What would you do?

General Real Estate Investing
1

Hey fellow investors,

I have an aquaintance friend with their home in foreclosure. Because the owner is a somewhat friend, I need to put together a good deal for both of us. I need an unbiased opinion and some ideas.

The FC sale is scheduled for late this month (March), and he has no money to reinstate loan.

Here are the numbers.

Single family home in move in condition.
Market value at $235,000+ (Identicle model sold for $242K)
Mortgage payoff $190,000 ($176,060 + $14,400 to reinstate)
Homeowner equity $27,000 after closing costs if sold today, but not enough time to sell before FC sale.
Spoke to lender and homeowner and they both agreed to sell me the home sub2. Lender was fine with leaving loan in homeowners name even after I take title. Nice 6.625% loan.

Existing mrtg payment (PITI) $1,278.00/mo.

Reinstatement amount is $14,400.

Lender offered two options to reinstate loan:
$5,000 now + add $832.00 to mrtg payment for 1 year making new payment @2,110.00. After 1 year, payment will return to $1,278.00.

or

$14,400 now and continue with normal $1,278.00 payment

I want to keep this as a rental. I’ve got cash to reinstate now, or I can make payments over the year.

Rents are $1,450-$1,600/mo.

I have two ideas:

  1. Buy home and have homeowner move out.
    If so, then what equity would you pay homeowner? Again, I am trying to help him out. I was thinking $0.70 on the dollar which is $27,000 x .70 = $18,900. He would get the $18,900 in two payments, one would be $6,000 moving money and the remaining $12,900 on a 8% note payable in 3 years (lump sum payment).
    I would be into home for about $211, 000 ($190k+$18,900+min. closing costs).
    or
  2. Buy home and allow homeowner to lease option at $1500/mo. He may be able to buy back in a year or two. I worry about violating Illinois usury laws. Would you even do this option? What option price would fly?

Thanks for all of your advice.
Gr8Home

2

Need Ideas? First one is rethink your ideas!

Idea #1: How about $1000 in moving money, and go! He has NO equity! If the bank forecloses, he loses everything, including his credit. Using your numbers, 70% of FMV is about $165K, so offering $190K plus closing is big enough gift, IMO.

Idea #2: NO! I have never seen an instance where it was a good idea to leave the homeowner in place as a renter. Just forget for a minute about ALL of the possible negative legal consequences that that could bring upon you and think about this; if the homeowner couldn’t pay his current monthly, then how is he going to be able to pay your MORE each month?

Raj

3

I agree w/Roger, your already saving his credit. Give hime some walking money maybe 3k since he’s a friend. He lost his equity when he stopped paying and didn’t sell right away.

4

He’s either a friend or it’s a business deal, it can’t be both.

I’ve seen too many instances where, as a friend, the investor offered too much, helped too much, etc and ended up in the same boat that the “friend” was in. Or, after the dust clears, the friend that you helped decided that you didn’t really help him at all, but rather took advantage of his “friendship.” It goes downhill from there.

So be an investor or be a friend.

Raj

5

Raj and Carl,

Thanks for the great advice.
I woke up the morning after I sent the original message and realized the same thing. If he can’t pay the bank, then why will he pay me.
I spoke with homeowner and told him he had to move. He agreed.

As for the walking money or no walking money, I will give him some walking money. I think it is fair for both of us. I believe it is a mutal compromise. If the friendship splinters I am not going to lose sleep over it. Bottom line it is a good deal for me.

Good luck with all of your investing, and again thank you for taking the time to provide your opinion.
Jim

6

Jim,

Good luck investing, and let us know how it works out!