Foreclosure/refinancing through a friend
A retired family friend and her working daughter have a high interest mortgage and want to refinance their house. I am fortunate to have enough savings to pay off their mortgage and offer them a below market rate for any term they want, as this would still be higher than any interest we could earn and we have plenty invested in stocks already. Furthermore, their mortgage payments would allow us to retire early. We have lent them money in the past -- up to 5 figure sums -- and they have always paid.
Obviously this is a bigger deal with some risk. We would have an attorney do the paperwork but are there any pitfalls you can think of that we need to be aware of should we proceed? We are in California if that matters.
As usual, I would recommend a good real estate attorney. They would be able to discuss all the options and pitfalls. A good lawyer would have seen more issues than any of us could imagine. And explain the procedure of foreclosing and reselling the house if the worst should happen.
Relatives are some of the worst to lend money to, but there are exceptions. Those exceptions are usually solid people. And as friends, you have the opportunity to stop over and see the condition of your investment. Banks don't do that. So you may see yourself as a wiser investor than most banks.
If the loan is paid off, you should earn higher interest than any investment. The entire loan amount is usually paid back in 10-15 years, the rest is interest, or in your case, profit. The great point is, you are in a position to forgive the remainder of the loan at that point. Or you can put an addendum in your will how the remainder of the loan will be handled. As a private lender, you can do great things for people.
On the down side, you face the risk of job/income loss, health issues, and other things that may cause missed payments That is life and a risk we all take. But your money is safe, since you have a lien on the property. That is why it is called Real Estate. That may be the only really safe investment you may have. But a real headache to recover -- taking over a year. Do a quick calculation to look at payments of 5 years, through a figure at court costs, add in the price of reselling the property at 80% market value, and see what comes out.
The two main threats I see is market value. No one knows when it will go up or down. The other is insurance. Make sure it is well insured. Arrange a proof if insurance. Another problem that could be an issue is, second mortgages. That is usually where banks and people fail. Talk to your attorney to see if you can get a deed restriction or clause in the loan agreement about second mortgages. Just an idea. I'm not an attorney and not sure if you can do that. If no one else can add a mortgage to the deed, that may be an extra layer of protection.