Owner carry back and foreclosure question - Posted by Mike Schmidt (IL)

Posted by Ronald * Starr on June 29, 2001 at 20:18:46:

Mike Schmidt (IL)---------------

Taking off on what JT (IL) says, If the second note were still on the property, the BK trustee would see little equity in the place over which to fight.

You might benefit yourself by having the second, if it is sold, sold to somebody else, not having the same last name that you have, and a post office box somewhere else. Then it doesn’t look like you are involved with it.

If you don’t get this house for yourself, please recognize that it is rare to buy ones own home on foreclosure or in the process. One’s own requirements tend to be narrow than can be met by most foreclosure properties.

Good InvestingRon Starr***

Owner carry back and foreclosure question - Posted by Mike Schmidt (IL)

Posted by Mike Schmidt (IL) on June 29, 2001 at 16:30:24:

I discussed this issue on the phone with Tim Jensen (thanks Tim!)we tossed around some ideas but I would like to know what others might think of doing in a case like this. Just want a full bag of tricks and learning in this business I find to be priority #1

Home is 2 months past due on 1st mortgage, 2nd is a owner carry back for $35K and will be 1 month late in a few days. VERY nice home on a wooded acre, mint inside and out. Could be occupied without having to do a single stitch of work.

House FMV $200-$220K
1st $147K @9.25%
2nd $35K (not sure of rate as of yet)

Thought is to offer 2nd $5K to close note then take over payments on first via a Subject to. Before I explain all this to the current owners I want to make sure I myself understand what would happen if it went to foreclosure. My understanding is the bank would take the home then send it to auction. If the bank at auction got $200K for the home do they have any obligation to pay off the 2nd note holder or give him anything at all?

What are 2nd note holders options if the home went to auction outside of bidding himself? Could he sue for his money? Is his lien removed after the sale?

The way I see it and understand it the 2nd note holder has a few options.

  1. He could also make a Subject to offer if he understands what that is or some other creative offer to try and get the house back.

  2. He could buy the home back by paying off the $147 owed to the 1st.

Thoughts / ideas?

Re: Owner carry back and foreclosure question - Posted by JT - IN

Posted by JT - IN on June 29, 2001 at 18:11:26:

Mike:

Your thinking on the 2nd mtg may be a little to aggressive, for the circumstances that currently exist. Meaning, they are only going to be late, 30 days, in a few days, so the owner is 29 days late, as of today ? If you put yourself in the same situation of this previous owner, and the condition of the property, etc., why would they be motivated to “throw the baby out with the bath water”, at this time ? May need to be more realistic in your approach with them. Something like a renegotiated 2nd, or a $ 10,000 discount may fly. If I were the person holding the 2nd, I wouldn’t appreciate the lack of consideration for my position. Now they may look at this entirely different, and based upon their circumstances, etc., but this wouldn’t set well with me, if I put myself in their position.

As for their protection in a Sheriff Sale situation, they will be made whole as long as there is $ 35K left over, after the Taxes are paid, the 1st is fully paid, including interest, fees and expenses. The 2nd has full rights to foreclose, just as the 1st would have. However, if they were truly facing that situation, meaning closer to that time frame and reality, then you may have more motivation for them to consider a deeper discount.

Could the 2nd buy back, subject to the 1st? Yes, if they understood that option, but realistically, how many ppl do understand that option ? Not very many, is the answer. There are RE investors that have been active for many, many years, that aren’t aware of subject-to’s. Doubtfull of this happening, and if the person holding the 2nd is that savvy here, you are toast anyway !

Could the 2nd buy back the home by paying off the 1st ? Absolutely, as long as Owner is willing to deed over the property to them, and they are willing to accept ownership.

I ahve dwelled on the 2nd pretty heavily here, because I think that this is your biggest concern. Now regarding the 1st (Bank), your question about taking home and sending to auction, isn’t quite an accurate description. What would happen is the Bank holding the 1st mtg. would file suit against the property owner, and get a judgement for outstanding mtg, then request the property be disposed of / liquidated via a Sheriff Sale. Then the priority of payment is Taxes, 1st lien, 2nd lien, and judgements against the individual, etc.

The key to the situation that you are inquiring about, is the knowledge level and motivation of the 2nd mtg. holder. However, at this time, being only 30 days late, what is their motivation? Not great today, but as time goes on, they may see the hand writing on the wall. If the 2nd motg holder would be totally adverse to the thought of getting embroiled in a foreclosure sale, as they will be sued by the Bank, as a matter of having an interest in the property, then they may be more motivated, but unlikely that they would throw away $ 30K, with the discount that you are considering.

I think that you are on the right track, with the 1st on subject-to, etc., but timing may not be entirely on your side, as the delinquincy is too new.

Let us know how you turn out on this one.

Just the way that I view things…

JT - IN

Re: Owner carry back and foreclosure question - Posted by Mike Schmidt (IL)

Posted by Mike Schmidt (IL) on June 29, 2001 at 18:28:08:

Thanks for the thoughts JT.

I understand what you?re saying about the 2nd, which is why I wanted to understand fully his options. Just like you mentioned, being offered $5K would not sit well with me either if I were in his shoes. Perhaps after explaining the situation to him the best thing to do is ask what he would consider to settle his note, then make a counter offer.

The 1st is only a week or so away from starting the foreclosure process. The person holding the 2nd is aware of the financial problems and that the 1st is close to foreclosure. I don?t think he knows just how close it is, which is why the $5K thought.

This home is exactly what I have been looking for, for my own residence, just not in the town I had as first priority, but its only 10 minutes away. With that said I would be willing to go higher in negotiating the 2nd, I just am trying to keep my feelings of living there out of the equation so I don?t do something stupid =)

After the first post I did talk to the owners and am pretty sure they are going to file a BK as well. They rented this home for a year and purchased it 7 months ago, so there is not a lot of equity involved for them. I also spoke with their attorney and he offered to work with me to distance the home as much as possible from the BK. I know there are no guarantees here but it does help that he understands the Subject To vs. BK issues.

Foreclosure already… - Posted by JT - IN

Posted by JT - IN on June 29, 2001 at 18:51:41:

Sounds like the 1st is trigger happy, if only 2 months past due on 1st, and filing FC. I am seeing most of them let the mtg og to 6 months and beyond, which eats up the equity, for us investors, and takes away a buying opportunity.

The BK would concern me here. I would get solid advice from counsel, not theirs, but yours, before proceeding. Their Atty will not have anything to say about how the Trustee in the BK looks at your RE deal, some 4 to 6 months down the road. Wouldn’t it be tradgic, since you are considering this property for your own residence, to have to scramble to refi in 6 months, to surface some cash, or worst yet, move out, if the Trustee rescinds the sale. You would become just another bidder to the Trustee, at that point.

Maybe this isn’t too likely, due to a low equity, but you are borderline to having something to worry about, depending upon any subsequent appraisal being done by the Trustee, especially if you are getting a substantial discount from 2nd mtg holder. I might want to invest in a (hopefully low) appraisal, before proceeding ahead with this purchase. The lower the better, as far as the BK Trustee would be concerned. If low appraisal show not much equity, then this relieves the concern of a recinded sale.

As for seeking your own residence, you have just become another emotional home seeker; LOL. You know what they say, “don’t fall in love with something that can’t love you back”. (This includes this RE deal).

Good Luck on working out details. Keep us posted on any success.

JT - IN

Re: Foreclosure already… - Posted by S.B.

Posted by S.B. on June 29, 2001 at 19:53:53:

JT

Have seen it mentioned several times that some mortgage companys let defaults go for up to 6 months as you said.

Do you know any particular reasons for that, other than they REALLY don’t want the house and hoping the owner will cure or get the place sold to clear all amounts owed?

Would the amount of any equity have any bearing on how quick they move to foreclose?

Re: Foreclosure already… - Posted by Mike Schmidt (IL)

Posted by Mike Schmidt (IL) on June 29, 2001 at 19:11:41:

Again, thanks for your thoughts!!
I am sure its closer to 3 months past due or the 3rd payment is now due. Seems 3 months is toe the line time around here, thats what I have seen anyway.

As for the “another emotional home seeker” part, I just keep telling myself a house is a house is a house, I just havent convinced the wife of that yet =)

Re: Foreclosure already… - Posted by JT - IN

Posted by JT - IN on June 29, 2001 at 21:58:27:

S.B.:

Really doesn’t seem to be a corelation between equity and how lenient a lender is toward not proceeding with FC. It appears to me, that things in general, have been so good, andlenders haven’t gotten burned in a while, so they proceed as they have, allowing people way too much rope.

I buy most of my property at SS, and I would say tht the average length of time between the first late payment and SS is close to a year. Usually six months after filing for FC, assuming there is no BK, or request for reappraisal, or other games a delinquint owner can play to drag out the process. I have recently seen case that were filed back in 1994, that haven’t made it to Sheriff Sale, yet. Lot’s of legal manuevering, and the owner is still living there rent free. It is a wonder that any of us can afford a mtg, when these type of expenses get passed through to the next borrower.

Just the way that I view things…

JT - IN