Should We Rent Back To Seller, Pre-foreclosure??

Question

We have the opportunity to put an offer on a 3 bed 2 ba property that is facing foreclosure.  The seller has indicated they'd sell for around 70k under market value if we allow them to rent the house for 5-6 months after closing so they can get their affairs in order before they move.

They've owned the home for a few years.  He is employed as a high school teacher/football coach.  I do not know the circumstances of why they're facing foreclosure.

Our agent believes this would greatly help this family out and would be a steal of a deal in our pocket.  We are concerned about having to face an eviction situation in 5 months.

We haven't seen the house yet, but it's in a good neighborhood and judging by photos, it's in good shape, just needs a few cosmetic upgrades.  We will have an inspection and septic tested.

Obviously we'd charge him above market rental rates.  Possibly ask for pre-payment of all 5 months?  Definitely going to have a lease and try to get a real estate attorney to look at it.

What else are we missing here?  Is this a giant flashing red light with warnings all around it?Would you do it?  Why or why not??

Bill B. · Answer

This has been asked and answered several times.  I’ll give you the long and the short of it, or at least the short…

1) You sign a real lease. With first 8 months (a couple months longer than they want.) and 10-20% over market rent. Then he rent goes up 20-50% after that. You explain to them it obviously doesn’t matter what the rent is are 8 months, because they’ll be gone in 5-6.

2) you have those 8 months held in escrow, with the title company, with a lawyer, whatever, and the funds are released to you on the first of each month. (Or you take them prepaid for the minimum number of months they say they[r staying.). 3) you add $20k to that amount for “new damage”, eviction costs, and unpaid rent owned security deposit. You have them show you and take a picture of all damage and sign a form saying they are responsible for any and all damage not shown in these photos.

It has worked perfectly for me the few times I’ve done it. But in case you haven’t seen the news articles. It often happens, especially among employed people who are still losing their house to foreclosure, that they can’t get their “stuff” together.  They either procrastinate or discover they are broke and can’t afford to move. Sometimes they never make a payment, sometimes they fight it for 6-12 months while not making payments.

You want it to be VERY painful not to follow through, not slightly painful. ps. I assume this is an investment home a you’d need to move in within 60 days if you told the bank it would be a primary home. Good luck.