Mysterious real estate situation

[brianlanning]

I have a bizarre real estate situation currently. The real place for
this question is probably a real estate newsgroup, but they all seem to
have no traffic except for spammers trying to sell property. So I
thought I'd ask here. Apologies since it's mostly off topic.

I'm currently renting a house. Originally, it was a rent-to-own
situation, a two year lease with the option to buy the house at the end
of the two year lease. The sale price at that time would be $460,000.
In addition, we would get 5% of the house price back from the rent
we've been paying. Rent was $2500 a month. The deposit was $5,000.

Several *weeks* after we moved in, the house was sold to another
person. Which we were ok with. But the new owner was nowhere to be
found for the first month. We had no idea where to send the rent
check. Finally, after a month, he appeared. At the risk of sounding
politically incorrect, he was... uneducated. Acted and spoke like he
came from the wrong neighborhood. But he was otherwise nice, dressed
ok, and was driving what I would call a normal car and seemed like a
likable guy so we were ok with it. Normally, I wouldn't even consider
something like this. But the person didn't match the house. His car,
clothes, and demeanor said $30,000 per year mcdonalds manager, not
someone who could pay $421,000 for a house. (which we know to be what
he paid). We also know that he put no money down, does not have PMI,
and has two mortgages. Through an accidental phone call/voicemail
message, we also have his interest rates on each mortgage. And we know
the tax rate for our area. This means we can calculate his monthly
payments. He claimed to be a mortgage broker and that this was an
investment property.

When he arrived, he asked questions that indicated that he had never
seen the house before. He didn't know how many bedrooms and bathrooms
there were, whether there was a full or partial basement. He left us a
p.o. box as the place to send the check. It's in a bad part of town.

Some quick math says that he's $600 in the hole every month. We also
recently learned that there's a $200 special assessment tax in this
area making him $800 in the hole. Since this was new construction,
i.e. we're the first people to live in the house, we know he's paying
taxes assesed as the value of the vacant lot. This april, the taxes
will be reassessed at the sale price of the house. In the chicago
area, taxes are ridiculous, figure about $12,000 a year. If he has an
escrow account, he'll be in the hole an extra $1000 a month assuming
the account isn't behind. So that's $1800 in the hole. If he has no
escrow account, he'll get a bill this april for $12,000. Half due in a
couple months, the other half due around september or something.

Here's my question: what's really going on here? He's either
brilliant or spectacularly stupid. Which is it? Is there some major
thing I'm missing here?

Even the tax shelter from having the mortgages isn't nearly enough to
make up the difference. Based on our supposed sale price, the 5%, the
deposit, the tax situation, the money he's losing every month. It
looks like if we buy the house for $460,000, he'll break even within
about $1000. That's with no real estate agent fees.

As far as we can tell, he's still paying the mortgage. We've had some
odd visitors lately though. People asking for the guy that owns our
house, then asking who we are and if we're renting. Asking if we know
where he is. Then when we ask who they are, we get some story about
them doing a survey or something. One guy got out and walked around
the back of the house taking pictures, never coming to the door. We
assumed he was an appraiser.

We're currently about half way though the lease. We haven't heard from
the guy since about april last year.

My gut is telling me that this guy paid off some mortgage broker to
look the other way in writing this mortgage. Also that he's just dumb
and didn't consider most of what's going on here. We're assuming our
deposit is gone. I suspect that when he gets the tax bill in april,
he'll stop paying the mortgage. At that point, he would be in breach
so we could walk. Or we could keep paying him rent which he would
pocket instead of paying the mortgage. Or we could not pay him and
probably get evicted after a couple months. We'll probably just pay
him and start looking for a house.

Can anyone infer what's going on here?

brian

 

[tamsuraiya]

Can anyone infer what's going on here?

Could be almost anything. Are you sure he has title to the house? Are
you sure of his identity?

Perhaps he has some equity in the house still, and you can secure your
deposit against that. But only a local real estate lawyer or other
expert can tell you, and that may cost more than it's worth.

Still, it is possible for an investigator to get the new owner's credit
history, and you can go to the county clerk's office and get a
transcript of title and liens and exact tax info.

Interesting situation. Keep us posted.

 

[brianlanning]

Could be almost anything. Are you sure he has title to the house?

As far as we can tell, yes. Although this may be one of those
quit-claim deed scams somehow.

Are you sure of his identity?

No. We considered identity theft, that he had actually used someone
else's credit to buy the house. If that's the case though, he's been
making payments on it. Otherwise, it would have foreclosed by now.
Usually those people stick to credit cards or bank loans though since
what you can buy is portable and easy to resell.

Perhaps he has some equity in the house still,

I really don't see how. Like I said, it think it was a 100% mortgage.
It may even have been a kited contract. I wouldn't be surprised if he
got a 125 loan either. And the house hasn't apreciated any. If
anything, it's gone down because he would be competing with the builder
who has lowered prices by about $40,000 on this model.

and you can secure your
deposit against that. But only a local real estate lawyer or other
expert can tell you, and that may cost more than it's worth.

I really doubt it. We may get a real estate attorney involved, but
probably not. I can see them needing to recarpet when we move out. If
you take that out of the deposit, the remaining amount probably
wouldn't be worth chasing after the attorney's fees. I doubt he would
be that together anyway. I bet he'll either try to keep all of it, or
give it all back. But if a bank took over, they would follow the lease
contract to the letter.

Still, it is possible for an investigator to get the new owner's credit
history,

Without his concent?

and you can go to the county clerk's office and get a
transcript of title and liens and exact tax info.

It would be too early for tax info I think since the first big tax bill
hasn't come due yet. Liens on the other hand would be interesting. I
suspect we'll get a phone call from him in the next few months bugging
us to buy the house. It might be interesting to point out to him that
there's a lien on the house during that conversation, if there is one.

If he files, we may try to get ourselves listed as a creditor since he
has our deposit. With the new laws though, he's so screwed if he
files. He'll probably be forced into a 13 which would mean we might
get some of the depost back. Or, that liability may go with whoever
has the lease. I think the bank that forecloses would be forced to
honor the lease under illinois law. If we wait it out, we may get the
deposit back from them. They would just go after him for the deposit.


Maybe he doesn't know about the new bankruptcy law, and he's planning
to take our rent, then file a chapter 7. We'll see what happens.

brian

 

[homeowneradvocates]

This means we can calculate his monthly
Knowing the sales price and the interest rate doesn't necessarily mean
you are able to calculate the payment. With the various 0 interest
loans and ballon payment options out there, it's really hard to say
what the payment is, without actually seeing the note signed by the
borrower.

If he files, we may try to get ourselves listed as a creditor since he has our deposit.

I assume you mean the $5,000. If that's the case, what did you pay for
the option to buy the house? Usually, the "deposit" is the same as the
option payment and if you dont buy the house, then you wont get that
back.

You can check out www.zillow.com and get some title information there.
Otherwise, make friends with a title company and have them pull loans,
and liens for you to see where the guy stands.

He could simply expect you to leave and to make the deal cash flow off
of the next persons option payment. No one ever said you had to be
smart to be an investor.

Joel

 

[brianlanning]

Knowing the sales price and the interest rate doesn't necessarily mean

you are able to calculate the payment. With the various 0 interest
loans and ballon payment options out there, it's really hard to say
what the payment is, without actually seeing the note signed by the
borrower.

Interest rate plus amount borrowed into a mortgage calculator, you
can't get much simpler than that. I guess it could be an interest-only
loan. That might knock $100 or so off the payment.

I assume you mean the $5,000. If that's the case, what did you pay for
the option to buy the house? Usually, the "deposit" is the same as the
option payment and if you dont buy the house, then you wont get that
back.

It wasn't like that. The $5000 was a deposit like a normal renting
situation. If we were to buy the house, we would get that back to use
for whatever. If we didn't buy the house, it would just be a deposit,
probably not getting some of it back to pay for damage or whatever. We
didn't pay any extra for the option to buy the house, except for maybe
an inflated sale price.

He could simply expect you to leave and to make the deal cash flow off
of the next persons option payment. No one ever said you had to be
smart to be an investor.

Yeah, we'll see what happens. Maybe he's trying to be like these
buy-here-pay-here car places where they expect to repo the car a
significant percentage of the time. If he has a number of properties,
maybe the other ones are subsidising this one. I doubt it though.

When we first rented the house, the original owners offered us a deal
if we bought the house. Essentially, they would give us maybe $20,000
back if we bought the house for some slightly inflated price. It's not
really kiting a contract since we'd have to come up with the down
payment at closing from a normal source. But it sounds fishy. Anyway,
maybe they offered the current owner the same arrangement. With
$25,000 in the bank, he could bleed for a long time. Not long enough
though. The moment of truth will be when that tax bill comes in around
april.

brian

brian