He took on a bunch of homes from an investor who went bust some years ago. They had awesome terms, but no equity. He had like a 6.6% fixed rate on some single family homes. The investor deeded the homes to this guy, then filed chapter 7 about a month later. The trustee didnt void the sale, since there was no equity to begin with. That investor was discharged.
The guy still has these homes 4 years later and making a killing on the rents. 5 homes with $400/month cash flow each. $800/month rents. And thats below market rent!
Now even if my friend goes bust, which hopefully he doesnt, he has nothing to lose but the homes and the built up equity. The loans arent on his credit report, nor on the original borrower’s credit report. In fact, that original borrower has since bought another home or two.
Posted by larry-GA on August 13, 2005 at 11:27:10:
I notice alot of foreclosures involving estates. There is little or no equity in the home most of the time.
I do notice some of the mortgages have great terms, like 5.2% fixed 30-year notes…
I have been thinking of trying to take on some of these properties, but wanted to run it by the experts first.
I figure I can get a property that has a great low-interest fixed mortgage, catch it up, and make a nice spread on the rents. Then, eventually take it through probate.
If something happens and I can’t rent the house out something down the road, i have no real liabilty, since the original borrower is deceased? Not like a regular subject to where I’m liable to the original borrower.
Example, I noticed one where the owner died earlier this year and had a 5.45% fixed 30 yr mortgage on a nice condo in good condition. He owed about $60k and the place was worth about $71k. I located the only relative who wanted nothing to do with it. I knew I could have rented this place for around $800/month, and the payment was only $335/month. However, i figured there was nothing I could do and just watched it get foreclosed on.
I don’t see how I can lose here…and i’ll be talking to my attorney on Monday…
It is not quite that simple. You are implying that there is no one hurt if you default as the owner is dead. You also seem to think that you can control the property and collect rent while the property continues to sit in probate. That is not really how probate works.
You may have a deal or two but I think you need to step through a few things before calculating the possible profits. Best would be to buy the property subject-to and have it discharged from the probate so the estate can settle. Even that is a bit too simple but closer to what will work.
John Corey
Chelsea Private Equity LLC
PS. Speak with your lawyer and then come back with the info. Assume that some lawyers are special-ists and better in some areas then others. Hence the advice might not be completely on the mark for RE investing.
Posted by larry-GA on August 13, 2005 at 20:55:57:
How about the bankruptcy process…
I figured if someone has been discharged from their mortgage, i could take on those homes subject to and be alright…of course i’d only do it if the loan terms were suitable.
Since they’ve been discharged, even if say 3 years down the road I go out of business, they are OK since the loan is no longer reported on their credit and they are no longer liable…
You need to study how bankruptcy works if you want to use that process as part of the plan.
A borrower is not discharged from a secured loan in the way you mean. The lender still has a claim on the property. The owner is still the owner until they sell or somehow lose title to the property (lien holder claims the property through the legal process for their type of lien).
Again, your thinking is creative but you need to study the mechanics so that you can line up things. Much of what you are suggesting will not work as suggested. There are some elements that will work once you tweak the model.
Focus on how subject-to investing works mechanically. Then understand what it means to have a lien (security agreement - mortgage or trust deed depending on your state). Then understand how a note is different from the security agreement.
BTW - Do you have any cash to work with? Most properties that are from an estate or where there is a BK are not in ready to rent condition. Hence you still need a bit of cash plus any back payments.
Larry,
Something is wrong with your thinking here.
When the home owner files BK, The assets are sold to pay debts. The mortgage holder has a secured intrest in the property. A BK does not give the homeowner the property free and clear. If you buy the property from the owner with approval of the trustee during BK, you have to satisfy the mortgage and pay the trustee the difference. If the owner has not kept up payments during the BK the lender will foreclose as soon as the BK is discharged. If you buy after the BK is discharged, and buy sub-2 the loan is still in sellers name and on their credit, The DOS clause will kick in and the lender will foreclose. Mortgage lenders have a secured interest in the property, A bankruptcy will not make that go away.
You really need to study about this as you have some very wrong assumptions of how this works.
I think he’s saying that if he finds borrowers in bankruptcy who decide to abandon their homes and get discharged from the obligation, he would take on those mortgages. Only if the terms were good.
I’ve had subject to’s where the sellers deeded them to me, then maybe a year or two later they had to file bankruptcy due to financial problems. The house they deeded to me had no equity and they were discharged from that debt. No more personal liabiltiy for them. It is still secured by the house, but the loan is no longer reported on their credit report because of the discharge. As long as the payments are made, the lender isnt foreclosing.
I’ve found that most of the homes he’s talking about need repair, and then the payments are soo far behind…its not really doable. Then again, its a way to go.
Don’t think you’re reading this guy’s post right. You might need to review “no asset” Chapter 7 bankruptcies.
Most chapter 7 bankruptcies have no assets. They file and then get discharged from all personal liabilities, except child support, taxes and student loans and fraud stuff. If there are no assets, nothing is sold. As long as secured creditors keep getting paid, they don’t foreclose or reposess either.
Once that discharge happens, all those accounts (secured and unsecured) are no longer reported by the creditors to the credit reporting agencies, by law.
Secured creditors, once they get relief from the court, can initiate foreclosure to get their money back out. This only happens if the borrower is behind in the payments during the bankruptcy proceeding. The PERSONAL liability is gone once the borrower gets discharged, but the security is still there for the creditor.
Larry is saying he can find homes where the borrower has been discharged, maybe had great loan terms, and take on those homes for the cash flow. Thats a great idea, if you can find them. Even if you default years down the road, there is no adverse affect for the original borrower as they’ve been discharged from all liability AND the loan is no longer reported on their credit. Can’t really lose there. I doubt the lender will call those loans due either, as long as you make the payments on time. You’ve got the same risk of that as you do with regular subject to.
The new bankruptcy law may change all this though…