Not a typical scene - ideas? Great credit, no down, multimillion dollar home.

General Real Estate Investing
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Over the years I’ve dropped in and out of these forums because I considered purchasing, but never did because the market seemed too inflated to me and I was moving around a lot. I’ve seen so many smart people here and so much good advice, so now that I’ve run into a possible opportunity, I’d like to run it past all of you. This is really unique and I have no idea if it’s even possible or worth considering, but I know you’re the ones to ask. If there’s a way, you’ll know it. :smile

Me: I have a lot of business experience but no real estate buying experience. I make good money (less this year than years past, but still way, way above average.) I am in the Los Angeles area. As you all know, the deflation is happening quite quickly around here.

There is a one-of-a-kind stunning home about 1/2 mile from where I live. The owner and I are in the same profession but we do not know one another personally. He purchased the property in 2005 for $1.2M and improved it dramatically. It is an absolute showcase: several movies, TV shows, music videos, etc. have been filmed at the property.

Total living space is ~8,000 SF. The first floor is in on a major street and has ~1500 SF which could be used/leased/sub-leased as retail space/gallery/whatever. I’m pretty sure the home is vacant now, and looks like it has been for some time. It is, however, frequently rented out for events, photography, and filming (I often see film crews at the property).

He listed the property about 18 months ago for $8M. I laughed. Over the past year, price was lowered to $7M, then $6M, then about six months ago to $5M. It’s still just sitting there. Obviously income is being generated from location fees but the first floor/gallery space is empty. I conservatively estimate one could generate ~$15k monthly between gallery space and location fees.

About three weeks ago, the mortgage lender filed a notice of default. Default amount is $160k, “opening bid” is $2.1M. City tax assessment is $1.6M.

I have very good credit - my middle FICO is probably in the 725-750 range. On my current lease, I pay ~$4500 a month plus utilities, etc. I am self-employed but can show tax returns for last two years with income to support payments / ability to pay within that range.

With the economic shift and having just cut a huge check to the IRS, I cannot shake out a significant down payment right now. In 1-2 years I should be in a position to put a good amount down.

So with all that in mind, I thought about approaching him about a lease-option, but if he is upside down in the property (likely, I think) it’s not likely to be a smart deal for me. I have no idea what his payments are, but if we assume the “opening bid” is his full balance, and he’s on a 30 year note, they are probably in the $10-11k range.

So what I’m asking all of you is: is there any opportunity here or should I just stay out of the way?

(I posted in this forum because even though it’s in pre-foreclosure, I’d been exploring lease-option.)

Thanks in advance.

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It sounds like there is definite opportunity there, however, the first thing you have to determine is what is the value of the property today. Then, you need to know the loan details. Whether you get them from the tax office or direct from the seller. There may be a 2nd mortgage on there that could be discounted via a short sale and then you could take over the 1st mortgage “subject to” the existing loan. The first could also be modified and then you could take it over “sub to” I think the real thing to ask yourself first is what is my exit strategy for this property? If it’s buy and hold then how will you cover the payment - renting downstairs, etc. is an option but do you have a specific, defined plan to do so.

A property in this price range has greater reward, but also greater risk so be sure to cover your basis by having a plan, a contingent plan, and a back up contingent plan.

cortjones

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Cortjones - thanks for all that great input. I definitely could not swing the entire payments on my own (not for long anyway), so there would necessarily need to be a $$ plan regarding location fees, downstairs rent, etc.

With regard to your exit strategy question, I am envisioning this as a long-term primary residence for myself, and not just an investment opportunity.

Also I suspect there is a second mortgage, as you said, and probably some kind of HELOC going on because he sunk a HUGE amount of money into a total rebuild of the place. Are the HELOC and 2nd mortgage lenders just going to disappear? I can’t see them just walking away, can you? When you say the second could be “discounted” do you mean reduced or entirely written off?

And finally, I assume all of this would need to be handled during the pre-foreclosure process, right? Once it goes to auction it seems all bets are off, correct?

Thanks again.

4

Mystic,

You can go the the register of deeds for your county and look up the deeds of trust. Depending on how many there are will tell you how many liens are on the property and what the INITIAL balances were. If the owner took out the loans using an adjustable rate mortage then there will also ne an “adjustable rate rider” with the deed of trust that will tell you the initial interest rate on the loan. Once you ahve these numbers you should be able to work backwards and figure out the balances. Hope this helps.

5

If the amount in default is just $160k, but the “opening bid” is $2.1M, then I strongly suspect that the foreclosing lien is in second postion, or more likely in third, or maybe even fourth position with $2M in liens in front of it.