Options at the height of the market?

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  • I figure I’d throw this out to the group. There is a seller who has two mortgages on a property and is being foreclosed on the 2nd which is for $50K.

    The first is a terrible ARM with a value of $140K at 8% and a clause that gives lender the right to hike it to 15%.

    ARV for properties in the area is $250K +/-.

    I have not seen the property yet but I’m assuming it will need some work to get it in a ready to sell condition which tells me the owners have very little real equity.

    The sellers are looking for a “loan” of $50K to pay off the 2nd and then move to a neighboring state in 3-5 years. Since it looks like they never made a payment on the 2nd, I won’t make the loan but did see a possible option opportunity.

    Problem:

    I thought there might be a possible option deal here by paying off the second but my concern is how do you set the option price being that we are in a red-hot real estate market. I could see prices collapsing in this area.

    Anyone have suggestions on how this deal could work other than selling it right now?

    Jeff,

    Depending on how aggressive you want to be, I’d look into buying the second at a discount and having a conversation with the current owner. This gives you leverage.

    If you could get the second for about $20k, you’d owe $140k on a house worth approx. $250k and it may need some work to put back on the market if the current owner is not willing to give you a deed in lieu or ??

    When you own the second (at a discount) you could have your own “short-sale”.
    And in a hot market, it would sell quickly.

    You’d get the difference between the amount owed on the second ($50k) and what you paid for it.
    The owner would get the equity above the loans.

    Don’t have $20k on you, I do.
    Or someone else close to you.

    You don’t want to make a loan to a homeowner who’s shown they don’t make their payments. You don’t want to make loans to homeowners anyway, its a trap. Ask me how I know.

    You could even split the deal with the current owner.

    Depending on the rehab costs, you have a nice deal here.

    Deal math:
    ARV: $250k
    Equity: Currently $250k – $140k -$50k = $60k
    Possible equity after restructure: $250k – $140k = $110k after buying the second for $20k.

    Owning a second mortgage with lots of equity above you gives you lots of options.

    Hope this helps,

    Mike

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