Lease Back?

Question

If I were to get an acceptance letter from the lender for a short sale transaction and I closed on the property and in turn leased the property back to the person who was getting foreclosed on.

The question is, will the lender care who I lease the property to after I close? Does the seller need to move out?

Thanks,
Curt

Curt Dumonceaux · Answer

Thanks for all the feedback guys. I personally do not do any leasebacks. The question came up because the investor whom I’m selling the property to, does do lease backs. I for one see the risk in that investment, but he has done this dozens of time with no problems. He will do a leaseback if the person who is not making there payments because of a “one time” problem, loss of job, medical bill ect.. Someone who has a bad history of credit and non payment of bills will be passed on.

Account Closed · Answer

Many people speed on the highway and then assume it is legal or they will never get caught.

Others participate in risky behavior assuming that they are somehow immune because they have not caught anything so far.

Maybe the guy has a system. It does sound like he is evaluating the risks. Or maybe he is a crash and burn situation waiting to happen.

John Corey

Purva Mehta · Answer

@Alan Brymer

Wow Alan that was quite and insightful post on issues with lease back. I am currently trying to acquire a pre-foreclosure property and was considering a lease back option to the seller, but your post has changed my perspective.

Thanks for the time and effort to share your thoughts and experience.

Loved the little humor you had in there.

Thanks

Ryan Moore · Answer

[size=24]DANGER!![/size]

Alan Brymer · Answer

I’ve leased back to sellers a number of times successfully, but have grown weary of it (as you will see) and will never do it again because of when it has blown up in my face despite my best efforts.  There are more than enough other ways to make money in real estate without having to defend your very existence on the planet.

Because what tends to happen when you lease back to sellers is what I call the “Prostitute Principle.”  This law is defined as this: “The value of your services completely diminish as soon as your service has been provided.”

I have seen this happen to real estate investors time and time again who lease back to sellers.  As soon as they ethically and legally help a seller avoid foreclosure, and do everything they promised to do on time, the seller will turn on them and start complaining about some perceived injustice, calling them a con artist.

If you can live with being treated like garbage by the very people who would have been thrust out on the street like vagabonds in the middle of winter without two pennies to rub together were it not for you bending over backwards and risking your butt to save them with an overly generous arrangement that’s better than 99% of other investors would ever consider doing, then by all means, go ahead.

If the irony of explaining something multiple times in clear, direct language, and having them read and initial every paragraph of a painstakingly understandable, notarized CYA letter, contract to SELL, and Lease Agreement, only to be threatened with legal action because they claim they didn’t know they were selling their house does not make you ashamed to belong to the same human race, then proceed.

If you’re going to do it, just know the following things:

1) No matter how intelligent, sensible, and responsible you believe a seller to be, they will mutate into something else entirely the very second you advance funds and solve their problem, to the same extent, and with the same speed and ferociousness as Bilbo Baggins in the first Lord of the Rings movie.

2) You will go from benevolent savior to despicable con artist within 1 week after closing.

3) They will almost always stop returning your calls once you have solved their problem, which makes collecting rent or qualifying them for a loan more difficult.

4) They will understand the terms of the sale and lease with 100% certainty, until the closing has occurred, at which point something which scientists do not yet comprehend alters the chemistry of their brain and supplants their true memories with false ones.  From then on, they will either forget A) That they agreed to sell their house, B) That they agreed to pay rent, or C) Everything else they promised to do, or D) All of the above.

5) They will miss 2-3 rent payments per year, on average.

6) Having a good CYA letter is not enough to prevent a lawsuit.  They will always find an attorney to represent them no matter how clear it is that they are wrong.

7) A good CYA letter is not enough to keep you out of a long, exacting, and expensive court trial that could last 2 years and cost tens of thousands.

8)A judge has it within his power to completely ignore the paperwork and everything the seller signed and undo your transaction from having happened.  It is all based on his whims and fancies.

9) Your transaction might be considered predatory lending even when it’s plain to see that they sold their house and are renting it back again (which, interestingly enough, is done all the time with commercial property by business owners who wish to raise capital without relocating).

10) You will have to have a ton of equity in the house when you buy it, if you ever plan on selling it back to them, because they will only be able to get a loan (if at all in today’s lending market) for 70-80% of the market value, which will probably be lower than it is now if you’re in a declining market.

11) If you buy it subject-to, their credit will improve quite a bit from you making the payment on their loan.  If you pay their loan off, there will be a verification of rent to qualify them for a loan, so kiss their chances goodbye if they miss even one payment in the next 12 months (which they will).

So if you can live with all of this, go ahead and do it.  If you’re like me, you’ll miss the good old days when two people could make an agreement, shake hands, and both do what they promised.

Eric Foster · Answer

Thanks... I was looking in the Orgonian online...

Mitch Freed · Answer

The article came out in the January 30th Willamette Week.  The link is as follows:

http://wweek.com/editorial/3412/10302/

Mitch

Eric Foster · Answer

Any idea how to locate this article online? I don’t get the newspaper?

Thanks!

Mitch Freed · Answer

I agree, leasing/renting back to homeowners after a short sale is a bad idea for many reasons.  I have heard from many sources that a Lease Option to the previous homeowner after a short sale negotitation could be considered as Mortgage Fraud.  The last thing we need is a bad rep with the lenders who we are trying to get to release liens.

An article came out yesterday in a local Portland, OR paper outlining predatory schemes that "foreclosure consultants" are practicing.  They are targeting the elderly especially.  One of the schemes they outline involves purchasing the home and renting back to the homeowners.  This leaves the homeowners with no equity and wide open to eviction.  The article has a picture of a big Vulture with house keys in its mouth sitting on top of a mailbox...nice depiction huh?  This may not be illegal, but there is a police detective involved investigating what she calls "Mortgage Rescue Fraud," along with legislators aimed at shutting down these rescue scams.

I am confident nobody here has any intentions of practicing these predatory habits, but we are all exposed to potential claims when dealing with the previous homeowners.

Jay Feldman · Answer

I think leasing it back to the owner is a bad idea. Maybe someone from MA can comment but I thought that has been out lawed in MA. Either way I think you are asking for trouble.

On the idea of selling it back to the owner or shorting a property and then selling it back I think this to is a recipe for trouble. I thought I read this could be considered fraud. In particular if it is not an arms length transaction which that would not be the banks are looking to avoid that like the plague.  
Good Luck