Once in a while, a deal comes along that provides the ultimate challenge of your real estate acumen, fortitude, patience, and your assessment of risk versus reward. In sharing this particular opportunity with you, I will describe the ins and outs of a complex deal structure which necessitated solid risk versus reward assessments.
Topics included in this article:
- Leveraging OPE (Other People’s Expertise)
- Dealing with an IRS Lien
- Power Team – Escrow Officer & Eviction Attorney
- Risk/Reward Assessment
- Stopping a Next-Day Foreclosure
- Fix/Flip of Historic District House
- Case Study
A Hairy Deal Surfaces
Every real estate deal seems to have a twist or turn these days. But this deal had many more challenges and learning nuggets than most ever do, including lots of hairy components:
- Referral from Friend – leveraging Other People’s Expertise (OPE)
- Necessity to act quickly with no margin of error (hairy)
- Next-Day Foreclosure sale (hairy)
- Subject-to (Sub2) Mortgage deal (hairy)
- Clouded Title with IRS Lien (hairy)
- Patience needed with Seller & Government processes (hairy)
- Requirement to buy sight unseen (hairy)
- Felons as Trespassers (hairy)
- Use of Power Team – Eviction Attorney, Escrow Officer
- Fix/Flip of Historic District home
- Calculating Profits & Risk/Reward debriefing
It All Started With a Call From a Friend
“Hey, Mike! I just got a call from a lady whose house is going to Foreclosure Sale tomorrow morning – can we help her?”
This was the call I received from an investor friend of mine. He had done a few deals, primarily in another state, but didn’t have experience with saving properties from foreclosure. He found a property owner who had procrastinated until literally the afternoon before her property was scheduled to be sold at the steps of the county courthouse, via a trustee sale (foreclosure).
My response to my friend:
“Sure, but I’m going to need a lot more information. It’s possible, but we would have to dive in immediately this evening to assess the key risk and reward areas. Then, if everything lines up, we can be prepared to jump into action with our game plan tomorrow morning.”
So I asked a lot of questions, and this is what he knew so far:
- The lady verbally agreed to sell the house to us if we could figure it out in about 20 hours;
- She hadn’t lived in it recently, and we had no access to view it because some trespassers had moved in;
- At least one of the trespassers was a convicted felon, and the neighbors weren’t happy about the noise coming from the property;
- Because of the trespassers, we would have to buy the property sight unseen;
- Owner was at least 3-4 months behind on her mortgage payments;
- The Trustee Sale was scheduled for 12:30 the next day;
- He didn’t have the expertise or power team lined up for such a hairy and time-sensitive deal as this.
After reviewing comparable sales in the Historic District neighborhood, we believed that the ARVE (After Repair Value Estimate) was about $125,000 higher than our verbal buy price. We also had every expectation that the house had no recent upgrades and wasn’t being gently treated by the trespassers. Due to the trespassers, we would have to roll the dice and buy it sight unseen, so we needed to budget a cushion for unknown additional damages.
We knew that this project would require a large rehab budget, perhaps approaching $100,000. What we didn’t know at the time, was that the title was not clear…
Based on what we did know so far that evening, it was worth putting together a game plan to push ahead and see how the next steps would fall in place, or not. So our preliminary risk/reward assessment was to Proceed for now…
The Game Plans for This Next-Day Foreclosure
As it was already about 10:00 pm, all I could do at that time was to put the pieces in place to position us to get the additional information we needed as early as possible the next morning. I grabbed two sheets of paper and immediately started to scribble down a game plan on each – one for the things that could be done that night, and one for the tasks we would need to complete the next morning. Then I jumped in and attacked the only one that I could impact at that hour – the Evening Game Plan. Below is the game plan that I discharged that evening:
The EVENING Game Plan
- Prepared a Purchase Contract for the buyer to sign;
- Sent an email at 10:54pm to one of my Title Company contacts, asking for a preliminary condition of title*;
- Agreed to a JV arrangement with my investor friend who brought the opportunity to me;
- Gave my investor friend an expected rundown of what would need to happen the next day (the Next Morning Game Plan, see below) for us to get a successful win-win result for all parties; and
- Asked investor friend to contact the owner and set expectations with her for the items on the Next Morning Game Plan that she needed to help with
Everything would need to go just right, and according to plan, for this deal to happen. The owner’s credit was already beaten up by her non-payment and procrastination, but it was about to take an even bigger hit if the foreclosure happened. Plus, she likely wouldn’t get any cash for the sale, unless we were able to stop the foreclosure and complete a more normal sale of the house.
She had felt bullied by the trespasser, whom she informed us was a convicted felon with an ankle bracelet, and due to his trespassing, she wasn’t even allowed to go retrieve items from her own house. And she didn’t have the money or expertise to fight the trespasser in the court system. She just wanted him out as it wasn’t fair that he and his new roommates were living there for free, just because they were brazen enough to break in and take over.
So there was a lot at stake, for the owner, as well as us once we started investing significant time and resources on the deal, to make it a win-win for all parties (owner, us, frustrated neighbors, lender, title company, escrow officer, and everyone else that became involved in the deal, other than the trespassers).
Here’s the list of key items that HAD to come together the next morning, quickly and without any additional hairy obstacles, for us to be able to get this deal done in a tight window:
The NEXT MORNING Game Plan
A. Get Condition of Title report from escrow officer and review for additional liens or clouds on title.
B. Call Trustee & obtain reinstatement and payoff amounts
C. Meet with owner and sign the Purchase Contract that I prepared
D. Get Cashier’s Check from the bank for reinstatement amount
E. Be at the courthouse by 12:30 to stop the foreclosure
F. Get reinstatement receipt
G. Open escrow with title company/escrow officer
Having done all I could for the time being, I left my office at midnight, set the alarm for 6:30 am, and got a few winks.
Trustee Sale Day: Foreclosure to Be, or Not to Be?
As the sun rose the next morning, we needed things to fall into place according to our “Next Morning Game Plan”. Any snafu and there would be a good chance that the deal wouldn’t get done. I didn’t need any coffee to start my day – I was already invigorated by the excitement of a challenging deal that laid ahead. Once we got the preliminary Condition of Title from the escrow officer, we would likely know if we had a deal or not. I was ready to jump through the day’s hoops!
My investor friend was real estate & business savvy, but hadn’t done any pre-foreclosure deals, or deals with so many moving parts that had to come together so quickly. He had checked with a trustee sale bidding service company, which specialized in buying at foreclosure sales, but they didn’t know how to effectively stop a foreclosure sale from happening.
By partnering with me on this deal, he got to see how I approached it and learned the finer points of solving a client’s last-minute foreclosure problem with Creative Deal Structuring and tenacity. I laid out the steps that needed to happen, and he helped me execute. This was a golden chance for him to put the “Earn while you learn” adage to use.
I had tasked my investor friend to call the trustee in the morning to obtain the reinstatement and payoff amounts and meet up with his seller (the owner) to ink our Purchase Contract. Meanwhile, I tasked myself with getting and reviewing the preliminary title report, assessing the risk, getting the cashier’s check, and stopping the trustee sale.
Reinstatement and Payoff Amounts Explained
When a loan is in default, the reinstatement amount is that lump sum amount that the lender or trustee calculates is needed to catch up or bring the loan back into good standing. This typically includes all past-due principal and interest payments, late fees, foreclosure/trustee fees, and reimbursements of certain costs (such as hazard insurance, property taxes, or winterizing costs) that may be advanced by the lender to protect its collateral/position.
In contrast, the Payoff amount is that lump sum payment that pays off the lender in full, including all of the outstanding principal, interest, and various fees.
I always try to get both numbers so I know exactly how much is due to get the loan back into good standing and to pay it off completely. Depending on the situation, either method might be the best option. In this case study, since we had to act in less than 24 hours, buy it sight unseen, and take on the risk of an IRS lien, we wanted to control the deal with the least amount out of pocket, so the reinstatement of the owner’s conventional loan was the best option for us in this instance.
For more about this subject, see this article from lawyers.com
Until the banks opened at 9:00, and until I knew the reinstatement amount, the only task I could focus on was the title report. I didn’t have to wait long…
Power Team Comes Through – My Escrow Officer Rock Star Delivers!
*The email I sent to the title company the previous evening and referred to in Evening Game Plan #2 above, is notable for several reasons. First, I chose a key person from my power team (my virtual team of professionals who helps us succeed) that had about 30 years of experience in escrow and whom I knew was very skilled in complex transactions from my prior dealings with her. In addition, I knew that she had a strong work ethic and would likely still be working late into the night or would be back at it early the next morning.
At 10:54 the previous night, I had supplied the escrow officer with the property information that I had including the address, the trustee sale info, and the background on the owner, and asked that she prepare a Condition of Title on the property. Specifically, I asked her to check if there were any IRS or other liens attached to the property or the owner, in addition to the defaulted loan.
Sure enough, she had the information back to me before 8:00 am the next morning! Do you see the power of a strong Power Team???
The escrow officer reported back that they had found an IRS tax lien on the property, for about $32,000 plus interest and penalties, which she estimated at $6,000 more. The importance of that was that the IRS lien would survive the trustee sale, and it would also survive any purchase that we would do in lieu of the trustee sale.
The only ways to get the lien removed would be by either 1) paying it off, or 2) getting it discharged from the property. For now, we knew that we would have to consider this risk and potential extra cost in our updated risk/reward assessment. An extra $32 – 40k would likely kill off any profit we could have otherwise forced into the property by rehabbing it. The deal had suddenly grown more hair!
Time for Reassessment
We would now need to re-evaluate the deal, in light of the IRS lien that the title search disclosed. We wanted to assist the owner by helping her avoid a Foreclosure sale, plus give her the right to get back into her home to claim any personal property that the trespassers hadn’t destroyed or sold off. In fact, the list of stakeholders continued to grow as we invested more time into this deal and became aware of the bigger situation. We felt bad for the neighbors also, who were tired of the noise and nasty comments coming from the trespassers.
But we also had to gauge whether we could still make it into a viable deal if we got stuck having to pay off her IRS lien. And unbeknownst to us, we were still in for another unexpected surprise later that morning…