First of all, my wife and I both have very stable, well-paying occupations and have saved considerably to begin investing in real estate. Our credit is excellent and we have little debt.
As for the opportunity, a family close to us was recently contacted by their mortgage companies giving them 90 days to pay up their mortgages, or they would be foreclosed on due to their 10 months of delinquent payments. They have an 80%/20% loan with $205,000 in principal remaining between the two lenders. The father has found a job and wishes to avoid foreclosure and rent the property back from us to stay in the neighborhood with his family. They had used a real estate agent to list the property in a last ditch effort to sell, but delisted it 2 weeks ago without result. I have not spoken with the agent, and have dealt directly with the owners who are more than willing to sell to me. The home was listed for $240,000 and had no offers. It was appraised 3 years ago at $213,000.
As the title portrays, this is my first deal and I want to do it right! Please advise me in the best way to proceed to obtain the property for the best price possible so I can rent it back to the current owners. Thanks.
I would be very leary about their ability to be great tenants. My experiences with renting to close family members or friends weren’t so great. They have no problem telling you that they are not going to pay you because they have something better to do with the money. Based on my experience I would not advise doing this as a first step for investing. They will not detach themselves from the property and feel it is theirs, thinking they can pay when they want and how they want. Its hard to come to the realization over night that you no longer own something that you have owned and still occupy. You would also have to seperate you personal realtionship with the tenants, and keep it strictly professional. (You may have to evict them one day) and find yourself in a tight spot.
It may work for you, but in most cases it results in a friendship destroyed and sleepness nights.
Thanks for the advice regarding renters. That is our only drawback. However, the short sale itself is the main concern currently. Let me know if you have any advice as to the best way to proceed with a short sale or to find out if this opportunity is really a great deal.
I have to agree with MsFlinvstr, I would stay away from this as your first deal !! Even though the father has found a good job, there is no guarantee that he’ll remain in it. Mistakes are made everyday by both employers and employees. It’s just too “iffy” for my midwest conservative blood !!
Just out of curiosity, What makes this one so hard? Granted, this may be an extremely naive question, but in the interest of learning - aside from the renting portion - what part of this deal makes it insurrmountable? Thanks in advance.
There is some really excellent information on this web site as I know you are aware. Please try out another web site : www.invest-2win.com It is full of rather boring, but extremely important terms you must know and understand to be as successful as I think you would want to be. You seem very bright and I’d hate to see you make the same mistakes I made 20 years ago. Do not get caught up in an emotional purchase !! Do the numbers. Then do them again. Understand what your Net Operating Income will be. Figure your Capitalization Rate. Do not just take someone else’s word for it !! With those two numbers, you can calculate what the value of the house really is. Set your minimum standards and do not cross that line !! Trust me, this advice is golden and not because I’m the one giving it. I’m simply passing along the best of what I’ve been told and what I’ve experienced.
Do the numbers and trust your math !!! You won’t regret it. Winging it is not how to make money in this business - did I say business ? Yes I did. Treat it as seriously as you would if your boss was watching over your shoulder as you worked.
I think I forgot to mention that we are currently renting while we determine a location to build. If the renting relationship goes South, we would likely move in to fix the place up and flip it within the next 6 months.
If you buy from them – they have to move out – end of story. You do not want to end up in a situation in court where they, “thought you would ‘loaning’ them the money to get them out of trouble.”
Also, there isn’t enough equity in the deal for your first deal. Keep looking.
Good luck to you – with your excellent credit and financial situation you’ll do fine.
First of all there needs to be some distinctions made. Pre-foreclsure does not necessarily mean short-sale. One of the best scenarios for a short-sale is where the owner owes as much as it’s worth. A short-sale is when a bank will discount. A bank will discount to get it off their books, because for instance if a house is worth $100,000. the bank has to hold in cash (at this time) 7 times that amount. That’s $700,000. that they can not lend out. As we know banks are not in the business of real estate, but are in the business of loans. So they want as few foreclosures on their books as possible.
Now with that said, the first thing that I want to point out is that you need to get recent comps. like from the last six months, and a current appraisel. I personaly would not look at this as a short-sale, but I would deffinatly look at it as a buy and hold. I would offer the owner what he owes on it and tell him that we’ll keep the foreclosure off his credit. If he only owes $205,000. and IF it comp.s out at $240,000. I think that’s plenty of equity for a buy and hold. Do your numbers and see if that works. And rent it to whoever you want.
What is the condition of the property? Are there any repairs that need to be done? If so, how much? What’s the after repair market value? If you can’t get comps right away, take a look at what the tax accessor’s values is, and post back. Also, how much is owed on the 1st lien, and on the 2nd lien to payoff both loans and to reinstate the delinquency.
Take everyone else’s advice that posted back, if the current owners will not move out, then walk away from the deal. It’s not worth it. If they do not pay you, it could get ugly. The amount of money you could potentially earn from the shortsale or ‘sub2’ could be eaten up in eviction fees, holding costs, and attorney fees.
