’s up to them, I know I will not do any deal unless the seller is done when I get the deed.
Interesting decesion made by the court which was appeantely sympathetic to the debtor, however how did they overlook usuary.
If I got the facts right the APR would have been 34.8%.
Good thing no one noticed that!
Anyway, it seems that the house was taken back by the creditor at a bigger profit, but just took a little longer.