Is this investment too good to be true?

A friend of mine approached me today, telling me there's a great investment opportunity on a house, the owner is upside down and looking to get out but still wants to live there.

Listed at 399k
Lender: Chase
Balance on the Loan: (one Loan) 590k
Appraised Value as of May 2012 is $389,500
Recent sale nearby 375k
Make offer at 310k

Monthly rent $2,400.00
1 Year buy back, 375k or Market price whichever is greater.

I would pay half down ($155k) and get the rest in loans, my monthly payment would be $800 or so, which means I'm $1600 cash flow positive excluding tax and insurance etc. The current owner will pay rent and is putting down 5% of the house value as a buy back deposit, if he doesn't buy back I get the house and the deposit. He is also paying 3 months rent in advance, so if he doesn't pay rent on time I can kick him out. I'm obligated to sell him the house within a year at $375k, which I have absolutely no problem doing.

I don't think this friend is trying to screw me over, she said she bought a house the same way but just doesn't have enough cash for this house. The owner is way upside down and is looking to get out of the loan, I'm a little confused about how I can buy the house for $310k (about $80k below market) while the guy is $590k in the red, meeting with the friend later to understand more.

Just wondering if anyone has seen some similar opportunities and what the downside is...I don't really see any if everything is true.

Thanks in advance!

I would offer the 100x the rent, so taht would be 240k. That would be a reasonable deal.

if its too good to be true.....

the question is.....whats your friend getting in this deal?

At this much under the loan, a short sale is most likely involved. You will have to sign a notarized "Affidavit of Arm's Length Transaction". Part of this mentions that the sale is between parties who are unrelated and unaffiliated by family, marriage, or commercial enterprise.

There is also another mention that: There is no agreement, whether oral, written, or implied, between the Seller and the Buyer and/or their respective agents who allow the seller to remain in the property at any time after the closing of this sale transaction.

The last one says" Each signatory agrees to indemnify the Servicer and Freddie Mac for any and all loss resulting from any negligent or intentional misrepresentation made in the affidavit including, but not limited, to repayment of the amount of the reduced payoff of the mortgage.

Be careful.

Its probably not allowed under the terms of a short sale. Banks are suspect to this kind of thing with people flipping their underwater properties between relatives. The short sale contract will likely require an affidavit that theres not agreements in place.
The seller is either simply unaware that this isn't allowed or looking to commit fraud with you an unaware accomplice.

Here's a reference to the kind of language the sale agreement will have :

http://activerain.com/blogsview/2610655/short-sale-arms-length-a...

"

There are no agreements, understandings or contracts between the parties that the Borrower will remain in the Mortgaged Premises as a tenant or later obtain title or ownership of the Mortgaged Premises, except to the extent that the Borrower is permitted to remain as a tenant on the Mortgaged Premises for a short term, as is common and customary in the market but no longer than ninety (90) days, in order to facilitate relocation;"

Would not allow the deal in question.

First the bank has to approve the 310k short sale, which I doubt they will because the fair value is around 375k. Of course banks do make retarded decisions from time to time, so that's still possible. Be advised the process can take many months.

Other than that, your main risk is that the current owner might just disappear, then you're stuck with a house that you have no use for. In the event you decide to sell the house, you're hit by the closing cost when you buy the house and realtor's commission when you sell the house. If the bank does approve short sale at 310k, you probably can still make some money depending on what price you sell the house.

Bottom line, it can still be a deal if you play your cards right. But it's not as sweet as you think.

To make this deal you would have to illegal things.

This person is trying to screw the bank I see no reason that he would treat you any differently.

He can offer you $5000 a month to let him stay in the place... won't do any good when he doesn't pay and it takes you 6 months to evict him.

Buy the house for 310, kick him out, sell to someone else.

If you can come to terms without making any side deals it might be ok. I wouldn't perjure myself just to make a few bucks. There are probably plenty of other short sales attractively priced that don't require doing anything shady. I also wouldn't want to rent to someone who would propose such a deal.

Let me see...

step one: buy mansion.
step two: don't pay the friggen' mortgage.
step three: squat in house until the bank is empowered to throw you out.
step four: (this is new!): convince sucker to buy house on short sell basis and rent to you.
step five: don't pay the friggen' rent.
step six: squat until the sucker is empowered to throw you out.
step seven: convince sucker to short sell to another sucker...

If you can get the bank to approve the short sale, might as well give it a try.

You probably will have to sign an arms length transaction affidavit. You may not have too though.

It't short sale central in Las Vegas. I see abundant families selling to kids/etc. in short sale. My neighbor across the street did it.

Not saying you should do it, it's clearly fraud, but at least around here, everyone seems OK with it. Everyone lies when they submit their financials to the banks when they're doing short sales. You just have to apparently and literally everyone I know has done it. Nobody seems to care. Both my sister and my best friend both strategically defaulted (buy and bail), neither had any change in job circumstances (actually my sister's income roughly doubled since she bought the house she short sold). Both of them just had their short sales approved with a deficiency waiver. No idea how that happens.

(I was dumb enough to put money down, so I still have equity and can't participate in the fraud, before I get flamed)

I personally would not make the deal unless you have a huge amount of money in the bank. Maybe if you are looking for a write off?

If the balance on the loan is 590K and the home is appraised at 390K - I would say buyer beware!

I'm glad that I'm smart enough to ask on this forum and learn what an arm's length affidavit is, the friend that proposed the deal didn't say anything about the affidavit at all, made me highly suspicious. I've decided not to pursue this opportunity.

Thanks everyone!

Al3xK said:   If you have to ask if it's too good to be true...it probably is.

Companies want to give me money just for opening a credit card, or puting some money in a bank account for a few months, or test driving a new car? Banks want to lend me more than double my annual income at 0%, and only charge me fees that range from 0% up to about half of what a savings account pays? Most of what I learn in FWF is "too good to be true", yet somehow most of it is true (or was true at one point...AOR isn't so lucrative right now).

Not that I think the deal in the OP is true (I don't), but that saying doesn't mean much to me anymore.

awstick said:   Buy the house for 310, kick him out, sell to someone else.

And then see how much damage the pissed off guy can do before you can evict him.

He currently has a P&I payment of over $3k month that he's not making on this house and wants to rent it back for $2400?
$310000 at 5% should net you a payment almost $1700 plus taxes and insurance on a +$500k house will be +$10k or a $1000/month.

I would think any investment that puts you at risk of going to jail should net you at least %10 return on your risk...

$310k @ 10% $2600 interest only plus taxes and insurance $1000/month

Also.. Since the home will not be owner occupied your taxes will probably be %40-50 higher

His rent should be $4k per month for you doing him this favor...

People wonder why the MOB charges such high interest rates... If there's a risk of going to jail.... you need to be compensated...