Real estate forclosure service?

**julien515** · Aug 2nd, 2012, 12:21 PM

I have a concept for a financial real estate service and I would like some feedback on whether or not it could work.

Say someone has owned their home for several years and own a large amount of equity in their property "lets say $65,000". However the owners fall onto hard times and start falling behind on their mortgage and are at risk of being foreclosed on. No bank would buy back that equity in their home and give them a second mortgage because they already can't pay the first mortgage. So their only choices are to go through with the foreclosure in which case their credit score would be ruined and they would only see a small amount of that equity if any. Or try to sell the house before it gets foreclosed on in which case any logical buyer would only pay a price well below market value. This puts the owners in a tight spot.

What my company would do is we would step in and find a third party investor to buy the home. The previous owners would sign a contract agreeing to buy back the house within a set time period and they would agree to live in the home and take care of it until they buy it back. The investor would take out a second mortgage on the house to get the 65,000 in equity. My company will take 35% of that equity as a fee and use the rest to pay off the mortgage on the house until the previous owners buy back the house. We will use whatever remaining equity that is left to cover the down payment when the previous owners buy back the property. So the owners get to keep their house with zero or very little money down and I am able to make a $22,750 profit.

**andviv** · Aug 2nd, 2012, 04:30 PM

It is a GREAT idea. Wonderful concept.

And it is also illegal in many/most? states.

Due a lot of due diligence about the legalities of this strategy.

If you are really 21, you may not be aware of how crazy it was 5 or 6 years ago. Many people were doing similar things.

Some of them were not ethical or clear enough on what they were doing.

Some "poor little guys" were "robbed" from their houses cause they did not understand the legalities. Went to court. Sue the investor (in this case, you). Investor goes to jail. "Poor home owner" gets the house back.

So, again, check the legal aspect of this in your state.

Also, you don't get the equity until the owner buys back the property. If the owner fell behind then his/her credit got ruined. Good luck having them qualify and get a new mortgage to buy it back in a short period of time. These days banks want spotless credit history and higher downpayments. The owner, by having owned a property recently, wouldn't qualify for the FHA programs that are allowing a lot of people to get loans with 3% downpayment (first time home buyer programs, etc).

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I commend you for thinking this way. I am sure you will be very successful. You are finding solutions to current problems.

I hope you find a way to make this --or something even better-- work for your customers and investors, so you become rich while providing a great service.

Again, do not want to discourage you, so make sure you read about "anti-flipping" laws in the states you are planning to invest.

**Amschel** · Aug 2nd, 2012, 05:13 PM

I think basically this is great thinking!

But I see some "hurdles" that you should take away first.

First off, I don't believe this is illegal. In essence the owner becomes a renter because he chooses to do so. It's a creative solution.

If you tie this up with an option to buy it's called a lease option deal, if it's not an option but obligatory for the previous owner to buy back, it's called lease purchase.

The parties that should have no problems with the deal are the previous owners and the bank. The previous owners are off the bank's hook and their credit is saved. If the investor buys out the bank, the bank will be fine.

The hurdles are I guess in the incentives for the investors to go along with the deal. Does it add up for them?

First, your fee is way to high. 35 percent is ridiculous. Bring it back to somewhere between 3 and 10 percent, depending on the deal.

Second, you should do the math on the profit side for the investor. What is his Return on Investment, ROI? My estimation on such a deal is that most professional investors would want 10 percent or more. Make it attractive to them. Depending on the numbers, such as rent and the interest on the second mortgage, it's quite possible that some deals can't be structured into a win win situation.

All in all I think it's more a matter of fine tuning the concept. But on the whole, why not? Good thinking!

**socaldude** · Aug 2nd, 2012, 05:13 PM

Ok so let me get this straight. So the home owner would pay 35% of the outstanding balance as well as interest on the second mortgage taken out by a third party investor?

I think its a really bad idea IMO. And the concept is flawed. I don't think an investor will take on that amount of risk on someone who is already in default, no way.

I used to work for a foreclosure company and I know the business very well. You better make sure you are an attorney if you wish to go into this business because almost all foreclosure companies are owned by law firms who do bankruptcies and evictions. Let me tell you, you get sued like crazy every week with people claiming fraud etc.

A lot of these investors don't need a middle man. These big banks package up these mortgages and sell them to others investors. Once you are in default then you are foreclosed upon the investing bank gets a Trustees Deed Upon Sale from the county recorders office. And now its an unlawful detainer to evict the people in the home.

It's a HUGE risk for both the homeowner and the investor. The homeowner now has to pay for a second mortgage with prob a WAY higher interest rate(huge risk premium for investors!).

The idea sounds good but i think its flawed. I don't think investors will go that route. They just go straight to the banks not to a middle man.

It's flawed on so many levels both concept and legal wise.

I have never heard of a business that does this. And maybe there is a REASON why.

**julien515** · Aug 2nd, 2012, 08:53 PM

Thanks for all of the responses, I am arranging to meet with some real estate lawyers to discuss the legalities of my plan and to have some contracts put together.

**andviv** · Aug 7th, 2012, 08:43 PM

Originally Posted by julien515

I am arranging to meet with some real estate lawyers to discuss the legalities of my plan and to have some contracts put together.

Please do keep us posted. I would love to hear what's going on with this these days...

Best of luck!

**miked_d** · Aug 7th, 2012, 08:57 PM

Originally Posted by julien515

Thanks for all of the responses, I am arranging to meet with some real estate lawyers to discuss the legalities of my plan and to have some contracts put together.

Talk to Realtors. They will have a good idea.

I've done work for a company that buys foreclosures on the courthouse steps. They have legal hassles all the time. Many houses need evictions served. They don't put the company name on the office door.