What are the restrictions of selling a short-sale back to seller?

21 Replies

What are the restrictions of selling a short-sale back to the seller?

Can I sell it back to them in 2 years?

I dont have the exact answer to this...but whatever answer you get make sure you do your own research as this is a very sketchy area...it runs right along the fraudulent line so you need to be extremely sure of the rules. My "personal beleif" is that the home should not be available for sale to the defaulted owner at any point.

More importantly, WHY would you want or need to sell back to the original owner? They already proved to be a credit risk, aside from the potential fraud issues.

Banks will not look kindly on you selling a home back to the owner of a short sale. That would be construed as the similar action of giving them cash for the transaction (which is a no no.)

List, Screen, Lease, Get Paid, Manage.
No Better Place to Lease Your Place
Owners rely on the #1 rental site to get the best results from their rental properties.
Get Started Now

This is a total "fraudulent conveyance". You are the architech of the scheme with intend to defraud or "short" the bank and cause a material loss for the institution.

Later revert/resell the property back to the owner...You are ready to go to jail?


Felix Liusky
fomer Bank Vice President

Quick answer- Do not do it! Very simple. Do not place yourself/ company in a place where you can be construed as doing something wrong. It is not worth it.

Next- Will is right. The property owner has proved themself to be a huge risk! Not a good idea when you are in business to make money.

I have had several people ask me why my company will not "rent' or "lease" properties that we buy through short sales, to other clients. My answer is always- Why would I rent/lease to someone whom does not pay. I am in business to make money. A realtor in my town then told me I was greedy cause I have properties and would not even consider renting/leasing to short sale clients. I just laughed. Then I replied, do you mind if I send over every client of mine, so you can rent to them? She looked at me like I was crazy. But never gave an answer.


I wouldn't touch that with a 10 foot pole.

I recently had a shortsale that I was working in which the seller wanted to do the exact same thing. He wanted to be the B-C buyer and use his retirement money to retain the house. There was no way I was getting involved in that fraudulent activity.

Originally posted by nationwidepi:
I think you have your answer now!

Sure do.

I think it's illegal to rent to the previous owner, but I'm not sure how long the resale goes out to. If the previous seller and then buyer did anything that can be construed as fraud, than I expect the bank might find out and sue you.
Orange jumpsuit.... if you're the one that gets to be the example, but long court battle, or expensive settlement is the probable outcome.

Just sell it to someone else, make your money, and let them buy something else.

I think it's illegal to rent to the previous owner, but I'm not sure
Where are you getting your info from? It is not illegal to RENT back to the short sale previous owner, it is however, illegal for them to receive any financial compensation, including, but not limited to selling them the home back.
I think we already made this crystal clear in this thread.
BAM Capital
Multifamily Syndicator
Targeted 10% Monthly Returns | Passive Income
Backed by institutional-grade apartments, strong sponsor track record, $700M AUM, over 5,000 units
Learn More

I said "I think" it's illegal....
Meaning there may be legal repercussions if you rent to your short sale seller. Most lenders are now asking that Arms Length Transaction Affidavits are signed and notarized by all parties (including RE agents etc). Those statements state they can't rent back their short sale.
Here is a section from one I just got last week:
" Affiant further says that there are no agreements or understandings, written or implied, that will permit Seller to remain in the above mentioned property as a renter or to regain ownership of said property at anytime after the execution of this short sale transaction."

That's where I got my info from.

H Mann,

Most likely the seller and their bank tried to see if a modification would work for the seller. I'm saying they tried to see if they could afford to pay a lower payment every month, and keep their home. The bank probably couldn't qualify them on any of the various programs available to them. This says to you: the sellers probably can't afford what the home would get for rent.

So then Mitsu, it would be perfectly legal to rent to said homeowner as long as they did not remain as renter.

Require them to move out for a three month period while you fix up the property and then move back in as your renter.

While this is not illegal, even by the words or your contract, it is not adviseable because of their not having the money to reorganize their current loan contract, where did the money come from to pay 1st, last, and security deposit? It would appear that you helped them to hide money from the lender that should have gone to them just so that you could have it from renting to them.

One thing that's not been mentioned here is the equitable mortgage implications of this situation. When you purchase a property from a seller, allow them to remain and pay you rent, then sell it to them at a higher price than you paid, you may not have done a lease/purchase at all. If they don't pay, and you try to evict, a judge may well say the situation is actually a loan and they purchased the house from you from the start. So, instead of evicting, you have to foreclose.

But it gets even worse. Say you purchase the house for $100K, and rent it to them for $1000 a month for three years and have a repurchase price after three years of $125K. You say its rent, with a separate repurchase. A judge may say its a loan of $125K with a $1000/month payment and a balloon of $125K. The judge calculates the interest rate on that loan and comes up with 18.3%. (RATE(36,-1000,100000,-125000)*12) Wait, he says, our usury law specifies the maximum rate on a mortgage in this state is 12%. This is an illegal transaction. Mr Former Owner, the house is yours. Mr Investor, get lost.

I was approached by a home owner today, she explained that she is facing foreclosure and her lawyer suggested that she find an investor to purchase her home as a short sale and sell it back to her so she can stay in it. After reading this thread I am realizing that what she asked me to do was illegal. Her lawyer told me he, the bank and the owner are willing to work with investors for this transaction. What kind of research can I do to protect myself?

This thread is 3 years old. Since I created this topic, I've heard a lot of stories about selling back to the short seller, or renting back to them. I don't know if the rules have/haven't changed, but I would suggest you do some research and disregard the answers from 3 years ago.

Thanks, yeah I realized the thread is old so I wanted to reply in hope someone would reply with something a bit updated. Finding current threads is proving to be a challenge.

Thanks for the quick reply.

Yasmine Bisumber -

This is easy. The buyer will be issued a short sale approval letter from the bank -- this is the official letter that indicates that the bank is willing to allow the SS to complete, and lays out all the terms and conditions of the sale. Normally it states that there can be no agreements between the buyer and the seller that are not disclosed and that the seller can't remain in the property. But, I guess it could say anything the bank wanted it to say.

If you're being told that the bank is okay with this, just make sure that in the short sale letter is specifically states that the bank is willing to allow the buyer (you) to sell the property back to the seller (and that there is a deal in place to do so), and any conditions that are applicable to that resale. Then make sure you follow any conditions that are listed (you'll be asked to sign this letter, so you'll need to abide by it).

I've never heard that a bank was willing to allow this, but if it's a smaller local or regional bank that owns the loan, perhaps something was negotiated by the lawyer to make this happen.

Just make sure you have it in writing before you proceed with the purchase...