The basic flaw in the situation painted by you is that the moment the owner quits claim to you there will be an acceleration of the loan or due on sale clause. The entire mortgage will have to be paid. Remember, the mortgage is not a lien on the owner but on the property. Either the owner or you would have to pay the $525,000 mortgage back to the lender. If you'll can't, the lender forecloses on the property. And with that there goes your $37,236
I work with a few of them.
You need 1) lender approval, lenders will allow a short sale to investor who rents back to owner. However make sure you dont get into trouble for equity stripping.
I work for an attorney and we do loan mods, and he may be able to write up a contract for you.
Its all in the agreement.
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You can do whatever you want. The question of legal or illegal is for you to answer. The issue here will be if @#** were to hit the fan, you benifited from this transaction monetarily. In the end you will sell this property to an assignee/ investor. The current homeowner will still be in the property. However you need to know that you cannot lease it back to him or to sell it back to the current homeowner. In a foreclosure situation where the borrower has missed payments and may have a NOD , any sale of that property must be "an arms length transaction". If you ever get looked at by the DA or if the borrower wants to come after you... you are going to be a sitting duck. If i were you, i would walk away unless you are just trying to help the homeowner and loaning him money to bring his situation current which he can pay you back. Besides you need to give him full 48 hrs to make up his mind.
Consider: The first mortgage is $525,000. The property is worth $475,000. You pay $37,236 to reinstate the loan. The owner quit claims it to you. (Actually, you wouldn't want to do a quit claim on it. What you're talking about, really, is a "Subject To." You'd be acquiring the property subject to the existing mortgage.)
So, now you own a property worth $475,000. You've put $37,236 into it.
Let's look at your strategies going forward:
(1) Lease it back to the owner for less than what his mortgage payments were: You'd have a negative cash flow. Someone still has to pay the $525,000 mortgage. It's remained in his name, but presumably you've offered to take responsibility for that. And you know that it's got to be at a reduced rate, since he couldn't afford the mortgage payments previously. Let's say his mortgage payment--PITI--is about $4,000 now. My guess is that the house will rent for about $2,500. But let's say he's willing to pay $3,000 a month. And while he couldn't afford the $4,000 mortgage, he can afford $3,000. Great. Except you've got a $1,000 a month negative cash flow. That's $12,000 a year, pretty much for the foreseeable future. On top of that, you've already sunk $37,236 into the property, and you have no equity in it. And if you wanted to sell it, You'd have to come up with another $50,000--the difference between its value and what's owed. That's an ugly, ugly picture.
(2) Assign it to an investor. As an investor, I'd want either: (1) positive cash flow, or (2) built-in equity. Either is fine. For example, if it had $1,000 a month positive cash flow ($12,000 a year), I might pay you $15,000-$20,000. But it'll have a negative cash floww, not positive. The other thing that'd attract me is some built-in equity. If the first mortgage is $525,000, then it'd be nice if the property's market value were about $700,000. But it's not. Why would I, as an investor, want to pay you $10,000 or so for a property that's $50,000 upside down and is negative cash flowing? Answer: I wouldn't. Nor would any other investor.
Besides, there are a lot of other complications. You really, really do not want to leave a person in a property and do a rent-back after a subject-to. You don't. As for the due-on-sale clause issue raised by John, of course the lender wouldn't want you to do that. It'd be an absolute violation of the due on sale clause. That's OK, though; in today's market, lenders aren't coming after investors for doing subject-tos. They're a great way to acquire property if the property's worth acquiring. This one isn't.
Daniel: You're trying too hard to make a really bad deal work. You're the one who'll get burned on this. There are viable deals out there, but this isn't one of them.
Tell the homeowner to try for a loan modification. If that doesn't work, then the possibilities are a short sale or foreclosure.
Hope that helps.
I'm not a lawyer so I won't comment on the legalities: however, you would have a higher probability of getting a return by taking your $37K to Vegas for the weekend (you would at least have a better time spending it).
There are some key issues with what you have suggested:
1) Although the default amount would be cured, the current owner has no job; and therefore, risk of the current owner defaulting on lease payments to you. Are you ready to cover the entire existing mortgage payment (not to mention other possible costs)?
2) The transfer via a Quitclaim may trigger the "Due on Sale" clause of the Promissory Note making the entire unpaid loan balance due and payable. Even if you recorded the Quitclaim, you are still in 2nd position to the rights of the Lender to foreclose.
3) Savvy investors reduce transactional risk. The deal you are suggesting is high risk!
It would certainly be a good deal for you, but not so good as far as the owner is concerned,. If he were to give you a quitclaim deed to the property in your favor in exchange for you paying $37,000 down on his mortgage to bring it current, he would be in effect relinquishing all rights he has to ownership in the property and granting full control and ownership of the property to you, in effect 'selling' you the property for $37K. Also, the current lender may not allow the property to be quitclaimed unless the current loan is paid in full, so that is something that would need to be addressed also. The conditions of this would likely be set forth in the Deed of Trust and is called a 'due on sale clause'. Most lenders require the loan to be paid in full when the property's ownership is transferred. Just a few thoughts...
Good luck with your situation - hope you both will be able to work something out.
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