Your Opinion on this Investing Strategy

Joined: 10 Feb 2009 Posts: 1

Scenario: A distressed homeowner has a bonafide hardship and must sell their home. Additionally, the home is 50 percent underwater. The lender approves the short sale to an investor. Previous homeowner has sufficient income and would like to rent back from investor with 2 year option to purchase at a TBD price. Investor agrees, and fair market rent provides positive cash flow. After 2 years, previous homeowner is approved for new government loan (after 2 year time required after short sale per Fannie Mae guidelines) and purchases home from investor for 5 percent premium over investor's price. Everybody's happy: Investor gets cash flow property, 5 percent capital gain after 2 years, hassle free tenant and buyer. Homeowner remains in home, doesn't have to move, and purchases home for 55 percent of their previous underwater loan.

Of course, there are a lot of risks: What if house doesn't appraise higher in 2 years? What if homeowner files bankruptcy? What if homeowner doesn't exercise purchase option? Well, that's why you are a professional real estate investor. You know how to manage risk.

So, does anyone see any major problems with this scenario? I've heard fraud, but where's the fraud? Please be specific. This idea could be a win-win for homeowners and private investors across the country, and could be the catalyst for the housing turnaround. I'd like to think I thought of this idea, but is it already being done? Just remember my name, GRACE ROGERS! P.S. Please contact me if you have deep pockets and would like to start an LLC investing in these properties while contributing to the social good as well!

Joined: 11 Feb 2009 Posts: 2 Location: Saint Paul, MN

In my experience, short sales are only modestly lower in price and value, than a normal market "arms length" transactions There are most likely vacant forclosed homes being offered and selling for much less. The down side on your deal is the lower priced sales becoming the predominant value in that area. Your deal sounds great, if the property is in a fairly solid area, and there are not that many vacant homes in your neighborhood your principles should be in good shape-Consult an attorney
Jeffrey

Joined: 17 Jun 2008 Posts: 14

Thanks you Both!!!

Nice article/ thread.

hope you will post more post in near future for your Views, Idea etc.

thanks

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Forex Brokers

Guest

Nice post.
Appreciated your nice comments on that.
Actually i don,t have a proper idea about your strategy but i am learning it from your post & other people reply.

Joined: 24 Apr 2010 Posts: 2 Location: Masachusetts

It is my understanding, that when a short sale is negotiated the origional owner must leave the home. The obvious loser in your senario is the bank which loses 50% of the value of its loan. I don't see them willing to do that unless the owner has such severe hardship that they cannot live in the house. The other issues is the IRS as the decrease in loan is income which must be reported unless the owner has sufficient hardship. I don't think either of these two entities will forgive the loan and the taxes and permit the owner to stay in the home. I would consult an attorney before doing this as the real estate investor may be considered a party to fraud.

Joined: 28 Jul 2010 Posts: 5

That's true!Short selling is not much lower in price and value, a normal market arms length transactions are most likely unemployed foreclosed homes offered and sold for much less. The negative side of your contract are lower sales price is the predominant value in this field.

Joined: 03 Sep 2010 Posts: 4

When you do a deal with partners, be the money or the management, but not both. Group decisions tend not to work well in real estate, and will cause you much stress.The real estate agent might show you only the comparable sales that make the property look more valuable.