I hope this is the right forum. I have a contract on a short that I am pretty sure will go thru. The current owner wants to be my tenant. Can I lease to him? Is this considered some sort of fraud/collusion? I don't know the guy from Adam. It sure looks like a winner to me. The place is very well maintained. I planned to buy and hold and this would give me zero down-time, no painting, cleaning, carpet or anything else.
Can I do it?
No. Owner goes or no deal. The lender will require the owner receive no benefit. There are several other reasons not to do this, but this is the simplest reason.
Jon, I understand what you are saying and that there are valid reasons behind it. Is there a document to this effect or something in writing? This would be "arms-length" and at Fair Market Rent. I've purchased a number of shorts where I have inherited tenants; this is the first owner-occ that I have come across. I used to buy reo's at the courthouse and did do rent-backs a couple of times. Can you site regs?
you'll receive an approval from the lender that will state what they're approving and in it will normally state that the previous owner not be allowed any benefit including continuing to occupy the property.
It's 90% certain that the lender won't allow it. Usually they have an addendum for you to sign that states you will not let the owner rent, nor will you sell back to the owner after closing. Which lender is it?
BOA is the lender.
Other reasons besides BofA will make you sign a statement saying you won't do it:
1) You're the white night now, but just wait until the rent is late. Then you will be the evil thief who stole their house.
2) Are they wanting to do some sort of repurchase agreement? If so, the whole arrangement can be declared an equitable mortage. And, depending on the numbers, you effective interest rate could violate usary laws. At best, you would have to foreclose rather than just evict.
3) They probably can't afford it. Unless you're buying it as something like 25% of the unpaid balance or they had some horrendous interest rate, the rent is going to be higher than their old payment. A profitable rental is one where the rent is more than twice the 0% down payment P&I payment.
4) They will probably have a good idea of your payment and resent anything you charge them beyond that. They will think "your PITI is $X, so rent should be $X." Never mind you have to pay numerous other expenses and you probably have a significant down payment into the deal.
There would be no lease purchase. This guy paid 400+. I am paying 220K. He needs to live somewhere and I would charge fair market rent, which is much lower than his current piti. I don't allow excuses or whining. I'll require a hefty deposit and a co-signor if necessary. I'm not looking to cheat the bank - I have zero connection to this guy and only spoke with him 3 wks post contract.
My evaluation for any rental applies the 50% rule (vacancy, yes you have to consider that, capital, and expenses eat 50% of the rent), and includes a return for your down payment. That latter factor is covered by calculating P&I based on 100% financing. At 5.25% for 30 years, $220K gives a P&I of $1214.85. That means rent needs to be $24000 for you to be break even. Now if you actually get $2400 and put in a 25% down payment, your cash flow is about $300 a month, for a 6.2% cash on cash return. Not a great deal, IMHO, but perhaps the rent is actually higher or there is some other play to make money on this deal.
Now, if he had 100% financing, which was entirely possible during the bubble, and was paying 6% on a 30 year note, his P&I would be about $2,400. PITI maybe, what $3,000? So, yeah, you're right, rent would be less than his payment.
But BofA is still very likely to consider him living in the place a "benefit" and will forbid him getting any benefit.
This is the verbiage from the BOA addendum that you are required to sign.
"The Parties acknowledge and agree that neither the Buyers, or Sellers, nor their respective Brokers/Agents
have any agreements written or oral that will permit the Seller or the Seller’s family member to remain in the
property as renters or regain ownership of said property at any time after the execution of the Short Sale
transaction. This includes if the seller is retaining a direct or indirect ownership or possessory interest in the
property, and/or have a formal or informal option to obtain such as interest in the future."
Now if you want to try it and sign off on it and risk fraud, no one here can stop you, but this is standard language in their addendum which is signed with all purchase contracts.
If I knew if there was a way to add an attachment to this thread, I'd post it and let you read the whole thing.
I would not do it even if the bank allowed it. They have a history of not paying their obligations on that particular house. Too much baggage.
Well Maryann, there you have it. This is a situation of first impression to me and I will, obviously, comply with the law (as such; it's more contractual...). I have no addendum from BOA stating such thus far. Do I think it reasonable or furthering some cause? In some cases, yes. Avoidance of fraud on the lender is something we can all respect. Does it overstep? Yes, clearly. What purpose does this serve in my (and the previous owner's) situation?
I know of many foreclosure auctions where a close relative bought and allowed the son, daughter, parent, sibling to stay in place. There is a ton of fraud out there, in every walk of life, but an arms length rental should be left alone. Just my opinion. Everyone should take a step back and think.
From a blanket standpoint, you are probably correct. I trust my gut on things like tenant selection. I've filed only a handful of unlawful detainer's (evictions) in 25 yrs. I have only a bit of knowledge on his current situation and I would clearly conduct some due diligence before going any further.
The purpose it serves is to inflict pain on the owner. The bank is taking a significant loss, on the order of $200K in this case. They're agreeing to do it, but that don't want the owner to benefit.
A foreclosure auction is different. Anyone, even the owner, can buy at the auction. And if you were to buy at the auction, these restrictions about renting to the owner would not apply. But the pain to the owner would be higher (five years to get a loan vs. two, IIRC.)
"Form over substance"
Inflict pain? Seems absurd. If it's not clearly prohibited, I'm renting to this guy if his current situation qualifies him. I've seen enough rentals to recognize a "good" tenant.
I don't really follow any 50% rule. There are many factors that I consider. I just plod along and figure out what is best for me.
Cheryl, You won't be closing that short sale without signing that addendum. I have NO idea where you are in the process. Usually the addendum comes in somewhere after the BPO has been done. Techically it's not a LAW that you can't allow the seller to rent, but if you sign that addendum and THEN allow the homeowner to live there knowing that your intent is to do that you would be committing mortgage fraud.
NOW, that said, you COULD test the water and take the addendum and cross out that line. It's like any other contract. If you don't agree with something, you cross it out initial, and go forward. My hunch is they won't accept it, OR maybe they will. We crossed out the "no flip" clause before and it was accepted. I would assume it boils down to the investor that backed the loan.
The addendums only purpose is to protect BOA. It doesn't make sense because my opinion is if they are getting their minimum NET, why should they care who lives there but that isn't how it works right now. Things are getting more stringent with the lenders and unfortunately, no one has stood up to them yet.
As much as you think this is a good idea, don't do it. It's not worth it
I'll abide by whatever the contract states. I'm certainly not going to commit bank fraud. The other matters I will handle according to my standard procedures. Thanks to all for your input on the specific issue.
Wow. That didn't come off as I intended. I appreciate ALL responses and want to thank everyone for the great input. After sleeping on it, I do understand all the pitfalls (not just legal) of getting involved with a former owner. Thanks again to all who offered me advice.