It doesn't matter if a real estate investor or real estate broker is involved in house flipping scams or is just inexperienced in how to buy and sell properties with mortgage problems. Don't get caught in a house flipping dilemma. If you're a homeowner with mortgage payment problems, maybe late on a few notes, or even receiving delinquency notices, be careful not to make a bad situation worse. The number of house flipping "gurus" out there is at a high point, matching the peak in troubled mortgages.
It's not that everyone offering you a possible solution to your problem is a con artist, or involved in some sinister house flipping scheme. There are ways in which legitimate investors can help a troubled homeowner and make a profit, and there's nothing wrong with that. Just be careful to protect yourself from the unscrupulous and uneducated real estate investors. Here are some tips to help you to protect yourself and avoid getting locked into a situation that could turn sour.
The Short Sale Time Trap
Short sales are big news right now, and for good reason. Homeowners in mortgage trouble see the possibility of convincing their lender to take less than they owe on the mortgage and let them walk away. With a large percentage of borrowers "under water," with more owed than their home is worth, this seems like a great way to avoid foreclosure. It can be a solution, but one report stated that fewer than one in five short sale offers ever make it to the closing table. With lenders drawing out the process, many buyers become frustrated and simply walk away in search of another deal. So, if you're promised the moon with a short sale as the answer, beware of locking yourself into a process that would preclude selling to another buyer who appears in the months it can take to work out a short sale offer.
Lease Purchase for Years
Actually, this approach has saved homeowners from foreclosure, but you just need to be sure that you understand what you're locking yourself into and for how long. A real estate investor builds a list of buyers, many who will need to purchase a home via a rent-to-own deal, as they have poor credit or no money for a down payment. This investor then sees your home as a fit for one of these buyers, and you're behind on your mortgage payments. The investor offers to take over your payments, even making up back payments, on a lease purchase contract for three or more years. They'll want the ultimate purchase price to be the loan value, or not much more. There are ways that this can be structured contractually to protect you somewhat, but have your own attorney go over the contracts.
The investor takes the home over, puts the tenant buyer in, and they are also on a lease purchase deal. They have agreed to lease the home and buy it at a set amount in the future, once they've repaired their credit or gathered their down payment. This can be a win-win, with you getting out of the home without a foreclosure, and the tenant buyer getting into a home when they couldn't have any other way. Just realize that you're still responsible for the mortgage, and will be through the entire agreement period. The investor has the right, but not the obligation, to buy the home. So, your problem could come back to get you three years or more in the future if their tenant buyer doesn't perform.
Flipping Houses With Short Term Hard Money Loans
Again, there's nothing wrong with this method of buying and immediately re-selling a home, but you should know how long your home is off the market in the deal, and how solid the investor's loan resources are. Basically, your home can be purchased at a bargain price, maybe as little as the loan balance, and the investor's buyer list has on it a few other investors who are looking for a similar property for a long term rental. The investor approaches you to execute a contract contingent upon them selling to another buyer, or they've already located the buyer and have a contract with them contingent on getting your home. Either way, lenders and title companies are no longer allowing "back-to-back" closings with the funds from the second deal funding the first. In other words, the investor in the middle must close on your sale with real money before the other purchase can close.
The investor looks to a short term source of money to get your deal closed. It can be a relative or friend, but in many cases it's a hard money lender with high fees and high interest rates. There's nothing wrong with this practice, and if all goes well, the investor will make a profit in flipping your house, with enough difference between purchase and sale costs to cover clearing the short term loan. What you as the homeowner need to be careful to do is to hold them accountable at the beginning to show you how they plan on funding your closing, even to the point of asking for a letter from their hard money lender. And, if all of this is contractually stretched too far into the future, you'll want to check with a real estate attorney for contract wording to protect you.
If It Seems Too Good to Be True...
The best way to protect yourself from house flipping scams or incompetence is to have a solid and realistic knowledge of what your home is worth in the current market, and how much you owe on it. If there's little room between the two, or worse, you owe more than it's worth, how would savvy investors be able to do anything with it?
James Kimmons - Business Technology and Marketing Writer Writing for business, particularly on the Internet, requires the ability to get to the point, ...
