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How to Buy an Underwater Property when Short Sale is Not an Option.

How to Buy an Underwater Property when Short Sale is Not an Option.

Authored by Thomas Visaggio on October 6, 2019

A call was recently received from a mailing campaign on a three family home in Passaic County. Although the seller was underwater with the property (outstanding mortgage balance of $400,000 and as-is value of $275,000), he was not distressed and was able to keep up with the monthly payments given the property was completely leased out at nearly market rates regardless of the poor condition of the units. Therefore, a short sale was not an option because he was up to date on his mortgage payments and showed no signs of financial duress. The only way to work out a deal would be to make an offer subject to assumption of the existing mortgage. However, if we made an as-is offer then we would immediately have negative $125,000 in equity in the property.

The owner was involved in construction and wanted to make many of the repairs himself in order to bring the property close to its market valuation in order to bring the net equity in the property closer to zero dollars. However, he did not have the cash to make these repairs hence we got creative and made the offer below:

  • $25,000 subject to the assumption of the existing mortgage and completion of required repairs by owner.
  • $25,000 available to the owner immediately through draws as the work is completed.
  • We have the right to all property net cash flows (rent minus mortgage minus taxes minus insurance) during the time period which we are waiting for assumption of mortgage to be approved and work to be completed.
  • If work is not completed or mortgage is not approved, then we received right to net cash flows until or entire $25,000 is recouped.

This is a risky offering which should be worked on with an attorney in a way that protects you as much as possible in the form of personal guarantees or a second lien position. At the end of the deal, you have a property that has an equal value to its outstanding balance but it is cash flowing tremendously and you would have recouped most of the $25,000 by the time of closing. Not a bad deal. Contact us to find out how we can help you.

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