upside down situation - Posted by rita

Posted by JohnBoy on July 17, 2001 at 08:22:12:

If the true market value is around $250k then I would agree with what you’re saying. I would however question the appraisal of $289k from two years ago. If the true value is really around $250k then it would be hard to comprehend that some appraiser would have bumped up the value by $40k for the second mortgage holder to justify giving the loan. I see the appraiser pushing it by $5k or so, but not by $40k.

I guess what we need to know is how much did Rita pay for the house when she purchased it, how long ago was that, and what have comparable homes in the area sold for recently. That would give us a more realistic idea of what the value would be on this home.

As she stated, she started out with an asking price of $289k and it hasn’t sold. It’s been on the market for a while now and we all know the longer a home sits on the market the more potential buyers tend think something must be wrong with it. It could also depend on how the home has been marketed. Did any of the realtors market the home other than just sticking it in the MLS and just wait for someone to see it? Have many people been by to look at the home? What are other homes in the area for sale priced at? What condition is this home in? Does it need any work? Carpet? Paint? Etc.?

There could be a number of reasons and/or a combination of things as to why this hasn’t sold.

Even if she had to sell for $280k she could still get the $10k down, bring the loan current, pocket about $5k and pick up $200+ per month cash flow. Her back end would be less. So it would appear she still has room to play with this.

I can’t figure out her numbers on that second though. Those payments are high even for 11%. I’m wondering if the second includes the taxes and insurance or not? It appears that they aren’t included on the first based on her interest rate and payment amount. The second would come out to an 11 year loan based on $950 payments at 11%.

So depending on how long her second is for and how long she has paid on both loans it would depend on just how much back end she could make off this selling with owner financing at 10% - 11% amortized over 30 years with a one or two year call. Her second would be paying down on principle much faster than the note she would carry and she would have a nice spread between the rate on her first, so she could still end up with something decent on the back end here. I will need more accurate information on her loans and what the true market value is to determine anything to be in the ballpark as to what she could realisticly get out of this.

upside down situation - Posted by rita

Posted by rita on July 16, 2001 at 21:30:26:

Hey Ed- I need some advice. We have good incomes but our circumstances have changed. Ill parents and kids in college are eating up our money and we have fallen behind in our mortgages. We have been trying to sell our home which appraised at $274,500 in 2/98 for the past 2 years. 4 realtors later, we have dropped the asking price of our home to less than what we owe our lenders. The first mortgage is at $197,000 (interest rate 7 3/8% with payments at $1395) and second mortgage at $73,000 (interest rate 11% with payments at $950) We are behind 2 payments. The realtors have not even shown our home for 90 days and the current asking price is $249,900 down from $289,000. What are our options? We have no set plans what to do when our house sells but would like to purchase another smaller ranch style home due to the ill parents. We are currently paying for foster care for them since they cannot live with us in our current 2 story home. We are in a bind. We have met with 2 bankrupcy attorneys but hope we don’t have to go that route. The banks have not yet foreclosed on us due to this unique situation. The second lender is at risk of getting no money and makes it hard for them to foreclose since they are not the first lender. Now that we have fallen behind, they are willing to talk with us but were not willing while our payments were current. WE have been using our line of credit in the second mortgage to pay the payments the past 6 months with the hope the house would sell soon. The bank has ordered another appraisal this week and it should appraise higher (around $300,000) if we are lucky yet the market brings no lookers. Please help. We are looking for any suggestions. thanks rita

Re: upside down situation - Posted by JohnBoy

Posted by JohnBoy on July 17, 2001 at 08:26:04:

Correction! That would be $25k bumped on the appraisal. Not $40k. Still high though.

Re: upside down situation - Posted by JohnBoy

Posted by JohnBoy on July 16, 2001 at 23:09:23:

This is a perfect example on an article I wrote that is in the money making ideas section of this site. Only instead of you being the investor you are the seller. You can do the same thing being the seller and acting as the investor by selling your home on contract. You could get more than enough money down to bring your loans current and still walk away with a chunk of cash, collect a few hundred per month in cash flow and collect a nice pay day on the back end when your buyer refinances in a year or two.

If the house is worth $300k you should be able to get $310k easy offering seller financing. You should easily get $10k down for a property in this price bracket which would bring the loan current and still put around $5k cash in your pocket, over $200 per month in cash flow and close to $30k cash in your pocket when your buyer refinances to pay you off.

You don’t need a realtor to do this. You can find a buyer yourself by running an ad offer seller financing.

Read the article at this link and you should have a better idea of what I’m talking about.

In the article put yourself in place as Mr. Downandout AND being the investor, both. You can solve your own problem with this.

Re: upside down situation - Posted by rita

Posted by rita on July 17, 2001 at 21:58:44:

I am unable to locate the article you are referring to.
Can you please tell me the site? Thanks again for your assistance. I did mention this concept to my lender and they thought is was a crazy idea. I am interested because it sounds like a win/win situation.
What are the potential pitfalls?

Re: upside down situation - Posted by Ron (MD)

Posted by Ron (MD) on July 17, 2001 at 06:24:43:


Your solution makes sense except for one major point.

Rita (the owner) said the house is listed for $250k and they are getting no lookers. They are getting a new appraisal (apparently ordered by the bank) and she is hoping that it comes in at $300k. In fact, the appraiser will see what the house is listed for and how long it has been listed at that price ($250k) and he is likely to appraise it for less, not more.

So, Johnboy, two questions: isn’t it more likely that the appraisal will come in at $240k than $300k? (I hate to see Rita banking on an unrealistically high appraisal.) And, second, how does that change your recommended solution?

Ron Guy

Re: upside down situation - Posted by JohnBoy

Posted by JohnBoy on July 17, 2001 at 22:58:38:

The potential pitfalls depend on how well you screen your buyers. If you get a deadbeat on your hands where they move in and later decide to stop paying then you will need to evict them, or depending on your state laws and how your contract is structured you may have to foreclose on them to get the property back.

It would be well worth paying a GOOD real estate attorney to have your contract set up so you know it meets your states requirements and structured properly so you can hopefully evict the buyer as a tenant instead of having to go through a foreclosure process. If you live in Texas then a contract for deed may not be the good way to go since I heard they just changed the laws pertaing to contract for deeds and are more of a disadvantage to the seller.

In my state as long as the contract is for less than 5 years AND the buyer has less than 20% equity in the property, we can just evict them as tenant instead of having to go through a foreclosure process.

We have the buyer sign a quit claim deed over to us that will deed any interest they have in the property back to us. This is held in escrow until the buyer pays us off. If the buyer defaulted we would have the quit claim deed recorded releasing any interest in the property the buyer would have and then we just file for an eviction.

Make sure you talk to a good real estate lawyer to protect yourself properly. It shouldn’t cost but around $300 to have him take care of this. Money WELL spent, especially if you’re not familiar with contract for deeds and how to structure them in your state.

Re: upside down situation - Posted by rita

Posted by rita on July 17, 2001 at 10:39:17:

To answer your questions- we paid the builder 5 years ago $236,000; we then had $15,000 in landscaping and another $10,000 in basement removations. The house is in impeccable condition and needs no repairs or painting. There are many upgrade including oak crown moldings, ceramic tile and wood floors. The realtors offer no suggestions why there are no lookers. Flowers are planted and the grass is maintained. Over the 2 years the house has been listed, we have had 12 lookers, 5 have bought other, more expensive houses that are directly on the lake. Our home just has lake access and is across the street so no lake views. 2 other lookers felt they could build for less than we had it listed for (not true but their perception) Our second lender has been raping us with an interest rate at 13% until recent to 11% since its tied to the prime rate. Taxes are an additional $2200 per year and insurance is $700. If we do an owner finance, do we keep the insurance on the property or does the buyer? Homes in our area have been slowly selling yet there is a new development behind us that are spec homes priced in the $250-330k range without the lake access. Thanks for the discussions- these are very helpful. We meet with the second lender today to see if they have any suggestions. Are there any questions I should have for them?

Re: upside down situation - Posted by JohnBoy

Posted by JohnBoy on July 17, 2001 at 07:18:39:

I can’t imagine the lender’s own appraisor coming in and appraising the property for less the what they have it listed at. In fact, I assuming that since this is the lender’s appraisor that they will be looking for the highest appraisal they can get to see where they stand on this.

Rita said the house appraised for $274,500 in 2/98. That was almost 3 1/2 years ago. Unless values in her area have dropped since then, I would think an appraisal coming in at $300k would be realistic.

As I said in another post below this thread, homes in these price brackets are usually a lot harder to sell. People paying these prices usually prefer to buy a new home and get exactly want they want, not one that has been lived in already.

The realtors are more than likely marketing to find retail buyers that are qualified which will make it even harder to find a buyer for this price bracket. Assuming this is an upper end bracket for her area. What will the chances be in finding a buyer with only $10k to put down and no bank qualifying, but can afford the payments on a home like this? My guess is much more likely than just trying to find the buyer that is pre-qualified to waltz into any bank and get a loan. Even qualified buyers with only $10k to put down would be interested in this since that would be a whole lot less than what they would need to come up with for a down payment and cover closing costs going through a lender to get financing.

Which type of ad would you be more likely to respond to?

An ad listed by a realtor offering a home at $289k the traditional way, or an ad that looked something like:

$10k moves you into this
NICE executive home
Good credit/No credit/Bad Credit

What would you have to lose by running ad in Sunday’s paper to see what kind of a response you may get? If you can’t find a buyer you’re in no worse of a spot than you are now. If you do find a buyer you’re about $45k to the good without taking a loss and losing any money on the deal. That would be worth the cost of an ad to find out what I might be able to do with this before throwing in the towel and just giving the place away by doing a short sale with the lender just to get out from under it. Wouldn’t you agree?

Re: upside down situation - Posted by JohnBoy

Posted by JohnBoy on July 17, 2001 at 11:03:54:

Forget about dealing with the lenders about this. Offer the property for sale with owner financing. You would ad the taxes and insurance to what ever your payment amount the buyer would be paying you. The buyer would get a new insurance policy naming you as an additional insured and a loss/payee.

Your buyer would need to pay for the first years insurance policy up front, then you would prorate that amount over 12 months and collect that amount each month in addition to your principle and interest payments. That way when the insurance policy comes due the following year you will have the money to pay for it. You would be escrowing that money to insure the funds are available without needing to worry about the buyers having it when the time comes.

So in this case your principle and interest payments come to $2,345.00 per month, taxes $183.34 per month and insurance $58.34 per month, for a total PITI payment of $2,586.68

If you offered seller financing and got only $10k down you would be financing your buyer for $300k. If you financed them at 11% amortized over 30 years their principle and interest payment would be $2,856.97 plus taxes & insurance for a total PITI payment of $3,098.65

$3,098.65 - $2,586.68 = $511.97 per month in positive cash flow going in your pocket.

If you made your contract due in two years where your buyer would need to refinance and pay you off, there loan balance owed to you would be about $297,142.98

Your loans total $270k which would be less when you go to pay them off when your buyer refinances, leaving you with about $28,000 + at closing.

You would make $10k up front, $12,287 in cash flow over 24 months and around $28k on the back end for a total of $50,287.00 off the sale of your home over two years!

Now doesn’t that look a whole lot better than having to just walk away from all that money???

Now if you’re still afraid of doing this on your own and you would rather just walk away from this and be done with it, let me know where your are located and we can see about helping you out by just taking over those payments for you until we get a buyer refinanced and pay those loans off! :slight_smile:

Re: upside down situation - Posted by Ron (MD)

Posted by Ron (MD) on July 17, 2001 at 07:54:32:


I do understand that a house with seller financing can be priced higher than a standard sale.

My problem is with the true market price of this house. It was appraised two years ago for $289, but this was (apparently) by a lender offering a home equity loan at 11% (kind of steep). Based on that steep interest rate, I’m guessing that the second mtg lender was trying to push up the appraised value and the result was a typical, refi appraisal (i.e., above market).

The new appraiser is probably going to get different instructions than the first. This time, the second mtg holder wants to know what its exposure is and will be looking for a realistic appraisal. Further, since this house has been on the market for some time and the most recent price is only $250, my guess is that the real market value is much closer to $250 than $300. As you have indicated, appraisals in this price range can be very subjective, but this appraiser has some very objective information: i.e., that list price for this particular house.

I’m not trying to argue the point or to disagree for the sake of disagreeing. I’m just saying that if the real mkt value is around $250, it’s unlikely that she will get a T/B for $310. She may get one for something higher than $250, but probably not $310.

Ron Guy