Why Bureaucracy Makes Me Crazy: FreddieMac Stinks!

I generally try to play nice. But I’ve had it in this situation. This might be a long one so you’ll want to buckle on the chin strap.

On July 9th I wrote a post about needing an investor to help bail out a woman who had gotten suckered into a fraudulent lease with option to purchase.

A Quick Recap

A single mom (SM) with two kids entered into a lease with option to purchase in November of 2006 with the “help” of two criminal, er for libel reasons I’ll just say incompetent or uneducated, real estate agents. She made a $2,500 down payment and paid rent on time. That is until she was notified by the Federal Home Loan Mortgage Corp. that the loan had defaulted and that they were foreclosing.

The owner had been taking her money but not paying the mortgage. Now she was supposed to get out unless she could buy the rental home. Because of credit and cash availability she could not. So she calls me to see how I might help.

The Numbers

Our SM had been paying monthly rent in the amount of $1,025/mo. The payoff on the home to make Freddie Mac whole was approximately $106,991.67.00 give or take $17 and some change interest a day after July 27. A quick review of the home and the neighborhood told me the following;

ARV of the home is probably $128,500-$130,000 even in this market. Much needed repairs include exterior paint, wood rot repairs, heating and air conditioning replacement and some other miscellaneous projects.

With my contractors, I figure this is $5,000-$6,000 in repairs. Add in a fee for me of $3,000 for putting the deal together quickly and you have a cost of purchase at $115,000-$116,000, plus closing costs.

The Solution

I brought the “deal” to an investor who was able to help. Provided they would make some money. We negotiated with the SM and her attorney a lease-option that would last 36 months. That’s a long period of time, yes. But in this case it was to both party’s benefit. Monthly rent would be $1,025/mo (fair market rent) with the SM paying for all repairs $250 or less.

The investor would get the wood repairs finished and the house painted immediately. Heating and air conditioning would stay in operation as long as possible but would, in any case, be replaced before the SM took sole possession at the end of the lease-option.

For every month the mom paid the lease on time she would be give a $50 credit towards closing costs. Purchase price on the home in 36 months would be $132,500 (probably about $10,000 under expected value.)

Do the Math

Everyone wins;

• The single mom gets to keep her house without any more down payment, the rent stays the same (until year three when it goes up $25/mo.) and if she performs her end of the deal gets to buy the house under market and in good condition.
• The investor gets to help the single mom AND make about $13,000 after expenses plus reap the tax benefits along the way. Oh, and some paltry cash flow. But they double their money in.
• Freddie Mac gets to sell the home, get it off the books and not lose any more money.
• The real estate agent (me) makes $3,000 for putting it all together.

So why can’t we do this?

Because Freddie Mac refuses to sign a purchase contract with my investors. It’s against policy. They wouldn’t be getting “fair market value” for the home because all they would be getting is the payoff. What idiots! They will only take a payoff. But my clients cannot get the money through a first mortgage unless Freddie Mac signs a purchase contract because according to every underwriter I’ve spoken to that’s a Freddie Mac guideline!

But let’s do the fair market value route, shall we?

I told you ARV is about $128,500 – $130,000. Let’s take $130,000 and subtract the repairs at retail. Now we are down to about $122,000. But that’s if you can find buyers who don’t mind repairing anything without added benefit. What’s that worth? No one can really say. But in a market full of homes for sale, let’s just say $5,000.

Now we are at $117,000. (In case you think I’m not being fair there is another REO in that neighborhood in similar condition that is still for sale after 90 days on the market, for $115,900. ) So let’s put it on the market at $119,900 What’s the cost of an additional 90-120 days (if they are lucky) sales time? Don’t forget admin, winterizing, inventory and other costs. $3,000?

Also, let’s not forget two things;

1. No one will pay list price. If someone can get another home $3,000 less in about the same condition, why wouldn’t they?
2. REALTORS. Now you have two agents to pay. Not just one.

But let’s figure this. Sales price of $114,000. (On a great day!) minus the extra holding costs of $3,000 and the selling agent fee of (2.0%) $2,280 and the buyer’s agent fee (3.0%) of $3,420 and you have left $105,300.

How is that better? And that’s if they get a good price for the home.

Now congress wants to bail out more bad mortgages. From the looks of it, that might be a better idea than letting Freddie Mac make business decisions.

In the mean time this single mom gets screwed again. This time by the people who are there to “help” the mortgage market. She’ll have to move, again. Lose her initial investment. Make her kids go to another school. Shall I go on.

Glad we have policies in life. They really help people who cannot think independently.