Can I stop repossession with a lease option offer?

by Readers Question

7:57 AM, 22nd May 2013
About 8 years ago

Can I stop repossession with a lease option offer?

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Can I stop repossession with a lease option offer?

Stop repossession with view to lease optionI need some advice on stopping a repossession for a motivated seller with a view to getting the property on an option. Property is listed as a 3 bed but has been converted to a 4 bed. £285000 on an interest only mortgage + £17000 in arrears. 4 beds in this area range from £330000-£400000.

Seller is unemployed, 58 yrs old and has failed in previous payment schemes set up for him by bank. Bank is concerned about his lack of funds and him nearing retirement age on an interest only mortgage.

I have a letter of authority and have spoke with bank as a friend of the seller but have been asked to put forward a proposal to them on how we wish to proceed.

There is difficulty in setting up another payment plan in sellers name because he is in need of assistance from council to be re-housed and feels that he must either be repossessed or have another party officially registered as taking over the property to get assistance from the council.

Can you please suggest a sensible way to structure this deal? I’d really like to help this seller and this would also be my first ever deal. Really want to get a deal under my belt for the experience.

Thanks

Marlon Fox

 


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Mark Alexander

8:12 AM, 22nd May 2013
About 8 years ago

Marlon, I'm really sorry but I just can't see why you might think this deal stacks up.

The bank and the current owner need the property to be sold for the debt to be repaid so they can both move on.

What on earth makes you think the bank would agree to disadvantaging the value of their security by consenting to a lease option?

I here about self styled property guru's peddling expensive training schemes to teach property newbies and wannabees to do these deals quite often. However, in my 24 years as a landlord, having also worked in insolvency, commercial banking and law I have never managed to get my head around why people think deals like this can be completed on a consensual basis between a distressed residential borrower, a property newbie and a commercial banker. Unless you are a multi millionaire and can prove it I can see no reason why the bank would be the slightest bit interested, even if you were I think they would ask "why don't you just buy the property?"

Sorry, that's probably not the answer you wanted to hear is it?

If another reader would like to challenge my thinking I would dearly love to debate this further.

ian

12:46 PM, 22nd May 2013
About 8 years ago

If your friend is going to be rehoused why not put it up for sale on the open market, before Bank reposess & sticks it in an auction. Or if you have the finance buy it at auction yourself get a better deal , no arrears to pay off. Better than what your proposing to do.

14:07 PM, 22nd May 2013
About 7 years ago

If this were my deal, I'd set this up on a JV / Installment Contract basis; using the Buyer's deposit to clear the arrears in full. That way, the repossession order is set aside, the lender is out of the equation and it's business as usual.

The burning question, however, is time. Is there the time for you to find an IC Buyer? If not, and you don't have the cash to settle the arrears in advance of finding the ICB, then a JV with another Investor may be the answer.

This sounds like a deal with cracking potential. Best of Luck!

Mark Alexander

15:05 PM, 22nd May 2013
About 7 years ago

@John Wallis - I understand very little of the jargon you are using in relation to structuring this deal, please explain. I understand that JV is Joint Venture, IC = Instalment Contract (please explain how that might work in this scenario) and am I right in thinking ICB = Instalment Contract Buyer?

I am prepared to be educated, 1-2-3 GO ........

17:32 PM, 22nd May 2013
About 7 years ago

@Mark: Apologies for the jargon but you're spot on with all the definitions. Were you kidding about the education? I wouldn't want to patronize a guy that's been in the property investment business far longer than I have!

@Marlon: Historically, I used to conduct repossession hearings on behalf of lenders so I'm a bit Gamekeeper turned Poacher.

For those not in the know, with a repossession, once the arrears are cleared, the Order is set-aside and the borrower is back on good terms (at least the argument is over) with his lender.

Whilst the Lender's terms & conditions would almost certainly prohibit renting the property without their permission.(this, as we both know, is fairly standard), I doubt very much (content to be corrected if my doubts are unjustified) if the same prohibition covers granting a buyer access to the property on licence between exchange and completion. The fact that Installment Contracts have a delayed completion built in might be stretching the point but, if the mortgage is being paid and is kept up to date, it is unlikely that they'll ask too many questions.

Now to how a JV / Installment (Delayed Completion) Contract works. I would JV with the Vendor to assist with the sale of his property. The price the Vendor would get would be fixed (as with an Option) and I would receive any surplus. I would then market the property on a Move-In-Get-a-Mortgage-Later basis and take the Buyer through to exchange of contracts. They would pay a deposit followed by agreed installments until such time as they could raise a mortgage to clear the balance due.

To clear the arrears (if it has to be done in one go), then I would use part (hopefully not all) of the Buyer's exchange deposit

That's it in a nutshell. Obviously, it's a little more complex but, if an inexperienced Investor JV'd with someone who was competent, it shouldn't be too difficult to achieve a result.

Mark Alexander

19:02 PM, 22nd May 2013
About 7 years ago

@John Wallis - I admit to being suspicious of schemes where control of a property can be taken by an individual with little or no money for profit. Examples being Rent2Rent and Sandwich Options, the latter of which appears to be a predecessor to the more modern derivative you have outlined above. I have only been convinced of the ethics of one such scheme known as "Rent to Buy" and the basis it was being offered by one particular provider. Funnily enough that scheme provider was endorsed by a senior government minister just a few months later.

Would you be agreeable to answer some very tough questions about the property acquisition method you have suggested here?

The downside is that the model could be publicly torn to sheds of course and you might end up with egg on your face.

The reverse is also true though, I could also end up with egg on my face if I am overly cynical and you subsequently prove me wrong.

The potential upside for you is massive. You could end up with an independent internet review thread which results in your concept being shown as a beacon of light as a tool to be used by investors, distressed property sellers and frustrated property buyers in the fallout of the credit crisis. Just imagine the value of that!

Gilly

20:39 PM, 22nd May 2013
About 7 years ago

This is absolutely fascinating - please elaborate further as I haven't really grasped it. My simplistic view is that I often think that vendors would be far better off selling their properties at auction etc rather than submit to a repossession which gives them the least amount of money. I have benefitted from this personally in the past (having bought a repo, after having made a genuine offer much earlier when it was on the market at a far higher price) - but although I may have been laughing all the way to the bank it didn't make me feel at all good, but I couldn't see how to help at the time.
My first question is - Is Marlon the buyer or the JV person (yes I'm that dull I'm sorry). Does he just set up a scheme with someone else or does he pay off the arrears, having set up a legal contract to buy subsequently? Who makes the biggest gain here? confused of cardiff.... John Wallis - you must be loaded if this is the area you work in!

22:06 PM, 22nd May 2013
About 7 years ago

@Mark ~ I don't intend to get into a debate (except over a couple of beers) because I don't think it will achieve anything constructive. JV / IC is a strategy I like. I use it to rescue distressed homeowners from the lifelong impact of being repossessed ~ including those in negative equity who couldn't sell in the open market even if they wanted to. It also helps those who can't get onto the housing ladder in the conventional manner. It's win-win. Whether or not it's a strategy for you is a matter of personal choice. If yours works for you, then I wish you every success.

@Gilly ~ Marlon would be the JV partner who would assist with the sale to a 3rd party. And I wouldn't say I'm loaded ~ I haven't been investing for long enough yet. I did, however, quit the full time job at Easter!

@Marlon ~ If you're interested in finding out more and can get in touch (this is my first time here so I don't know how it works yet!) then I'll be more than happy to talk to you.

23:54 PM, 22nd May 2013
About 7 years ago

Thanks to John Wallis for your comments on this matter. I would very much like to talk to you more about the way you are structuring your Installment Contracts, as I feel l a little help in this area would give me far greater ability to help the sellers that have been contacting me, other than simple option deals. Many of the buyers that have contacted me would also feel far more comfortable with the added security of an IC. Might you be interested in working with me on this deal and possibly some others? Not sure how we go about exchanging details on here though??

Mark Alexander

8:02 AM, 23rd May 2013
About 7 years ago

@Gilly - fascinating it may well be but having used forums for quite some time I think I can already see which way this thread could be heading. I had a good idea what I might be dealing with when I first received the request to post Marlon's original question and I thought long and hard about doing so.

There are some very creative people in the property world, just as there are in the gambling world. They create complex structures with the promises of fast wealth and then charge a premium to teach them to others. It's starts of cheap, or even free but it's a sales funnel and the next level of education gets progressively more expensive. The bottom line in terms of the Get Rich Quick principles are always similar, i.e. use other peoples money to profit from property investments.

These structures rarely work in practice and even if they do they tend to be incredibly unethical.

Anything worthwhile and even the scams get exposed on forums eventually and you can learn about then without paying for them. I have my suspicions that some if not all the comments here are planted as none of the people who have commented have verified their identity by linking back to their Twitter accounts or websites and there have already been calls to make contact with each other. This thread has all the hallmarks of many other sales funnels I have seen, i.e. tell part of a story, make it fascinating, refuse to share the golden secrets online, call me, etc.

Please check out this video blog I created back in 2011 >>> http://www.property118.com/lease-options-how-do-they-work-and-should-they-be-regulated/18739/

I would also suggest that you visit the Property Tribes forum as they have several threads devoted to exposing the cracks in these types of schemes and the people operating them.

Just work through the example offered by John Wallis here. His business model involves taking money from a buyer who can't afford to get a mortgage and using that money to pay off somebody else's mortgage arrears whilst John takes control of the property. How is the buyers deposit secured? Who is now accountable as the landlord? Are the mortgage company going to consent to this arrangement? If the mortgage is unpaid who is responsible for the money the purchaser paid over and who does the mortgage company chase?

These arrangements are peddled as win/win and many inspired amateurs are brainwashed into believing that. However, all these schemes I've seen are a million miles from being win/win, allow me to explain. A fraction of the deals which are completed will work fine in the long run but the majority will not and the so called investors (the inspired amateurs) will generally walk away from them scot free having rarely invested a penny of their own money. Even that is not the major point though! You see, most people buying and selling houses are not gullible enough to fall for these schemes and no matter how desperate they are, they take professional advice. Any decent IFA, accountant or solicitor will advise their clients not to touch these schemes with a barge pole. Admittedly, it's a numbers game and that's why some deals are done. The real winners though are the people who invent these schemes and then charge a fortune to get rich quick wannabes to teach them how they work. Again this is a numbers game and the mentor will always find some people who manage to do deals and they will be held up as proof of concept. The success is, of course, usually short lived but this rarely matters as these people then become apprentice mentors and so it goes on. Just imagine the financial carnage and reputational damage these schemes cause for genuine people and our industry as these schemes continue to fester!

When I first started to expose these schemes I was accused by the guru's of only doing so to protect my mortgage brokerage business, which incidentally was the largest in the UK.

However, I closed that down in 2009. I have posted details in the link below as I expect mud to be thrown now as a result of the revelations in this post. Given that I am no longer in the mortgage business that particular accusation can no longer be levelled at me. The best the guru's can come up with now is that I am a "dream stealer" as I have already made it in property and I don't want the extra competition. If that's the case, ask yourself why I created Property118 to share best practice amongst my fellow landlords and letting agents.

Promised link explaining why I closed my mortgage brokerage business down >>> http://www.thamesvalley.police.uk/newsevents/newsevents-pressreleases/newsevents-pressreleases-item.htm?id=160461

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