Rescuing An Inheritance From Foreclosure
9 LESSONS FROM A VACANT HOUSE
Rescuing An Inheritance From Foreclosure
About a year ago, our daughter, Beth, was walking her dogs through a neighborhood when she spotted stickers on a house. They were on the door and window. The house was vacant.
Upon closer look, the stickers indicated that a bank had determined the house was abandoned. This meant that it would be heading to foreclosure.
What could we do with this? Was it an opportunity?
We did a little bit of searching online and found out the property was in the name of an estate. The owner who passed away appeared to have a daughter who lived nearby.
Beth talked with his daughter and found out more details. The owner passed away during Covid. The will was lost or destroyed in undetermined circumstances. She was supposed to inherit the house but did not have money to pay for probate. The cheapest attorney she talked to would cost $30,000 and every attorney required a retainer.
She had been furloughed during Covid, adding to the financial pressures.
The pre-foreclosure hearing was coming up in a few weeks. How could we stop the foreclosure process and help her get some of the equity in the house?
Beth and I came up with a plan to buy the house subject-to the existing mortgage. That would take advantage of the low interest rate and minimize our holding costs. We would split the net proceeds 50/50 with the daughter after making repairs and selling the house. The daughter agreed to this plan with us.
WHERE TO START
There were several urgent items to address.
- We needed an agreement with the Daughter.
- We had to stop the foreclosure proceedings and the court was likely to set a sale date at the upcoming hearing.
- Probate had to be completed prior to the sale date.
- A lot of pieces had to fall into place.
One possibility was for the heirs to reinstate the mortgage.
The court hearing was on a conference call with many cases being heard. I got on the call along with the Daughter, ready to speak if needed. The Daughter opposed the foreclosure because she had a buyer for the house.
The judge gave us 90 days to close.
The 90-day delay gave us a little time to breathe and sort out what needed to be done next.
I turned to an attorney, Charles Castellon, who we had used for our own estate planning.
Charles helped us navigate through the legal system. There was no will as it had been either lost or destroyed. The daughter had to get other possible heirs to waive their rights to the property.
Charles was willing to accept the case on a contingency basis, file for probate, and help us avoid foreclosure. His firm would also handle the closing.
We would also need to work through the lender’s attorney to get the amount of funds required to reinstate the mortgage.
Lesson One. We needed an attorney to help us work through the probate process and fight the foreclosure.
EMOTIONAL ROLLER COASTER
The heir experienced a range of emotions during the process of trying to save the house. She initially seemed encouraged at the prospect of getting something out of the house that her dad wanted to leave to her. But it also brought back the emotions of grief. Then it seemed her friends and family thought our attempt to save the house from foreclosure was a scam. She needed to be reassured that this would work out for her benefit and that it was worth the effort and emotional toll.
Lesson Two. Heirs may be on an emotional roller coaster dealing with loss. This may be combined with well-intentioned friends and family who warn of fraud and are discouraging.
THE BANK WAS NOT COOPERATIVE
It was difficult to get any information from the bank. We were directed to their attorney who was handling the foreclosure.
The heir only received mortgage statements.
Locks had been changed by the bank and the heir was unable to get access inside the house until probate was completed.
Once probate was completed there were less than 30 days until the foreclosure sale date.
The bank would not provide the amount required to reinstate the mortgage, even with a court order.
Since we could not purchase the house subject-to the existing mortgage, we had to resort to paying cash.
Where were we going to find $400,000 so we could close in less than 30 days? We had to close prior to the scheduled foreclosure sale date.
Lesson Three. The bank did not have any incentive to work with us. Market values had increased significantly, and they could make more money foreclosing and selling the house at auction.
PRIVATE MONEY FUNDED THE PURCHASE
Another challenge was finding someone with $400,000 to loan in under 30 days. Most of the regular private lenders we work with had their money tied up. Banks require too much documentation and time, so that was not a realistic option. And a hard money loan would eat up much of the equity. It turned out that friends who had sold other properties recently were waiting to close on a larger deal this summer and they had some idle cash. They were willing to lend it and support our daughter in her first house flip. Our estimated time from purchase to sale was four months, but we had to budget holding costs for six.
Lesson Four. You never know who is going to have the money to fund your next venture or deal. Tell everyone what you are doing.
PURCHASE STOPPED THE FORECLOSURE
We finally closed on the property about nine months after our first contact with the heir. We had agreed to split the net proceeds 50/50 with her. Since the bank would not allow her to bring the mortgage current, we had to amend the contract and purchase the property with cash. This would reduce the expected proceeds as compared with the original agreement to purchase the property subject-to the existing mortgage. She received some of those proceeds at the closing. Once we repaired and sold the house she would receive another check. After many hurdles, we had succeeded in getting the house through the probate process and rescued it from foreclosure. It was a victory, but we were not done yet.
Lesson Five. Probate situations can take a long time. Even longer if there is no will.
We were unable to inspect the property until after probate was completed as the bank had changed the locks and was not very cooperative getting us inside. Once inside there was no power or water.
After closing we had utilities turned on and determined the repairs were going to be a little higher than expected, but not bad. It was a paint and carpet rehab with a few other minor items. The rehab was done quickly and the house was listed about three weeks after we had closed. After getting the property under contract to sell the air conditioner started making a loud noise and required another repair.
Lesson Six. Expect the unexpected. Appliances sitting idle for too long can develop new issues. Even in a relatively new house.
The market had changed considerably since our daughter first saw the house. Rising interest rates had significantly reduced demand. Working with our Realtor, Tom McNamara, we confirmed that most of the i-buyers had pulled out of the market. However, there were recent sales in the neighborhood that indicated the value of the house was higher than it was a year earlier.
We received some offers, but they were low. Some were lowball offers which we did not even bother to counter. Some people thought we were making too much money flipping a house. Others were concerned about ADA features. We finally received an offer that, after a little negotiating, resulted in a contract that we believed would maximize the benefit to the heir and net us an acceptable profit.
Lesson Seven. Keep your eye on the market throughout the process. Especially when dealing with probate and pre-foreclosure situations, as these can take longer to resolve.
We closed on the sale less than three months after completing the purchase. Although the profits were smaller than we have seen on other properties, it was one of the most exciting ventures.
There were many winners at the closing.
We completed the sale of our daughter’s first flip. As sellers, we shared in the profits.
At least as important was helping a lady get an inheritance, which her dad had intended. The heir received a check for the balance of sale proceeds.
Charles’ firm earned fees for handling the probate, pre-foreclosure defense and two closings.
Tom and the selling Realtor earned their commissions.
Our private lenders had put some of their idle cash to work and earned interest while contributing to our daughter’s real estate success.
The painting, flooring, and other contractors had each earned a profit.
And a house that had sat vacant for over two years was going to be occupied and enjoyed again.
Lesson Eight. Solving problems in real estate is a team sport and everyone on the team wins. There are many roles in every transaction and each is important. Continue to build your team with relationships.
Lesson Nine. Sometimes the story is more important than big profits.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.