Love Austin Homes Investing Blog

Does anyone have suggestions for how to help someone facing
foreclosure on a mobile home & lot and they are approximately $45,000
upside down on loan:retail value? The bank would have to discount the
loan nearly 40% just to break even.

These folks would really like to avoid foreclosure.

Thanks,
Peggy

ANSWER

Peggy,
On the Topic of Mobile Homes –

It is possible but unusual for a lender to accept a short payoff on a mobile home, with this large of a discount. Even if they did, the deal would depend on someone else wanting to finance and buy the property – and it’s hard to find buyers for these properties, unless selling them with owner financing (which is not done in a short sale situation).

In most cases, when you buy a mobile home, unless you bought it used at a 75% discount from new, you should go ahead and start filling out the bankruptcy paperwork, because you will need to have it completed by the time you eventually need to sell.

The economics are:

· Used single-wides are worth $5-15K or less

· Under single-wides with land are worth: $land value + $5-15K or less

· Used double-wides are worth $5-25K

· Used double-wides with land are worth: $land value + $5-25K or less

The ‘or less’ has to do with condition or the cost of demolishing or removing the mobile home from the property. Unfortunately, I see people buying these things new for $30-90K, or $60-$140K with land (even when the land is only worth $5-25k). Why do people buy these? It seems like a good deal to get a home and 1-5 acres for <$1000/mo or a home alone, for < $600/mo… until/unless you go to sell…

The only way I’ve seen people get out of these are:

1) The land has intrinsic value that has appreciated to compensate for the huge write-off of the mobile home (this is rare)

2) The homeowner decides to live in the home for the duration of the 30-year loan (this is sad)

3) The homeowner finds some other misinformed buyer to take over their payments through owner-finance, lease, or lease/option (this is common)

a. These buyers are often other family members or friends

b. Of course these deals usually eventually fall apart and become #4

4) The homeowner walks away and is foreclosed on (this is typical)

5) The homeowner wins the lottery, gets an inheritance, or is otherwise successful in life and/or business to the extent that they are able to pay off the loss and get out (this is a miracle)

We’ve had dialog on this topic from time to time, but I have yet to see a solution for people in these situations. I know there are some people, like Dan Francis and Jack Burns, that can sometimes help find people to take over payments on mobile homes, but usually these are for properties that are not already many payments behind, and on the verge of foreclosure. If these buyers a can catch up, this may be an option.

Phill

Hi, this is Nirav, I need some advice.
I am actually going to place my first bid within the
next 24 hrs. The house is listed at 93,000, I looked
at the CMA’s and all of them are going from 110,000 to
127,000. I have done a walk thru inspection on the
house, and needs very little work. I was just
wondering where I should start my bid at. It is a HUD
home owned by the bank. Appreciate any response.

ANSWER

Nirva,
I always suggest the classic formula of 70% ARV (After Repaired Value) – repairs. If this home should be worth an average of around $120K ARV, and it’s going to take you $5K to renovate, you would bid $120K x .7 = $84K - $5K repairs = $79K.

This formula assumes a relatively conservative 15% cost of sale and carry/money (C&C), 5% contingency, and 10% profit. Obviously, if you have estimated your renovation costs well, and the home sells in a timely fashion (because it is a fairly ‘resalable’ home), you won’t use up your contingency. Also, if you have cheap money and/or you use discount realtor services or sell it yourself, some the 15% C&C costs can be reduced, though it may not actually be worth it for a newbie to cut these corners.

In this example,

In a best case resale scenario, your profit might be: $127K (resale) - $79K (buy) - $5K (reno) - $7.5k (C&C) = $35.5K (profit)

In a worse case resale scenario, your profit might be: $110K (resale) - $79K (buy) - $10K (reno + contingency) - $16.5K (C&C) = $4.5K (profit)

Something in-between is much more likely.

The truth is, however, it’s pretty hard to actually find and get 70% deals. Because of this, most people take a gamble and bid closer to 80% or even more. At those margins, you would bid up to $91K for this home, and cut your best case profit to $23.5K and your worst case to, gulp, a LOSS of $7500. As you get better and better at doing this, you will be able to tighten up your ARV, reno, and C&C estimates and feel more secure about what you can afford to bid. I just negotiated a 75% deal this week, for example, that I’m pretty excited about. $235K (ARV) x .75 = $176K - $25K (reno) = $151K (buy price). Would I love to get this down to 70%? Sure, but I also realize that pigs get fat and hogs get butchered, and I’d rather just be a fat pig

The biggest mistakes I see newbies make is going into deals too rosy-eyed. They overestimate what homes will really resale for, by overlooking problems the home has, like being on a busy street or having a funky layout. Sometimes these problems are the reason the home is available at a screaming price today. Newbies also underestimate renovation costs and don’t take into consideration that once you start pulling walls down, etc. more problems are likely to show up. The real ‘cash and burns’ occur when a newbie borrows too much money at a high interest rate and runs out of $$, or has to price the home above what someone will really pay and the project starts going into the red. I just bought one of those, from a newbie, in midtown last week. He had to cut and run.

The second biggest mistake I see newbies make is being too cautious and never doing anything…

Good Luck!
Phill