Cash Only Foreclosure

[susanb]

So, a business partner is trying to talk DH and I into buying a cash only foreclosure for them and then selling it to them with a land contract/owner will carry.

My response to this is hell no, for a variety of reasons.

One is that I am under the impression that banks only ask for cash only if they know a loan will not be approved due to a problem with the house/appraisal, such as a huge amount of repairs needed.

DH thinks that there are other reasons banks might ask for cash only on a foreclosure.  He knows more about this, but can't give any other reasons. 

What say you?  What are the reasons that a bank would sell a foreclosure as cash only?

[kittensaver]

Of the cash-only forclosures I've seen (3 in our wider neighborhood since the crash of 2008), they were not eligible for bank loans because they were not habitable by bank lending standards (one had no kitchen - it was ripped out; another had missing walls and floors because the DIY rehabber ran out of money; stuff like that). Banks here will only lend on "habitable" properties. I don't know of any other reasons, but I'm sure they probably exist. 

[haapai]

Perhaps there is a cloud on the title. 

[haapai]

There may be some other oddball situations where the house has what any lay person would call a major defect but still meets standards of habitability. 

Examples would be

• a huge special assessment that will come due soon, or expected to pass.
  
• the house is likely to be claimed under imminent domain causing the buyer to lose any repairs plus loan costs
  
• the previous owner is in prison on meth-cooking charges but municipal authorities are looking the other way and nobody has gotten their act together to clean up the property
• The neighbors deal.  All four adjoining neighbors deal. 
  
• The guy who defaulted on the loan lives next door with his parents. 
  

In each of these cases, the bank might not have a legal obligation to disclose anything but still doesn't want to take their chances with anything other than cash on the barrelhead. 

[Tiny]

One is that I am under the impression that banks only ask for cash only if they know a loan will not be approved due to a problem with the house/appraisal, such as a huge amount of repairs needed.

In my area, the foreclosures with alot of work come with a way to apply for rehab loans (Fanny Mae and Freddie Mac listings usually mention the rehab loans).  Also, if you are looking at houses in bad shape there are financial institutions that will lend you the money to buy it and fix it up.  There are hoops to jump thru though.  In my area you need a loan officer who knows their way around the various programs/loans available for low end houses.    

Is the asking price for the foreclosure some low amount of $$?  I suspect the 30K and under houses/condos, while not specifically being sold as cash only, probably are sold for cash.   I can't imagine banks are eager to make a 30 year 26K loan on a 'move in condition' condo  OR on a house that's only a shell (needs a kitchen, bathroom, roof, furance, A/C, etc). 

Are you sure it's a 'Cash Only' sale and not an "As Is" sale?
 

[susanb]

Thanks for the responses. 

Tiny, yes, it am sure it is a cash only sale.  The price is 140k.

[Opti]

susanb, I haven't heard of cash only foreclosures before. I will say when I hear cash only referring to buying a house I think of builders and tear-downs.


Without further info from the seller I'd go with your gut and assume this is not a property you want to rehab. Good luck with the business partner (and DH ).

[susanb]

Thanks, Optimist.  DH will accept my hell no (we each have veto power over financial decisions).  However, I made the mistake of being openly hostile (no yelling, just super skeptical and annoyed) towards this idea and DH told me that I wasn't being open to other possibilities/reasons for the cash only status. 

He was right, so I thought I would ask around. 

As far as the business partner, he owns a small percentage of our primary business.  He is a great asset because of his sales skills, which have also taught him not to take no personally.     

[midjd]

The land contract with a business associate would be what would send me screaming

Haapai's list is great. The only cash-only sales I've seen are uninhabitable property or clouded title... there may be some oddball reason out there that isn't so bad, but it would have to be the exception to the rule.

[susanb]

Mar 13, 2013 21:33:10 GMT -5 midjd said:

The land contract with a business associate would be what would send me screaming

Right?

I decided to focus on the cash only part with DH because that is objective.

Doing a land contract with a business partner is just bad judgement, and trying to convince someone their judgement is bad never seems to work.  DH knows 100x more about business than I do, but sometimes his common sense is off. 

[Deleted]

Mar 13, 2013 21:33:10 GMT -5 midjd said:

The land contract with a business associate would be what would send me screaming

Haapai's list is great. The only cash-only sales I've seen are uninhabitable property or clouded title... there may be some oddball reason out there that isn't so bad, but it would have to be the exception to the rule.

even if you were doing cash only, wouldn't you still have a title search done and buy title insurance?

[tskeeter]

susanb, I wonder if you are focusing on the wrong facet of this deal.  As I understand it, your business partner wants you to buy a piece of property and turn around and sell it to him.  Why does your partner want to use your money/credit to fund the purchase and not his own?  I'm betting it's because he doesn't have the money to do this on his own.  If he doesn't have the money to fund the purchase, what makes you think that he'll be able to make the payments on the property?  Especially if he will have to put a substantial amount of money into renovations before the property can generate any cash flow.

However, that doesn't mean that you shouldn't try to find a way to make the deal work, if it is really a good deal.  The first step would be to figure out why it's a cash only deal.  The answer might be a simple as visiting the property and taking a look at it, then having a conversation with the seller about why it's cash only.  The second part is to figure out how to minimize any risk associated with the deal.  Something like being in control of the deal yourself.  But doing it in a fashion that you don't "steal" the deal from your partner.  Maybe something like controlling the deal, but having the partner participate in the profits as compensation for finding the deal and helping make it into a profitable venture. 

[swamp]

The only cash-only sales I've seen are uninhabitable property or clouded title... there may be some oddball reason out there that isn't so bad, but it would have to be the exception to the rule.

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[kent]

Why does your partner want to use your money/credit to fund the purchase and not his own? I'm betting it's because he doesn't have the money to do this on his own. If he doesn't have the money to fund the purchase, what makes you think that he'll be able to make the payments on the property? Especially if he will have to put a substantial amount of money into renovations before the property can generate any cash flow.

My thoughts exactly - what could possibly go wrong? 

[bean29]

Susanab,

My husband was aksed by a friend to do essentially the same thing except we know the property his friends formerly owned it and they are in good shape.  I think  Paul offeres low on forclosures and offeres cash as a way to get them to close?  I thought cash was a common form of payment on forclosures?

DH offered lower than asking and he is paying cash if they accept his offer - I am not sure if it was required.  It has been so long since he offered he no longer expects his deal to close.

DH has another friend/buisness aquaintance that was heavily into selling property on land contracts.  This guy is very wealthy and he has done well with this buisiness model.  I would expect that your partner can not do this deal on his own - that does not mean there is not a profit to be made.  You might want to do the deal but with terms more favorable to you as you are carrying more of the risk. 

If the property is solid and priced right - if he defaults on the land contract you get your asset back - as long as he does not destroy it, you just re-sell or re-rent it.

[midjd]

My husband was aksed by a friend to do essentially the same thing except we know the property his friends formerly owned it and they are in good shape. I think Paul offeres low on forclosures and offeres cash as a way to get them to close? I thought cash was a common form of payment on forclosures?

Offering cash is fine - since many banks won't lend on small amounts, it can be much easier to go that route for cheap houses like the ones Paul buys.

But when the home is advertised as "cash only," that's a little different. That means that, for whatever reason, obtaining financing will be difficult/impossible, which should be a huge red flag.  It doesn't mean no one should ever buy cash-only - for example, if it's a habitability issue and you're planning to tear the house down anyway, it could be a good decision.

DH's uncle is buying a house for cash right now - it has about 2' of standing water in the basement and some tremendous mold problems, but he's only interested in the hunting land included, so he doesn't care.

But even if there is profit to be made in this deal, I think commingling land contracts (which are messy enough in themselves) with business relationships are a recipe for disaster... unless maybe your business is in real estate.

[Tiny]

Mar 13, 2013 20:50:57 GMT -5 susanb said:

Thanks for the responses. 

Tiny, yes, it am sure it is a cash only sale.  The price is 140k.

Wow!  140K is alot of cash!   (or a really big line of credit)

Just cause they are asking 140K doesn't mean that's what they'd settle for.   From a 'speculators' point of view - I'd look at the property and maybe do whatever on-line searches/freedom of information act kinda stuff I could do to see what potential pit falls are involved with the property...   My starting offer wouldn't be 140K even if I thought this was something I would want to buy...

You could yank your DH's chain that sure he can attempt to buy the property - but he can only offer $10K for it - cause that's the 'budget' for this endeavor.          

[Deleted]

Is it a foreclosure sale or a bank owned property sale?

Foreclosures here are always all cash sales, on the courthouse steps so to speak.

If it is bank owned cash only, then there is a title or CO problem like it is a known a meth house and needs total rehab to be livable.  Ask your spiffy sales friend to show you the title search report and see what it says.  If he hasn't paid for a title search, then he's not actually serious about the property, just wants someone to make it easy for him.