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DW has been running our real estate rentals -- but not so well.

(1) In one case, a tenant consistently paid the rent "in part" -- so that he ended up with a considerable amount due, and DW was unable to make several recent mortgage payments. Eventually, the house went into forclosure and was auctioned off by the county. She herself located a buyer for this house, but was unable to close the deal before the foreclosure. So that buyer outbid everyone at the auction and it was arranged that he would buy the house at the price that he and DW agreed upon, (which was his bid price). OK. So as I understand it, the county will give possession of the property to the buyer. DW says she will still get a large chunck of that money, after the bank recovers what it is due and the county imposes some charges for the time it held the property, etc. Anyway, this is what I understand from what she is saying. Does this make sense?

A footnote to this scenario: she tells me that the original tenant (who was paying the rent "in part") will be evicted by the buyer, but will be under some kind of repayment plan to her ("since he's basically an honest guy.") This seems pretty incredible to me, as I see no reason for him not to just disappear to another city.

(2) in this scenario, DW wishes to save a certain property from foreclosure, and has located a buyer who will buy it at a fraction of its cost, wth an agreement to sell it back (at a slightly higher price) in six months (by which time she believes she will be better able to handle the mortgage payments). She wants to get it back because the people who are in there now want to buy the property in a year or so; she'd really like to sell it to those people right now, but they can't pay now.... So that's scenario #2. Does that make sense?

Are there some serious red flags in these scenarios? To me it all looks stange, but she insists she knows what she's doing.

culcha
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To me it all looks stange, but she insists she knows what she's doing.

Looks strange to me too. Sorry I don't have more time to improve the productive nature of my post, but will leave you with the question of what knowledgeable landlord has a property go to foreclosure and another at risk?

At the very least, a close sanity check on the way business is being conducted is required before continuing the insanity.

Best of luck.

IP
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...what knowledgeable landlord has a property go to foreclosure and another at risk?

At the very least, a close sanity check on the way business is being conducted is required before continuing the insanity.


This is supposed to be the new, improved, sane DW!

It was much worse before. Now, having done a very extensive amount of damage, she's supposed to be turning the corner and getting back on track.

Actually, the foreclosure -- which was a side-effect of the extensive amount of damage -- may be partially responsible for the current improved(?) situation.

culcha
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This is supposed to be the new, improved, sane DW!

It was much worse before. Now, having done a very extensive amount of damage, she's supposed to be turning the corner and getting back on track.


I'm not even sure how to respond to that. Seems to me that unless this outflow of capital is of zero concern to you, you need to work on being a less silent partner. At a minimum, I would ask why she thinks that things will be different this time, and to show you a spread sheet with the detailed 10 year profit projection. You can offer her this one if she doesn't already have one:

http://www.mortgage-investments.com/resources/spreadsheet-do...

Third download on the list.

Even with a good track record I INSIST on covering this info with DH and getting his buy in. Plus it's a good way to keep track of how accurate your assumptions are, and helps you tweak them going forward for better accuracy.

Best of luck,

IP
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Seems to me that unless this outflow of capital is of zero concern to you, you need to work on being a less silent partner. At a minimum, I would ask why she thinks that things will be different this time, and to show you a spread sheet with the detailed 10 year profit projection. You can offer her this one if she doesn't already have one ...

Thanks.

The spreadsheets look very interesting and very useful -- but I don't think she has ever used used spreadsheets (or would ever use them). (And I certainly don't think she would accept them from me. I suppose she would say for me to get busy and get a promotion at work instead of messing with this stuff ...)

As for the outflow of capital, I think that has mostly already happened. The train has left the station on that one, and it was traveling at a high rate of speed.

My idea is to get her to stop with the real estate completely. I think she should grow veggies and herbs in the backyard.

I am indeed trying to be less of a silent partner (and I think you are absolutely correct on that point) ... but she generally resists on the grounds that I am trying to "control" her (and that all I'm really doing anyway is trying to avoid going after that promotion.)

culcha
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The spreadsheets look very interesting and very useful -- but I don't think she has ever used used spreadsheets (or would ever use them). (And I certainly don't think she would accept them from me. I suppose she would say for me to get busy and get a promotion at work instead of messing with this stuff ...)

GAME OVER!

No spreadsheet no business.

Would you higher a businesses manager if during the interview the said. "I don't do spreadsheets, everything is by intuition."?

If you were my CEO and she was the COO that you employed, you would be "Pursuing other interests."

Cheers
Qazulight (This is why I do not manage my own properties, I couldn't get through the interview with myself)
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Hi Culcha,

(1) DW says she will still get a large chunck of that money, after the bank recovers what it is due and the county imposes some charges for the time it held the property, etc. Anyway, this is what I understand from what she is saying. Does this make sense?

Sure... if the auction sale was really for sufficiently more than the existing liens, foreclosure costs and legal fees. But if that were the case, the bank would have invariably delayed the auction so that the transaction could have settled without so many costs.

Thus, yes... it makes sense... but is extremely unlikely.

(2) in this scenario, DW wishes to save a certain property from foreclosure, and has located a buyer who will buy it at a fraction of its cost, wth an agreement to sell it back (at a slightly higher price) in six months (by which time she believes she will be better able to handle the mortgage payments). She wants to get it back because the people who are in there now want to buy the property in a year or so; she'd really like to sell it to those people right now, but they can't pay now.... So that's scenario #2. Does that make sense?

You've identified three players in this para... DW, buyer, the people in there now... and then ambiguously referred to "she" and "her" in a circular fashion such that I can't make heads nor tails of the question. Sorry.

In any case, buying on a lease/purchase deal leaving the tenant or prior owner with a promise to re-sell at a future higher price is considered "predatory" and illegal... *UNLESS* you are the government... then it's A-OK.

Luck!
Dave Donhoff
Leverage Planner
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1.) You are kidding yourself, after fee's and costs you are not going to see anything from the foreclosure. Know how I know, because if you were the property never would have went to foreclosure in the first place. Some hard money lender, buyer would have stepped in and helped you solve your problem.

2.) People wanting to buy a house in a year which they can't afford now most likely means they will not be able to afford it then either. Plus there's so many if's in between (including illegal actions not being notice) that this just isn't going to end well.

She has no idea what she is doing and is either in denial, covering up or both. Having two properties in foreclosure without saying I F'd up, this is how and this is what I will do different means you are clueless, in a hole and furiously digging deeper.
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<<(1) DW says she will still get a large chunck of that money, after the bank recovers what it is due and the county imposes some charges for the time it held the property, etc. Anyway, this is what I understand from what she is saying. Does this make sense?>>

Sure... if the auction sale was really for sufficiently more than the existing liens, foreclosure costs and legal fees. But if that were the case, the bank would have invariably delayed the auction so that the transaction could have settled without so many costs.

Thus, yes... it makes sense... but is extremely unlikely.


The auction sale was at a price that DW negotiated with the guy and the bank (who had a rep at the auction) before the auction actually took place. She said she couldn't get them to hold off on the foreclosure so that she could close on the deal in time.

It all sounded strange to me, but she said that this is the way it must be done (by law) and that we should get something back later in the week.

<<(2) in this scenario, DW wishes to save a certain property from foreclosure, and has located a buyer who will buy it at a fraction of its cost, wth an agreement to sell it back (at a slightly higher price) in six months (by which time she believes she will be better able to handle the mortgage payments). She wants to get it back because the people who are in there now want to buy the property in a year or so; she'd really like to sell it to those people right now, but they can't pay now.... So that's scenario #2. Does that make sense?>>

You've identified three players in this para... DW, buyer, the people in there now... and then ambiguously referred to "she" and "her" in a circular fashion such that I can't make heads nor tails of the question. Sorry.

Sorry. "She" always refers to DW. She's trying to save this property from foreclosure and sold it to a buyer, putting an option in an appendix to the contract; the option is to buy the property back within six months at a pre-determined price. She figures that she will have the cash then. So, it seems to me to be like a costly loan. But I think the last foreclosure gave her a scare.

But are you saying this whole thing is illegal? (Then I wonder why the lawyer didn't say anything about that --??)

culcha
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1.) You are kidding yourself, after fee's and costs you are not going to see anything from the foreclosure. Know how I know, because if you were the property never would have went to foreclosure in the first place. Some hard money lender, buyer would have stepped in and helped you solve your problem.

Gosh, I hope something comes of this. I think DW is trying to save some face now, after losing lots of money earlier (--not in RE).

This person who bought at the auction did so at a price that he and she agreed upon beforehand. According to her, the foreclosure proceedings were just too far advanced to get her sale in (in time).

2.) People wanting to buy a house in a year which they can't afford now most likely means they will not be able to afford it then either. Plus there's so many if's in between (including illegal actions not being notice) that this just isn't going to end well.

They may never actually buy it, that's true. --But what's the illegal stuff you're alluding to? I didn't see that anything illegal was going on -- neither did the lawyer -- but I was concerned about the legal validity of the "option" she mentioned. It's an appendix to the contract though. (I was thinking that an an "option" as something that you may or may not do, but she describes it as something that the buyer MUST NOT VIOLATE. So he couldn't just go sell the property to someone else.)

culcha
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Hi Culcha,

She's trying to save this property from foreclosure and sold it to a buyer, putting an option in an appendix to the contract; the option is to buy the property back within six months at a pre-determined price. She figures that she will have the cash then. So, it seems to me to be like a costly loan. But I think the last foreclosure gave her a scare.

As it seems to you (a costly loan) is *EXACTLY* how the courts have deemed it to be... and if we are talking about a residential property (1-4 units per tax parcel,) then there are predatory lending limits to the total costs of a loan... I suppose its *possible* the deal could be structured to stay under those cost caps, but they are so crazily-low, I very much doubt it.

FWIW... if she's the seller-rebuyer, *she* is the one the law ostensibly identifies as the prey, and regularly breaks such contracts such that ownership defers back to the original seller (your DW in this case) without interim cost nor penalty (since the 'predator' (who you wife currently is relying on for bailing her out) has breached commercial 'fair play.' (Are you confused yet? Yeah... it really doesn't make a lot of sense ;~)

But are you saying this whole thing is illegal? (Then I wonder why the lawyer didn't say anything about that --??)

The law is a *HUGE* playing field with lots of moving boundaries... and a 'general practitioner' or a lawyer that simply specializes in things *OTHER THAN* residential investment real estate laws, can easily miss the subtleties.

Luck,
Dave Donhoff
Leverage Planner
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I was thinking that an an "option" as something that you may or may not do, but she describes it as something that the buyer MUST NOT VIOLATE.
An option is something that you may or may not do.
In this case, the "you" is culcha/culcha's DW.

I'm going to try to write this without any pronouns to make it clear as I can - I'll call the buyer "Bob".

culcha has the option to purchase property X at Y price by Z date.
Bob, who agreed to that option has agreed that culcha has that option that culcha may (or may not) exercise. Bob can't sell the property because culcha has that option.

This is very similar to options on stock - ex. you sell the option to someone to buy X stock at Y price by Z date. If they exercise the option, you need to have the stock to deliver to them.
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FWIW... if she's the seller-rebuyer, *she* is the one the law ostensibly identifies as the prey, and regularly breaks such contracts such that ownership defers back to the original seller (your DW in this case) without interim cost nor penalty (since the 'predator' (who you wife currently is relying on for bailing her out) has breached commercial 'fair play.' (Are you confused yet? Yeah... it really doesn't make a lot of sense ;~)

Yes, I am confused. If she's the prey -- the victim let's say -- I don't see how the law comes after the victims. And I also don't get the part about regularly breaking such contracts. In fact, I don't see how she can break it at all: either she exercises that option within the six months, and buys the property back, or she doesn't, in which case the other guy -- the buyer, the predator -- gets a really good deal on the property.

I suppose I should read up on commercial fair play. (So far, it sounds like the idea that it's not fair that she should need money this badly. But there must be something else involved ... )

culcha
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In fact, I don't see how she can break it at all: either she exercises that option within the six months, and buys the property back, or she doesn't,
I'll call the "buyer" Bob again.

Door #3 (from what I understand of Dave's post): DW sues, gets the property back, and only has to pay the amount gotten from Bob plus some very small amount of interest on the money she effectively borrowed. (Or maybe DW doesn't even have to pay that much because Bob was a predator, and losing money is part of the punishment for Bob. Dave or someone else might be able to clarify that part)

Unless Bob is making 100% on his money in 6 months, I probably wouldn't sue. But I hate dealing with lawyers that I'm willing to give up a little money if I can avoid dealing with them.
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Hi Culcha,

Sorry, my turn to be unclear (and if you regularly read my stuff, I am apparently far from immune ;~)

foo1bar had it pretty much right. The law wouldn't be coming after your wife in this case (assuming she doesn't cross the line in committing fraud along the way, for example.)

The investor/buyer is pretty much legally pre-condemned as being in-the-wrong, and all of his/her transactional profits would be deemed to be annualized interest revenues, subject to overwhelmingly tight lending laws. Because of this, if the transaction were to occur as you suggested, your wife could very likely have the entire transaction wiped out in full, after the fact (and after time, during which she ostensibly has financially recovered her footing and could afford to carrry on as the owner/operator.)

I am not recommending this con game though. In my experience, trying to game the legal system to prey on predators (especially when who the law deems as predators may actually be fair-trading 'saviors' who are simply ignorant of the legal situation) comes back to bite the original/actual predator...

Dave Donhoff
Leverage Planner
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DW sues, gets the property back, and only has to pay the amount gotten from Bob plus some very small amount of interest on the money she effectively borrowed. (Or maybe DW doesn't even have to pay that much because Bob was a predator, and losing money is part of the punishment for Bob.

I guess I just don't get the "sues" part. As long as he doesn't try to sell the property to a third party, what might be the grounds for suing him?

And when you use the word "punishment," do you mean some legal punishment, or something else? The only thing that I can think of is that "punishment" is being used metaphorically (like a punishing hurricane, or the punishment coming from some tornados). Maybe, in this case, you mean something like "the cost of doing business." The guy buys up lots of properties, let's say, and sometimes, the person who sells them to him actually comes back and exercises the option to buy. So he is "punished" in the sense that he lost out on keeping the property after the option would have expired.

But maybe I'm still missing something.

culcha
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I guess I just don't get the "sues" part. As long as he doesn't try to sell the property to a third party, what might be the grounds for suing him?
The grounds are that he is making a loan at an interest rate that's too high.

There are 2 ways to view this transaction between Bob and culcha.

1> It's a purchase by Bob of the property and Bob selling an option to culcha that culcha can exercise and repurchase the property within 6 months. (Let's say Bob purchases it for $10K, and sells the option to culcha that culcha can repurchase at $14K within 6 months)

2> It's a loan by Bob to culcha. Bob lends culcha $10K, and culcha has to repay $14K within 6 months to get clear title to the property again (A ~80% annualized interest rate)

The courts view it as #2. And if culcha sues, the courts will say "Thou shalt not charge 80% interest rates. Bob was a very bad boy, and Bob doesn't get $14K - Bob gets $10.1K from culcha, and culcha gets the property"

Numbers above are obviously made up - just used to provide an example that hopefully makes it more understandable.
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foo1bar had it pretty much right. The law wouldn't be coming after your wife in this case (assuming she doesn't cross the line in committing fraud along the way, for example.)

OK. The law wouldn't be coming after DW. That makes sense.

But I still don't see how it is that she might draw the law's attention by committing fraud. After she sells this property, she's pretty much out of the picture (that is, except for the possible exercise of the option to buy). Who would she be defrauding?

...if the transaction were to occur as you suggested, your wife could very likely have the entire transaction wiped out in full, after the fact (and after time, during which she ostensibly has financially recovered her footing and could afford to carrry on as the owner/operator.)

Wow. This seems really odd. Presumably, she first sold the property, took a big tax loss, and then bought it back, and starts depreciating it with a different cost basis. Meanwhile "Bob" (or whoever] is responsible for any mortgage payments, etc. --But you're saying that this could all be wiped out -- so that then she becomes retroactively responsible for mortgage payments, and doesn't get that tax loss? If Bob had been making mortgage payments, then he gets them all back? Maybe he got some new tenants in there and had them sign a lease ... this is all wiped out? Semms strange to imagine the reality of all the ramifications.

culcha
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Hi Culcha,

In case number 1 I still say do not hold your breath on getting any money back. Yes, if there is more money received at auction than all debt and fee's owed plus expenses, in most area's I am familiar with, the people foreclosed on get it back. However, in practice I am not aware of a situation where there was any money left over. You see a foreclosure typically happens because you owe more than the house is worth, aka being underwater. If you didn't, some hard money lender or quick purchase pro would come in and make an offer, thereby preventing it from going into foreclosure. The fact that that didn't happen tells me you probably owe more than the property is worth. Since a property at auction typically sells for less than current fair market value (do to risks and unknowns for the buyer) and the house was underwater before the auction and there are additional fee's and penalties that have to get paid, their is typically no money left over for the people who got foreclosed upon.

In case #2 I think you need to put some specific example numbers behind it. You don't have to use the real numbers but they need to be correct in relation to one another (for instance get the real numbers and times by 80%). It sounds like a case where the hard money lender / buyer did come in prior to auction and offer you a deal. For example if the house is currently worth $200k, you owe $100k on it but are not making the payments and you were a few days or months from losing it at auction. The hard money lender steps in and buys the property (maybe subject to the original loan) for $150k giving you an option to buy it back for $200k for 6 months. The reality is you will probably not buy it back in the time allotted and the buyer will have a $200k rental property they paid $150k for (plus the considerable hassle and risk involved). This is not necessarily a bad deal for you vs. imminent foreclosure. It depends on the numbers, how much time you have (e.g. you could have evicted the tenant and done a normal sale), etc.

On the other hand if you allowed the foreclosure to happen. Then have someone bid on it at auction with an agreement you will buy it back from them. That is likely illegal (though I'm not a lawyer so I don't really know). Also there's a whole lot of things that can go wrong in the process. Example: you get caught, it sells at auction for more than you want to bid, you change your mind after the friend bought it at auction for you (e.g. it went down in price or you didn't fix your bad credit), the buyer changes their mind after they bought it (e.g. it went up in price or they got a renter they want to keep), etc. When stuff goes wrong, you don't have a whole lot of recourse since the deal was shady in the first place. It just isn't worth it. There's plenty of ways to make and lose money in real estate being completely above board the entire time.

Once you give us specific numbers Dwondhoff can probably help out. I've only done one hardmoney deal and a couple creative financing situations but I believe he has done many more.
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Hi Culcha,

But I still don't see how it is that she might draw the law's attention by committing fraud. After she sells this property, she's pretty much out of the picture (that is, except for the possible exercise of the option to buy). Who would she be defrauding?
OK... this is going off the rails now........

Based on what you have described so far, there is no obvious fraud in play. If your wife decided to try to prey on the investor by drawing him/her into the transaction in order to later trigger the reversal of the transaction (in essence getting a free loan, and potentially having the liabilities wiped out) *THEN* there could very well be accusations of fraud on her part, all depending on the circumstances.

Presumably, she first sold the property, took a big tax loss, and then bought it back, and starts depreciating it with a different cost basis. Meanwhile "Bob" (or whoever] is responsible for any mortgage payments, etc.
These are apparently your presumptions... not mine.

--But you're saying that this could all be wiped out --
The transaction between your wife and the investor/buyer could be reversed, yes.

As to the ramifications and effects on agreements with other parties involved, that's all depending on the circumstances.

Helpful?
Dave Donhoff
Leverage Planner
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I am the President of a 120-Unit Condo complex. In the past 18 years, we have had units sell for more than the monies owed, thus giving the former owner a refund.

Of course, this was based on past-due regime fees, not a foreclosed mortgage.

Donna
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Just a quick follow-up on the first scenario. (I'm still not sure about how the second one will play out ...). Just yesterday, DW and I received a check for a little over $40k, which was designated as "surplus funds" from the auction/sale.

The new owner is evicting the present occupant, which I have to say I'm not shedding any tears over, since his failure to pay the rent was one of the aggravating factors that led to it our being behind in the mortgage payments, which in turn led to the foreclosure.

culcha
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Congratulations, that is literally the first time I've heard of the person foreclosed on actually getting money from the foreclosure.
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Congratulations, that is literally the first time I've heard of the person foreclosed on actually getting money from the foreclosure.

I was a bit surprised myself. But I checked with another lawyer, who agreed. We got a check from the county with the notation "surplus funds."

What also surprised me was that at the auction, the guy actually bid the amount that he and DW had agreed upon -- even though it was several thousand dollars more than any other bid. Legally, he could have gotten the property for less, but he stuck by the number they agreed on.

"Surplus funds" are nice -- we needed them!

culcha
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