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Hi Gang,

IP keeps reminding me of our REI boards (which I keep spacing out about...)

Working a deal right now in Georgia....
http://boards.fool.com/Message.asp?mid=23715054

Anyone else spinning deals in similar ways?
Best,
Dave
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your post reads like a caricature of a Trump wanna be
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Hi namkato,

your post reads like a caricature of a Trump wanna be

Please continue... what do you mean specifically?

Dave
(Assured he NEVER wants UFO hair...)
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Dave wrote:

"The tennant can only qualify (poor credit) for a loan at 90% LTV...
Underwriting only calculates at the lower of appraisal or contract... so $149,000 is the underwriting number.
90% of $149,000 is $134,100.... which will be the tennant's new 1st mortgage.
I will carry the 2nd, all the way to 100% CLTV at the full $160,000 price (thus $25,900.)
The tennants monthly payment to me will be a deferred-interest (NegAm) payment of a flat $125/month, which keeps her inside her $1,200 net monthly ceiling budget.

Tennant is fully aware that at the $160,000 purchase price I am being compensated from future sale or refi payoff proceeds for arranging the deal, and I am taking the risks of the asset market value. If the market depreciates, or even stays flat an extended period, I will be forced to eat the losses in a shortsale when the next buyer desires to buy... and as a 2nd lien holder I'll forego any collection attempts on the tennant/seller since she'd be walking away without any proceeds herself.

STILL... my upsides;
A) Buy at $90k (target... say I fail miserably and only get it at $125,000...)
B) Sell at $160k... mostly unrealized profit taken on an installment payment basis,
C) Buyer's financing pays off $134,100 of buy price... I realize between $9k to $44k in profit, depending on how I bought,

Risks;
A) Tennant decides last-minute to move & not buy. (That's the most significant risk I can think of.)

Risk abatement;
A) Tennant sent in a $2,500 non-refundable earnest money deposit toward closing costs... she's got skin on the table.

I've got two more like this in the hopper I'm working on.... the KEY is finding the exit prior to executing the entry, whenever possible."

Hi Dave,
This deal strikes me as loan sharking. Unsophisticated buyer with bad credit taking on a 1st with 90% LTV (what kind of loan?), a 2nd with neg-am. I know it happens every day but it is not suitable. This is like a stock broker putting someone's life savings into all tech stocks in 1999. You are stretching her to the max, no one should be buying with 100% LTV and neg-am at the peak of the market. I'm trying to see how she is not getting in way over her head, and how you might be using your knowledge of the game to take advantage of her.
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This deal strikes me as loan sharking. Unsophisticated buyer with bad credit taking on a 1st with 90% LTV (what kind of loan?), a 2nd with neg-am. I know it happens every day but it is not suitable. This is like a stock broker putting someone's life savings into all tech stocks in 1999. You are stretching her to the max, no one should be buying with 100% LTV and neg-am at the peak of the market. I'm trying to see how she is not getting in way over her head, and how you might be using your knowledge of the game to take advantage of her.

When I was younger and more stupid, I took a private mortgage at +2% over the going rate, interest only, balloon after 7 years. With our combined incomes, we could easily afford the mortgage as well as carry the mortgage on the starter house that we rented out, though the deal would not have coincided with the percent debt to income ratio that the lenders adhered to more strictly in that time. Six months later after exH tore the house apart and then decided I would get the total rehab house in the divorce and he would keep the starter home, I would have been stuck without the "loan sharking" of those good people. 100% of my take home pay with 8 exemptions went to pay that mortgage as I fixed up the house to marketability. More than once, as I watched my savings ebb, it was tempting to simply hand over the keys to these people who had released exH from his obligations and allowed me to take on the mortgage personally with just my say so that I could do it. I however had been taught to meet my obligations.

Any amount of financial sacrifice would have been worth getting rid of that particular marriage noose around my neck. Sometimes, this type of loan is the only option, and people are grateful for the opportunity that would otherwise be shut off from them.

InParadise
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InParadise:

Is it possible you needed a better divorce lawyer?

As you say...You were much younger and less knowledgable.

Been there....Done that.(in different situations)
Experience is one hell of a good teacher but mighty expensive sometimes.
I never forget the knowledge learned from the school of hard knocks!
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Is it possible you needed a better divorce lawyer?

Only if my goal had been to go for the juggular. I'm quite sure I could have screwed him big time had I been that kind of person. Instead I put together two property packages and told him to pick one and I would take the other. He originally chose the fixer upper, destabilized it's marketability further by tearing down walls and ripping out ceilings, pulling the double hung windows apart and taking the leaded glass out, then deciding he wanted the other package after all. IMO it was more of a ploy to try to get me to say Oh no, little old me can't handle that I need you so badly, but he underestimated just how much I wanted out. I just said fine and got on with my life, which has worked out wonderfully thank you.

Call it my price for freedom...worth ever cent and every drop of sweat. On top of that, I can live with myself for the way I conducted my business.

InParadise,
big believer of what comes around goes around, even if it takes a while
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Hi namkato,

Thanks for being straight & candid!

This deal strikes me as loan sharking. Unsophisticated buyer with bad credit taking on a 1st with 90% LTV (what kind of loan?), a 2nd with neg-am. I know it happens every day but it is not suitable.

By what measures? Seriously... what standards are to be used in determining what is or isn't suitable, if the individual isn't allowed to decide in full awareness.

In this specific deal, she's completely aware of all factors... including the expectation that she could own the home for several years before she catches up in equity to her original acquisition price, yet nobody else is providing her with the means of owning her home in any other way.

This is like a stock broker putting someone's life savings into all tech stocks in 1999.

Except that she's putting precisely $2,500 into this, she's not buying a home she doesn't already live in, and her real-market payments will be "at" what someone with good credit would be paying.

With all sincerity, she's being placed into a pretty advantageous position. Nobody else will let her qualify to retain possession, and attain title, with a limited amount of the future equity being the collateral that allows her to do so.

You are stretching her to the max, no one should be buying with 100% LTV and neg-am at the peak of the market.

A) MILLIONS of bnaks and borrowers finance at 100% LTV. Are they all wrong, in your opinion?

B) The real estate markets (most anyway) peak every year at least once. In some markets they cycle longer... but living in your home at or below A-paper carry-costs is rarely a bad financial decision... even in flattening markets.

I'm trying to see how she is not getting in way over her head, and how you might be using your knowledge of the game to take advantage of her.

Of the first statement, it appears you're looking for the opposite.
Of the second statement, I've created a set of solutions to several folks problems that (all being aware all around) are acceptable to all.

Am I using my knowledge? I certainly hope so.
Is it to the occupant/buyer's detriment? Not in either of our estimations.
Is it legal? In every aspect I am aware of, yes.
Is it ethical? In every aspect I am aware of, yes.
Is it profitable? For all parties, potentially yes.
Is it risky? For all parties, potentially yes.

Here's an acid-test question I ask myself;
If the counter-party knew what I know about the deal, would they proceed?
In this case, I've made sure they do... so the answer is "yes."

I find it's actually quite regularly possible to create such profitable cross-solution situations WITH everyone on the same page. It definitely let's me sleep at night. (And besides... for whatever reasons... my whole life I've found underhanded deals to never end up being profitable anyway.)

Cheers,
Dave
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I seem to detect a degree of antagonism directed at real estate investors in this thread. I also see an undue amount of sympathy as well as pity toward those who wedged their financial butts into a crevice by their bad decisions, and now expect to be miraculously saved.

My take:

Before buying a home (or anything else for that matter) one must assess the risks and responsibilities associated with the assumption of a long term debt. No one is ever forced into buying a home at gunpoint. It's an individual decision. Buying more home than one can realistically afford is a foolish exercise in both greed and vanity. Counting on runaway inflation to gain equity and/or enable refinancing a year or two down the line is, if anything, even more foolish. When the pipe dream fails and the day of reckoning arrives, the choices are limited. To be sure, there are people positioned to extricate you from your untenable position. Enter the shark, the deal-maker, the leech, whatever you want to call me. Sticks and stones, and all that....Since I must now assume the responsibilities you misjudged, forgive me for trying to create conditions most favorable to me. Just because you made a hasty and not fully thought out decision doesn't mean that I have to assume your problems. If I can work the numbers, and eke a small profit out of the misfortune you created for yourself, don't blame me. Blame yourself. I didn't create your problem. You dealt in pipe-dreams, I deal in realities. If I miscalculate, I lose. If I do, the only one to blame is me.

~aj
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"A) MILLIONS of bnaks and borrowers finance at 100% LTV. Are they all wrong, in your opinion?"

This is correct, they have been doing this for about 4 years. The practice is untested in a RE downturn, and could result in millions of borrowers like yours losing their houses. You throw in a neg-am and it compounds the problem. There is a very high percentage of borrowers out there who do not know what their loans can do to them, but the lenders are very aware. Predatory lending does not end with the Ameriquest settlement, it is widespread, boiler room tactics.




http://www.voiceofsandiego.org/site/apps/nl/content2.asp?c=euLTJbMUKvH&b=486837&ct=1983305
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Predatory lending does not end with the Ameriquest settlement, it is widespread, boiler room tactics.

100% LTV isn't predatory lending, it's risky lending. Banks used to insist on an 80% LTV so that if they were forced to foreclose, they'd be less likely to lose money selling the house at auction. The party likely to get hurt the most if real estate prices go south is the lender, not the borrower.

The practice is untested in a RE downturn, and could result in millions of borrowers like yours losing their houses.

100% LTV loans won't cause anyone to lose their homes. Nor does a RE downturn force anyone to sell, or increase anyone's mortgage payments.

The risk to the borrower lies in ARM's. If the rate on an ARM goes above what the borrower can pay, then they may lose their home. Which the lender sincerely hopes won't happen if the house has lost value.

The article you link to is about the risk to lenders, and to the housing market as a whole. The point he's making is that with no equity, borrowers have little incentive not to walk away from a house if they can't make payments.

- Gus
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"100% LTV loans won't cause anyone to lose their homes. Nor does a RE downturn force anyone to sell, or increase anyone's mortgage payments."

No, but it makes the entire housing market foundation a lot shakier.

"The risk to the borrower lies in ARM's. If the rate on an ARM goes above what the borrower can pay, then they may lose their home. Which the lender sincerely hopes won't happen if the house has lost value."

ARMs are bad enough, but he has her in a neg-am, the most toxic loan yet invented. Lots of unsophisticated buyers do not fully comprehend what they can do to the buyer. So the lady is doing 100% LTV, neg-am, she is losing equity daily.

Here's some unsophisticated buyers who are suing:


http://thehousingbubbleblog.com/?p=142
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ARMs are bad enough, but he has her in a neg-am, the most toxic loan yet invented.

Yeah, I have a hard time with those as well. They assume an increase in property value, which seems extremely unsafe in today's environment.

- Gus
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Hi namkato,

You're missing some critical issues;
ARMs are bad enough, but he has her in a neg-am, the most toxic loan yet invented.

"Toxic"? Are you sure you understand that word?

Lots of unsophisticated buyers do not fully comprehend what they can do to the buyer.

This is absolutely true, IN GENERAL.

As I've pointed out, this particular borrower is fully aware of the details, terms, and spirit of the program I've offered (and she has every freedom to turn the offer down.)

So the lady is doing 100% LTV, neg-am, she is losing equity daily.

How can she "lose equity" when she has none (or, to be correct, she has $2,500 of liquid equity that she's contributing to the purchase)?

As I explained before, but you somehow missed;
A) She lives in the home now, and her alternative is to leave,
B) I've arranged financing at payments BELOW what she would be offered, given her credit history, at MY OWN risk,
C) I've arranged the degree of leverage for her (zero down payment) BELOW what she would be offered, given her credit history, at MY OWN risk,
D) She has zero in equity now... but she DOES have (and greatly desires to keep) possession and the enjoyment of occupancy,
E) SHE KNOWS that in order to own the home everyone else would offer her MUCH HIGHER payment requirements, and MUCH HIGHER down payment requirements,
F) She fully understands that MY OFFER rolls the payments and down payment she WOULD HAVE HAD TO PAY (but no way could) to the end of her financing with me, AT MY RISK,
G) She is GRATEFUL for the offer (because she UNDERSTANDS it. It seems only those who don't understand it balk at it.)

THINK IT THROUGH!!! I am the one at primary equity risk!

This ONLY makes sense for me to offer because I also know how to solve the existing foreclosing lieholder's liquidity problems, and have the credit strength of my own to do so. I am able to borrow money fast (though at a high short-term cost) and acquire title to the property at sufficient discount that I can shoulder the risks I carry for thei borrower.

IN RECAP;
I am allowing her to stay AS AN OWNER instead of a renter, at LOWER payments than she'd get with her credit, and LESS down payment than she'd be allowed with her credit.

IN RETURN, she's providing me the reward for my risk in some amount of the FUTURE (non-guaranteed) appreciation equity of the home. We are COUNTING on her "down payment" and her "financing profits" to come from some future BUYER.

Make more sense now?

(The more I detail it out... the more insane I think I must be... LOL!)

Cheers,
Dave
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Namkato....

Now that you've REALLY forced me to think this through, MAYBE YOU ARE RIGHT!!!

I should evict that lowly tennant immediately, sell the property to someone (anyone) who will take it at a fast 5-10% discount, and run giggling with my cash.

Is that the "better world" you would envision? I'll let the tennant/buyer know of your wisdom. ;~)

Dave
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Dwdonhoff,
I do hope it works out for both sides. I a 100% LTV with a neg-am is often trouble. The Fed has come out with suggestions for lenders to tighten up lending STANDARDS, including abolishing both 100% LTV and neg-ams. Not long after their strong suggestions, WAMU laid off 2500 loan officers, and there have been numerous other layoffs. Maybe higher loan STANDARDS and lower loan volume go hand in hand.
Good luck.
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Nor does a RE downturn force anyone to sell, or increase anyone's mortgage payments.

If you're depending on rental income and there are no more renters, you can be forced to sell.

If your salary goes down when the housing market does, you might not be able to afford as much of a payment.

These are risks even with a fixed-rate mortgage.
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Hi Namkato,

I do hope it works out for both sides.
Cool, me too ;~)

I a 100% LTV with a neg-am is often trouble.

I'd agree, and suggest the reason is lack of understanding of those who choose to use it. Such a lack is usually due to the borrower being incapable (uneducated) to understand AND/OR (more often) a combination of the loan originator not understanding and/or not caring.

The Fed has come out with suggestions for lenders to tighten up lending STANDARDS, including abolishing both 100% LTV and neg-ams. Not long after their strong suggestions, WAMU laid off 2500 loan officers, and there have been numerous other layoffs.

??? Are you saying you think WaMu laid off 2500 loan officers because of 100% NegAm loans (which WAMU doesn't even offer)???

Please explain...

Maybe higher loan STANDARDS and lower loan volume go hand in hand.

Would standards that better micro-fit borrower's risks to lenders be included in the "higher" determination? Because this improvement has been one of the strongest reasons for the INCREASE in loan volume.

Good luck.

Much appreciated... I'll take all I can get.

Cheers,
Dave
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IN RECAP;
I am allowing her to stay AS AN OWNER instead of a renter, at LOWER payments than she'd get with her credit, and LESS down payment than she'd be allowed with her credit.

IN RETURN, she's providing me the reward for my risk in some amount of the FUTURE (non-guaranteed) appreciation equity of the home. We are COUNTING on her "down payment" and her "financing profits" to come from some future BUYER.

Make more sense now?


Dave,
My first question when I started to try to decipher this thread (which is getting waaay too complicated for 1:30 a.m.) is:
How did you end up with a deal in Georgia, as far away from Washington as you can get? and what part of Georgia is it?
Atlanta has seen significant appreciation in recent years, so if it's in a decent part of the city (and at that price, I have to wonder) she might see that she has a pretty good chance of gaining equity in a few years - maybe. The feeling in Atlanta is that prices might flatten out, but they will not go down any time soon.
BUT, if the real value of the house is $150K tops and she's accepting a price of $160K, and knows it will take her FOREVER to break even on equity, does she even realize that if she needs to sell one day that the 7% (standard in Atlanta) RE commission will also come into play, unless she short sells to an investor, in which case she defaults to you and possibly the mortgage co.?
For you, I see no risk. Even if you have to pay $125K for the house, you'll have roughly $12-15K profit immediately ($134,5 from the lender, plus the broker commission plus her $2500 earnest money) and as much as $35,000 more than that and the $125/mo income as long as she stays in that house.
She might be willing to take on the risk of a $160K purchase price, but she'll be so upside down for so long, it really does seem like she's doing what Georgians are becoming known for nationally - stretching themselves to the limit till there's no breathing room, and it will take on ly a slip for her to fall.
It sounds like a wonderful deal, and we'd all like to find something similar, but IMO, you could price it AT market, instead of above market, and everyone - ESPECIALLY you, will still be a winner.
Yes, you've made a deal that "works" for everyone, but especially you, and I'm sure she's feeling like this is her "only chance" at homeownership so she'll accept any terms you offer.
I hope it works out for everyone, but if YOU manage to get a break on the price, I hope you'll consider giving her one.
good luck
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Hi JodyNRoy,

My first question when I started to try to decipher this thread (which is getting waaay too complicated for 1:30 a.m.) is:
How did you end up with a deal in Georgia, as far away from Washington as you can get? and what part of Georgia is it?


The owner contacted me from my online classified advertisements (remember, I do less than 5% of our firm's volum in my home state.)

The deal isn't far from Macon.

BUT, if the real value of the house is $150K tops and she's accepting a price of $160K, and knows it will take her FOREVER to break even on equity, does she even realize that if she needs to sell one day that the 7% (standard in Atlanta) RE commission will also come into play, unless she short sells to an investor, in which case she defaults to you and possibly the mortgage co.?

Yes, we've gone through the possiblities. All I can do, however, is make an offer that makes the best sense I can.

For you, I see no risk. Even if you have to pay $125K for the house, you'll have roughly $12-15K profit immediately ($134,5 from the lender, plus the broker commission plus her $2500 earnest money) and as much as $35,000 more than that and the $125/mo income as long as she stays in that house.

LOL... you're saying you see no risk IF EVERYTHING WORKS PERFECTLY!

Well OF COURSE you see no risk in THAT case.

In the cold, hard world of reality, there are unforeseeable potential risks... and they'll bite you in the butt every single day when you least expect them.

You have to plan for the unforeseeable.

It sounds like a wonderful deal, and we'd all like to find something similar, but IMO, you could price it AT market, instead of above market, and everyone - ESPECIALLY you, will still be a winner.

Why, in your business opinion, would it make sense to NOT ask to be compensated for arranging for her to own at payments equal to (or below) that of someone with perfect credit?

THAT is what the sales price premium compensates me for. And I am most DEFINITELY at risk of ever actually seeing that premium. As you point out, she could go BK, or into foreclosure, or have some future buyers choose to short-sale again, cutting me out entirely.

"No Risk" indeed... the only time there will be no more risk is when this deal is completely off my books, checks have cleared, title has cleared, and Georgia has fallen to the lower half of the states in real estate fraud (attracting attorneys looking for actionable litigation.) The fact that this is in GA makes it (on it's own) RIFE with risk.

Yes, you've made a deal that "works" for everyone, but especially you, and I'm sure she's feeling like this is her "only chance" at homeownership so she'll accept any terms you offer.

Why "especially" me? If it doesn't work for me, I go away, she gets evicted. Does not get to stay, does not get to pay as though she had 740 credit scores, does not get a mortgage history... Isn't this "especially" working for her too?

I hope it works out for everyone, but if YOU manage to get a break on the price, I hope you'll consider giving her one.

If I succeed in winning a discount, nobody's "giving" me a break. Every dollar will have been one that I've earned in a long study of finance, law, and psychology.

ANY discount below general market is compensation for learning how to acquire it.

I could (namkato apparently thinks I should) evict the tennant and simply sell immediately and book my cash.

Any premium I get by "pre-selling" the home with a future value reflected in the 2nd lien I carry back (flapping in the wind... basically an "unsecured loan" that may never be repaid,) is compensation for the risks I take in being "the good guy" and keeping the tennant in place at my own risks.

good luck

Much appreciated! I'll take every ounce of the stuff I can find!

Cheers,
Dave
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