Is this legal and/or ethical?

Question

A friend of mine is behind on his mortgage and facing foreclosure due to an injury that kept him out of work for over 18 months.  Someone offered to purchase his house if a short sale can get approved and lease it back to him with a chance to purchase it down the road.  If this is legal, how would you be able to protect yourself from this investor taking the house?

Phil Z. · Answer

That's the workings of a mortgage scam.

And don't 'give the house back and move out'.   They should stay in the house and try to work out a loan modification or short sale with the bank.  With FHA loans you might become ineligable by moving out and not continuing to maintain the property.

Simon Campbell · Answer

Along the same line of thought as @Dick Green . If a homeowner can afford to pay market rent then they should be able to pay their mortgage. It seems like a bad financial move to take on the burden of the loan hoping that the individual will all of a sudden be able to find the money that they claim not to have today.

Dick Green · Answer

If the current homeowner can afford rent after short sale, they should be able to qualify for modification.

Karyn T. · Answer

That sort of transaction is completely illegal (post housing-meltdown) in Washington state, from my understanding.  It probably is in other locals as well...

Edit:  I am no expert, but this very scenario has been discussed at our local REIA meetings as something "not to try" as a wholesaler.

Simon Campbell · Answer

Every short sale regardless of lender requires the "arms-length transaction" certification that has wording like below:

"The Buyers and Sellers nor their Agents have any agreements written or implied that will allow the Seller to remain in the property as renters or regain ownership of said property at any time after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission."

I believe there is a similar type document for non-short sale properties that are undergoing foreclosure.

There are certain programs which allow homeowners to stay in home and either rent or buy back. A new supplement to the HAFA guidelines "amends this restriction to allow servicers the discretion to approve sales to non-profit organizations with the stated purpose that the property will be rented or resold to the borrower, so long as all other HAFA program requirements are met."

Marty Happle · Answer

Thanks.

Wayne Brooks · Answer

Seller, buyer, agents, and closing agent will all have to sign an arms length affidavit stating no such arrangements exist.  It would be fraud, and yes it is done every day, and yes it would be easy for anyone to verify the events later.

Is this legal and/or ethical?

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