The challenge
A doctor client in his late 60s has a girlfriend who lives in her house. The girlfriend purchased the house some years ago and pulled equity from the home as real estate prices increased. After the housing collapse, her house was underwater, meaning she owed more on the property than it was worth. She was unable to pay her mortgage for several months and eventually the bank foreclosed on her house. Although she is still living in the property, the bank is evicting her. She wants to stay in her house and is back on her feet financially, but it is too late?
What we did
We received a call from our client and asked if there was anything that could be done. It turns out there was. We worked our resources and found a local real estate agent who did some digging. Our client thought about buying the house from the bank in a short-sale and then renting the house back to his girlfriend. Sounds reasonable, but it’s a big no-no. You are not allowed to engage in a short-sale and rent the property back to the seller. It’s considered mortgage fraud and can be considered a felony. Although it would be next to impossible for the bank or lender to discover this, we had to strongly advise against this approach. Fortunately, the research turned up that the property was already sold to a large investment holding company – they purchased the home via a short sale. This gave us an opening. Our agent contacted the listing broker and we negotiated an offer. At the same time, we had to secure financing. We started the process of getting a pre-approved lending letter. This used to be much easier, but now lenders have a much more difficult underwriting process. We provided the mortgage broker with all of the necessary documents – tax returns, K-1s, P&L statements, brokerage statements, income reports, etc. Concurrently, we initiated a no-fee non-purpose securities-based line of credit against his investment portfolio through the custodian (in this case, Charles Schwab). Why? We wanted to negotiate the sale price hard, and then once finalized, we wanted to come in with lower all cash offer. In order to get the cash to make the near $1 million purchase, our client would have had to sell part of his investment account. In doing so, he would have been subject to capital gains taxes. Alternatively, and as a less expensive option, he could get a loan against his investments at a rate less than 3% per year. We would use this as a short-term loan to buy the property, and then immediately after purchasing it, we could do a cash out refinance to pay back the loan.
The outcome
- Although holding company didn’t want to sell the house, she found a new house she loved in the same community.
- Because my client had the cash available, he was able to make a cash-only offer and get a good price for the home.
- The client earns a good return on the rental and still has the line of credit available.
These examples are for illustrative purposes only. Any strategies referenced herein do not take into account the investment objectives, financial situation, or particular needs of any individual. They should not be considered individual advice, suitability must be independently determined. Individual results will vary and may be more or less favorable than in the examples shown.
