Creating real estate investing/financing

[IPAfan]

So I know several of you invest in real estate as well as the stock market. Up to this point I have no investment in real estate, and still haven't even bought a house. (I'd like to do this sometime in the next 3 years, but I'm not in a huge rush.)

I'm short on money, and most of that is devoted to stocks and running my business. However, I might be interested in making some leveraged real estate investments if I were able to come up with a good way to do it.

One idea has occurred to me in particular. I think it would be possible to find plenty of distressed homeowners in my market. Some of these have a small amount of equity in their homes. I believe that I could do a land purchase agreement where I'd get a quitclaim to the seller's house subject to the deed of trust.

Practically all deeds of trust have "Due on Sale" clauses which allow the loan companies to call the loan upon sale. However, I believe that these clauses are rarely if at all being enforced in this environment so long as the payments are current. Banks honestly have a lot more to worry about than person X making person Y's mortgage payment.

On the right terms this would give me a way to make a small leveraged investment in real estate, control the deed and management of the property, and have no recourse on the debt.

The reason I'm really interested in this is the idea that I might have a few potential clients with low- mid 5 figures in home equity, but no jobs or cashflow. I might be able to have these people hire me by quitclaiming their real estate to me. I could create terms such that people would quitclaim their property to me, but then lease it back from me at the cost of PITI + $50-$100, and then I could give them a 1-3 year non-assignable call option on the property at current FMV.

If I could do this I could take legal cases for a non-recourse leveraged slice of real estate equity. If the clients exercised the call option I'd try to make 50-100% more than my typical legal fee (because of the risk involved, but still around avg. fee for the market.) If real estate improves but the client isn't able to exercise the call option, then it expires worthless and I try to realize the value of the equity (this could be the most lucrative possibility), or the real estate value drops and I'm out the value of my legal work.

This is pretty convoluted, but trying to come up with ways to make a healthy economic profit on my work while perhaps sacrificing the liquidity and risk free nature of cash payment.

[lovetobike]

Hey Beerfan! Long time to see. I'm glad you found us! -- lovetobike (formerly drmdrd)

[Deleted]

Practically all deeds of trust have "Due on Sale" clauses which allow the loan companies to call the loan upon sale. However, I believe that these clauses are rarely if at all being enforced in this environment so long as the payments are current.
I'm not into real estate investing & at this time I don't want to be BUT: One thing that I have learned in my life is when you lose control of something you can get screwed. In your example you say the banks rarely if at all are being enforced. Rarely means that they "Can" pull the rug out from under you. I never let myself get into the situation where someone else has control, but that's just me.

[IPAfan]

Agreed that there's a risk OldTex, the question is whether the risk is priced attractively enough to take it.

In my hypo, if the bank were to foreclose there would be a big risk that the bank could sell the property for less than the fair value, and the equity could get wiped out (or greatly diminished.)

OTOH it would be possible to prevent that risk by buying the house myself at foreclosure auction. I might be able to afford it with the house I'm looking at.

[bimetalaupt]

Beerfan
,
You can hedge your real estate investing delay with REIT,s.. If RE does well so will the REIT.. On the other hand you might see better deals if and when interest raises.. Like in Aug 2011
Just a thought,
Bruce

[Deleted]

Is your credit good? One other option is to formally assume an existing loan.

I can't imagine why someone would allow someone to take over title to their property and payments of their loan unless they were going to let it go into foreclosure anyway. Way too much risk that you would make late or no payments with no recourse to you. They would be far better off doing a short sale and renting elsewhere.

[2kids10horses]

Let me get this straight... you're a lawyer, and you want to intentionally try to beat the "due on sale" clause! LOL!!!

Ok, let's talk about this... I have done pretty much what you suggest. I once bought a house using a "Contract for Deed". Here in GA, the typical transaction is the Seller gives a Warranty Deed to be Buyer at closing. So, the Buyer owns it immediately. He then signs a "Security Deed" in favor of the Bank loaning the money. If he doesn't pay, the Bank has power of authority to foreclose, and auction the property on the courthouse steps.

Now, you can buy property with a Contract for Deed. In that case, the Deed isn't given to the Buyer until the Buyer has made all the payments. So, until the time has come that the Buyer has made all the payments called for in the contract, the seller still owns the property. Assuming the Seller has title, and if there is a Security Deed, has made all his payments, the Buyer can get good title at the end of the Contract. So, in effect, this can defeat the due on sale clause to the extent the new "Buyer" can get control of the property while it is still technically owned by the Seller.

The risk is the Seller needs to keep making his payments on the first mortgage. Also, other creditors can place liens on the property. The Buyer ought to record the contract to cloud the title so that the seller can't turn around and sell the property to someone else.

Now, all that said, I was able to purchase property in GA using a Contract for Deed. I made the first mortgage payment for the Seller and mailed a copy of it to the Seller each month. I paid off the contract after about 3 years and took conventional title. It worked, but it was a pain.

The problem you are facing, beerfan, is that people owe more than their houses are worth. So, it doesn't make much sense to take over anyone else's mortgage when the mortgage exceeds the value of the house!

On the other hand, banks are giving away houses to qualified buyers. If you can find a way to get financing prearranged, there are screaming deals available.

Oh...

one more way to "beat the due on sale clause": Have the Seller put the property into a land trust for "estate planning purposes". Have you set up to be the trustee. (And beneficiary.) Name the trust something using the Seller's name. It's best to get 'Permission' from the bank prior to doing this because when the Seller retitles the deed from his name into the trust, that DOES trigger the due on sale since it's retitled. But, hopefully, the bank won't care. Record the Deed in the name of the trust. Don't record the actual trust that shows you are the beneficiary unless you have to.

[lovetobike]

it really seems like it would be easier to buy a home that was going into foreclosure. Or you could do what I did, found an owner listing it on Craigslist and negotiated to the terms that made DH and I happy. As early as you are in your career, perhaps you should just get a house to live in and not worry about it being an investment. "Invest" in your career and stocks. Perhaps down the road you can get into the LL arena for RE investment but I wouldn't advice it at this point in your life.

[yclept]

I tend to agree that you would be better served to buy a house to live in, but then I've been saying that for probably about a year. If I were you, I'd stretch a bit to get a nice house that will suit your needs for say the next ten years. I don't see this confluence of low interest rates and fire-sale housing prices ever happening again in your lifetime -- certainly not in mine.
But interest rates seem headed back up, and the oversupply of houses will disappear faster than any of us now imagine possible. It only took a couple of years for the whole thing to melt down; I doubt it will take much longer than that to melt back up. At least if you buy a good starter house now, you will have that portion of your assets appreciating at the same rate as the rest of the housing market. Later, if you want something bigger and better, the house you buy now will still be worth the same relative value to the grander house as it is now. The equity you build through payments and appreciation will make the down payment for the better house later.
If I understand you correctly, you are looking at this as a way for clients to pay legal bills they incur who would not otherwise be able to afford your service. I guess that makes some sense if you have time to deal with such clients, but overall I think it would be better to deal with clients that can pay their bill without resorting to small amounts of equity they have in their houses. Seems to me that all sorts legal of troubles could spin out of this if they don't like the deal a few years down the line, regardless of how grateful they may seem now. For example, say the client(s) die(s) and heirs posit that "the lawyer" (you) "screwed" their parents out of what should have been their inheritance -- probably groundless, but who has time for such misery?

[danshirley]

I agree with Yclept: the best RE investment is the one you can live in. The next best is one you can rent to someone else to live in (presuming you have the wherewith-all to manage that).
Over and above that if you want to invest in RE with the view that RE will stage a come-back there are plenty of ways to invest via REIT's . e.g. Vanguard has a REIT ETF: VNQ that should track the RE market pretty well. AND it pays a dividend and has options.
finance.yahoo.com/q?s=VNQ
finance.yahoo.com/q/pr?s=VNQ+Profile
finance.yahoo.com/q/hl?s=VNQ+Holdings

[IPAfan]

BTW I don't have time to do a lengthy response. I'm not trying to BEAT a due on sale clause, the point about the due on sale clause is that it gives the lender the option to call the loan in. In this real estate environment that's not happening.

[phil5185]

the point about the due on sale clause is that it gives the lender the option to call the loan in. In this real estate environment that's not happening.

Say I'm a lender & I loaned you $200k to buy a house and the house is now worth only $150k. When I learn that you had transfered the deed to a third party, that would give me the right to 'call' the loan - and I would enforce my 'due on sale' clause in a new york minute. That gives me the opening to get a $200k judgment from you - rather than settle for a $150k short sale - plus I don't have to take the house back & mess with trying to sell it

[IPAfan]

phil,

Couple points.

I'm looking at a property worth about $75,000 (according to a recent appraisal) and the note is for $55,000. Second, if I take the house subject to the deed of trust, the note holder can't get a judgment against me. All they can do is demand the $55,000 or foreclose the house.

If they foreclose it and sell it for over $55,000 at auction then I'd be entitled to any proceeds above and beyond.

The more I think about this idea it seems like a big hassle, on the other hand if I can actually realize $20,000 in a reasonable amount of time in exchange for legal work then it's a good deal for me.

[2kids10horses]

beerfan,

If the bank forecloses on the property, even though it might appraise for $75,000, they might only get a bid for $30,000. They probably won't get a bid at the courthouse steps at all. So, it would go back into their REO holdings, then they'd list it with a Real Estate agent, who would list it for $75,000 or maybe even less.

Investors like myself would only offer $30 to $40K for it. At most.

The technique of buying properties "subject to" the existing financing worked when properties were rising in value. I don't think it works well in today's environment.

[IPAfan]

2kids

Thanks for the advice. This really isn't an idea that would normally appeal to me, and I was probably just grasping for straws to find a way to make some profit on this case. I'll continue to look into more attractive alternatives. I may just pass on this client, but if I can find a way to make $15k+ even if I have to wait 1-2 years I'll definitely consider it.

[2kids10horses]

beer,

If your goal is to get a paying client for your legal practice, couldn't you just do the work, and have him sign a promissory note in your favor? And, couldn't you ask that he pledge his house as collateral? Sure, it would be a second, but if he has any equity in it, he would have some motivation to pay you.

I sometimes sell my houses to people and take back a mortgage. It's called "Owner financing". In your case, you would have a second mortgage. If he sells the house, you would get paid off. If he gets foreclosed on his first, well, then you would get the chance to buy the house by paying off the first mortgage. Sometimes, the first lienholder will allow you, the second lienholder to assume the original note. In this case the bank holding the first mortgage would see you as a fellow lender, and may make it easier for you to take over the first note. If, however, the bank goes ahead and forecloses, then you're screwed.

Just a thought.