Landlording & Rental Properties

Can I Lease The House Back to the Seller After I Buy a Short Sale?

Expertise: Real Estate Investing Basics, Personal Development, Flipping Houses, Real Estate Marketing, Real Estate News & Commentary, Business Management
60 Articles Written
Short Sale Lease Back

Purchasing a home where the occupants know the lay of the land, love the house, and are already occupying it seems like win-win. Typically this is called a turn-key rental.

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However, in a short sale situation, is it still OK for you to rent back the house to the current owners?

Let me preface and conclude the article with a no, no and no. Let’s explore each of those more deeply!

Emotions Running High

What seems like a logical solution lacks the critical element that can destroy your deal and may cause legal problems: emotions. No one enjoys losing their home, of course, but this compounded by being at the banks whim to help you get the home sold, the uncertainty of when you may have to move, and the stages of grief the seller may be facing.

When it seems like someone is coming to your saving grace, promises run high and feelings run deep. Once the pressure is lifted though, those positive thoughts can change with the wind and resentment and the word “fair” becomes much more sensitive.

Keep Your Friends Close

…and your Tenants at Arms Length. The short-selling lenders are going into greater detail about the contingencies that must be included in order to close the short sale. Many, in fact, that are placed on the buyer, and defined between the buyer and the current borrowers. The buyer is promising to abide by these, as are the title agent, attorney, seller, & anyone else involved.

You are encouraged and required to read the closing docs, affidavits, and arms lengths disclosures. Many are pretty concise about not allowing the buyer to rent the house back to the borrower, and not having any side agreements between any of the parties the banks are not aware of. If you are putting a lease in place, and tell your agent about it, you’re opening up a can of disclosure and liability, and risking getting the short sale cancelled.

Bottom line: If the bank says the borrowers have got to go, and you can’t rent back to them, best listen and agree to what you’re signing off on.

Otherwise, words like “fraud” & “FBI” and other f-expletives may be added to your real estate vocabulary.

Keep It Clean

I can’t speak obviously to your direct neck of the woods, but in many markets there is a shortage of housing inventory.

If you can market the home and have a new renter that is not emotionally attached to the home move in, you should. You’re kidding yourself by thinking the easiest solution will be the best solution, in this case. It’s cutting corners and banking on the homeowner, & lenders not coming back to haunt you legally, emotionally, and financially.

If you want to get a leg up on getting the house rented, run “ghost” ads on craigslist that outline the general features of the house without the address, and see how much interest you can cull. You can send out flyers to the neighbors saying you are buying a house in the area and they can “Pick Their Neighbor” if they know someone that is looking to buy or lease to own. Once the house is ready to go, or even a few weeks before, you can reach back out to your interested candidates & perhaps have a renter in place in a relatively short amount of time after you close. If you don’t close, there may be investors in the area that may pay for your leads or give you a referral fee if they close on a lease with one of your candidates.

If you’re purchasing short sales, keep your nose clean and your rental business professional. Simple solutions can cut out any possibility of backlash from authorities or past owners, and keep you being happy to be a landlord for years to come.

Have you had a bad experience with renting a foreclosure or short sale back to the previous owners?
Have you had to learn this lesson the hard way?

Photo: elvisripley

    Jim Pratt
    Replied almost 7 years ago
    Been there, done that. Rather rent to Section 8 then someone with a history of missing payments. NEVER again.
    Tracy Royce
    Replied almost 7 years ago
    Spot on, Jim. Thanks for sharing.
    Roy N
    Replied almost 7 years ago
    Why would you rent to someone who couldn’t make the mortgage payments and expect them to be able to make rent payments? Reply Report comment
    Roy N
    Replied almost 7 years ago
    Why would you rent to someone who couldn’t make the mortgage payments and expect them to be able to make rent payments?
    Tracy Royce
    Replied almost 7 years ago
    Not everyone thinks so logically automatically Roy, that’s the issue!
    Sharon Vornholt
    Replied almost 7 years ago
    I agree with you Tracy. In their minds it is still “their house” that they were forced out of. All sense of reason goes down the drain. It’s best for everyone for them to move on and for the new owner to find a new tenant or buyer for the house. Sharon
    Tracy Royce
    Replied almost 7 years ago
    Absolutely, especially seeing as how they can most likely go rent something comparable for 1/2 of what their mortgage payment used to be. Reply Report comment
    Tracy Royce
    Replied almost 7 years ago
    Absolutely, especially seeing as how they can most likely go rent something comparable for 1/2 of what their mortgage payment used to be.
    Sharon Vornholt
    Replied almost 7 years ago
    I agree with you Tracy. In their minds it is still “their house” that they were forced out of. All sense of reason goes down the drain. It’s best for everyone for them to move on and for the new owner to find a new tenant or buyer for the house. Sharon Reply Report comment
    Karen Rittenhouse
    Replied almost 7 years ago
    We never rent back to the previous owner: 1. What Roy said 2. If you purchase the house for less than what was owed to the bank and the original owners are allowed back in, you could be seen as a conspirator in defrauding the bank. Never a good idea. Plenty of tenants to choose from. Thanks, Tracy.
    Roger DiRuscio
    Replied almost 7 years ago
    I have read a lot of good advice here. No, I would add especially if there was cash for keys. We just received a eviction judgement on a slightly different situation where we rented back to a former owner after foreclosure, with bank approval I might add. It was one of the reasons they sold us the house. They didn’t want to see an 80 year old lady evicted either. She pasted away and all of her family would not leave. No good deed goes unpunished they say.
    Roger DiRuscio
    Replied almost 7 years ago
    I have read a lot of good advice here. No, I would add especially if there was cash for keys. We just received a eviction judgement on a slightly different situation where we rented back to a former owner after foreclosure, with bank approval I might add. It was one of the reasons they sold us the house. They didn’t want to see an 80 year old lady evicted either. She pasted away and all of her family would not leave. No good deed goes unpunished they say.
    Roger DiRuscio
    Replied almost 7 years ago
    I have read a lot of good advice here. No, I would add especially if there was cash for keys. We just received a eviction judgement on a slightly different situation where we rented back to a former owner after foreclosure, with bank approval I might add. It was one of the reasons they sold us the house. They didn’t want to see an 80 year old lady evicted either. She pasted away and all of her family would not leave. No good deed goes unpunished they say.
    Tracy Royce
    Replied almost 7 years ago
    I second that, thanks Karen!
    arthur field
    Replied almost 7 years ago
    Great post, just commented on a very similar question in a different real estate forum. Short sales are tricky business to begin with, adding a tenant already known for slow to no payments is a bone headed move on any landlord or property owners part. Also love and couldn’t agree with more on the comment “keeping tenants at arms length.” Real estate brings out the most unscrupulous people and situations known to man. The problem described above spells out both!
    arthur field
    Replied almost 7 years ago
    Great post, just commented on a very similar question in a different real estate forum. Short sales are tricky business to begin with, adding a tenant already known for slow to no payments is a bone headed move on any landlord or property owners part. Also love and couldn’t agree with more on the comment “keeping tenants at arms length.” Real estate brings out the most unscrupulous people and situations known to man. The problem described above spells out both! Reply Report comment
    Tracy Royce
    Replied over 6 years ago
    Thanks for the comment Arthur! Reply Report comment
    Tracy Royce
    Replied over 6 years ago
    Thanks for the comment Arthur!
    Steve Cochran
    Replied over 6 years ago
    For sure disclose. You can always try to do a rent back for current sellers. You just have to disclose what’s going on. Lenders can make an exception if they want to. I have a short sale right now with sellers that want to rent back for a good reason. Their 90 year old mother is bed ridden and has been on hospice. They would like to rent back for a year to give their Mom time to have her final days at home. We actually found a buyer that was fine with that. We put that in writing and disclosed all to the lender, requesting an exception. We unfortunantally were not approved but we did request with everything disclosed and signed the arms length agreement with the exception on that as well. I have heard of lenders making an exception. I would encourage anyone to try..just disclose,disclose,disclose.