Rent Skimming - long

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Rent Skimming - long

Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

Background,
A woman who couldn't afford her payments left Maryland. Her bank started foreclosure and stopped about 1 1/2 years ago. She filled out the paperwork for a deed in lieu of foreclosure and the bank refused to accept it. For 6 months or more she begged the bank to foreclose because she didn't want the liability of a vacant house in Baltimore. The Bank has done nothing.

The deal
We share the same lawyer and he asked me if I wanted the property for free, with the caveat that there was a $200k Mortgage. Out agreement states that she is aware that my taking the property will have no affect on her obligations to the bank. If there is a foreclosure it would show on her record and she would be liable for any deficiency.

Research
I asked three attorneys if it was legal for me to accept rent payments while not paying the mortgage. All concluded I have no obligation to the bank. They also felt I had little risk with the tenant because if a bank forecloses they are obligated to honor the lease. However they recommend and I obviously would disclose the possibility of foreclosure to a tenant. I will likely use a month to month rental agreement.

Tonight I read in a thread about Quit claim deeds, about "Rent Skimming" laws.

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Aaron Norris
Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
13y

Why would you want to be even associated with this kind of transaction?

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  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    13y

    Why would you want to be even associated with this kind of transaction?

    2Reply
  • Jon K.
    Member since 2011 · 798 posts · 216 votes
    13y

    Interesting. I don't have an answer, only more questions.

    How can she "give" you a property she doesn't own? The mortgage company or bank owns it, right? Wouldn't you need permission from the owner (bank) to take possession? If it "comes" with a $200,000 mortgage, is she expecting you to pay it?

    Is this authorized squatting? She lets you in and you (well, your tenants) squat?

    If she doesn't own the place (she's not paying), why would a future buyer of the property be required to honor a lease with you... since you don't own it (she can't give what she doesn't own, right? I'm posing this as a question. Why would the bank have to honor a lease with a non-owner (you)? I don't see how she can "give" you a property that she hasn't paid for. She doesn't own it, the bank does. Or, am I wrong?

    If everyone could "give" away properties they were in foreclosure on, that just sounds like a mess. Wouldn't we all let our properties go into foreclosure in someone else or another company's name who "gave" them to us? Then, not pay the mortgage, but accept rent? And, a prospective buyer who wants to buy the foreclosed property would have to honor our lease (even though we didn't own it, as it wasn't paid for and we weren't making payments?

    Are you responsible for back taxes, unpaid utilities, etc.? If she "gave" you the property (though I don't see how since she doesn't own it... the bank does), doesn't that come with responsibilities for paying taxes and back taxes, unpaid utilities, and so on?

    If this is not defrauding, it sounds like trespassing, at best. Maybe I'm wrong. Even if she "authorized" the trespassing, if she doesn't own the property (bank does), I don't see how she could grant you this permission.

    All the above are questions I have, not answers. I've heard of squatters taking possession of unoccupied homes that are in foreclosure by taking advantage of antiquated property laws.

    1Reply
  • Ned CareyPro Member
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    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y
    Originally posted by Aaron Norris:
    Why would you want to be even associated with this kind of transaction?

    Because it will bring significant cash flow. The tone of you question implies there is something wrong with it. It is by no means traditional but it appears legal. However that is why I asked about laws that I may be unfamiliar with.

    Jon K. asked several questions

    She Does own it. Her name is on the deed. The mortgage company does not own the property they have a security interest in the property. They have the right for foreclose on the property but the property is not theirs.

    The fact she is not paying does not change the fact that she owns it until the bank forecloses.

    That is the law. It is a recent law to protect tenant in the foreclosure crisis.

    Jon the rest of your question are pretty much covered by the fact she still owns the house, until she sell it to me that is.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Ned: I'm assuming you saw my comment about the CA rent skimming law in the other thread. In addition any rent-skimming laws, there are the terms of the actual note and mortgage. Have you read the terms of the specific mortgage and note? I've seen some from the major lenders (BofA, HSBC) that make the assignment of rents binding on the successors-in-interest, heirs and assignees. I'd be sure to go over the specific terms in the mortgage with your attorneys.

    I'm in agreement that you have no contractual obligation to the lender. Just a big fat 200K mortgage hanging over your head. :) I bought my short-pay deal from a seller in the same situation as yours. Her BK had been discharged two years prior, she hadn't received a payment since before the BK and the lender didn't pursue foreclosure. She was being sued for back HOA dues. I pushed her to negotiate a deed in lieu with her lender and to call me back if that didn't work and we would look at a short sale. They stonewalled on her on everything, so she was willing to deed away the property.

    1Reply
  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    13y

    Could you instead settle with the bank for an amount less than $200K if the property isn't worth that, and not risk foreclosure?

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  • Ned CareyPro Member
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    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    K. Marie Poe yes I did see in the other thread. When I looked up rent skimming basically the main this that came up was the CA law. Given that Maryland seems to be the CA of the east (without the sunshine) I though we might have a law too but I didn't see anything.

    I Don't have the note but the Deed of Trust is online. Unfortunately I can't fine the last 3 pages but I see no assignment of rents.

    I saw part of your deal in the quit claim thread. Was there a thread where you tell the whole deal?

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    I know there are some issues here in Fl in regard to doing a sub2, when the "buyer"has no intention of paying the underlying debt. These are specifically aimed at trying to protect distressed owners from the RE sharks/scammers. I also thought there was some federal regulation on this. I don't do any sub2's where I don't pay the underlying debts off, so I've never researched it. I'll make some inquiries tomorrow.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    "For 6 months or more she begged the bank to foreclose because she didn't want the liability of a vacant house in Baltimore."

    That's right the bank doesn't want to get sued for more damages then the property is worth owning it and someone gets killed on the property or hurt etc. I have had banks tell me they would short the note or do a short sale but under no circumstances did they want this certain property back in a particular area.

    The mortgage amount is irrelevant as a 200k mortgage might have a house worth only 20k today. Many of the banks even though these loan are out there have already written some of them off.

    You might could do something with this but I like vanilla deals. I do not like to ride to close to the flame as sooner or later you will get burned. There is creative and then there is too much risk for the perceived gain.

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  • Ned CareyPro Member
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    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    Wayne Brooks thanks, I wasn't even aware of the issue until you brought it up. I will keep looking.

    Dawn A. It is conceivable I could do a short sale and retail the house. But short ales aren't my specialty and neither are selling to retail home buyers. I am in no position right now to handle the purchase of a $150K house myself right now. However it the bank does eventually decide to foreclose doing a short sale then becomes on option I may pursue.

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  • Arcinio Arauz
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    Aaron Norris: I believe Ned has the same exit plan as I do with my deal. We have no intentions to squat and collect rents then run off. If an owner is willing to hand over a deed then we become the owner of the property with a bad debt attached to it. In the end we wish to buy the property at a discount and perhaps hold or flip it. The question in mind is in regards to rent skimming. Nothing wrong with getting cash flow on a property you own while you make attempts to work with the bank as long as your state permits it.

    Dawn A.: Yes you can work a deal with the lender. Even though the debt is 200k the bank will sometimes take less versus a foreclosure

    K. Marie Poe: Where's the best place to find out what the notes says in regards to
    rents; a deed of trust at recorder's office? Also, do you have a link on CA law about rent skimming.

    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    This First Tuesday article is a good place to read about the CA rent skimming law. You can look up the actual civil code as well.

    http://firsttuesdayjournal.com/rent-skimming-by-buyers-within-the-first-year-2/

    Ned Carey The First Tuesday article focuses on CA law, but ends with an explanation of the Federal Rent Skimming law, including citing the relevant US Code and the penalties.

    0Reply
  • Arcinio Arauz
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    Reading on rent skimming in California...It seems as if there are two types a "single act and "multiple acts" of rent skimming. The single involves one residential rental property upon which a person collects rents without paying into the underlying loan within 1 year of aquiring property (what happens after a year? IDK). This is a civil claim and if I'm not mistaken, only a tenant who paid the rents can make this civil suit to recoupe any money loss. I have not read anywhere (yet) where a bank can sue for a single act. It's a civil claim against tenant and owner (if tenant even makes the claim) and is only subject to loss money from tenant.

    The mutiple act involves 5 or more properties upon which a person collected rents and willingly was in the wrong by not paying any outstanding loans on those parcels aquired in a two year period. This multiple act of rent skimming is a criminal offence with high fiines and prison time. A lender, tenant and other lien holders can file this suit against the "skimmer"

    The federal act of skimming involves any skimming against a VA or FHA type of loan in a multiple act.

    Skimmer's defense: This is when the one collecting rents can defeat the skimming claim by proving:

    1. Used rent income to pay medical expenses on self or family.
    2. Used rent income to pay for repairs on property for safety reasons.
    3. Had no ill intent to defraud and tried to meadiate with lender.

    After some consideration and a few emails to attorneys, it looks as if Ned and I are pretty safe taken we know our tenant and keep them in the loop.

    1Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    13y

    I am in NY but here are two instances I dealt with.
    First property was commercial & I put it into foreclosure for arrears on the note I held.
    My mortgage note addendum specified rent assignments & I collected for two years until the foreclosure was resolved. ( They paid us off)

    Single family home abandoned by the borrowers & moved out of state.
    I had a potential buyer enter the property & maintain it (middle of winter) but until we got the deed in lieu of signed ( took 6 months ) I was strongly advised by my attorney that I could NOT legally collect any rents or consideration from the occupant. I just added the equivalent of the free accommodation to his purchase price.

    Personally if you can remove yourself from any civil liability I would go through with it just for the experience & the unique but potential gain.
    Keep us posted & good luck.

    0Reply
  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
    13y

    I don't think this transaction passes the sniff test.

    Nevertheless, just out of curiosity, what would you do if the tenant quit paying rent after moving in?

    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Pat L.:
    I am in NY but here are two instances I dealt with.
    First property was commercial & I put it into foreclosure for arrears on the note I held.
    My mortgage note addendum specified rent assignments & I collected for two years until the foreclosure was resolved. ( They paid us off)

    Single family home abandoned by the borrowers & moved out of state.
    I had a potential buyer enter the property & maintain it (middle of winter) but until we got the deed in lieu of signed ( took 6 months ) I was strongly advised by my attorney that I could NOT legally collect any rents or consideration from the occupant. I just added the equivalent of the free accommodation to his purchase price.

    Personally if you can remove yourself from any civil liability I would go through with it just for the experience & the unique but potential gain.
    Keep us posted & good luck.

    Pat L. In your SFH example, were you the lien holder in 2nd position? And was the first mortgage in foreclosure?

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  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    13y

    I do have issue with this transaction for a few reasons:

    1) Whether the bank has to honor the rental agreement or not, you could potentially place the tenants in a tough situation with having to move, frustration with people posting on the door, and door knockers. Can a tenant sue you if for knowingly put them in this situation and it was far more stressful then you had led on?

    2) Ethics. While this transaction might create great cash flow for you, what true right do you have? Curious to know why the lawyer doesn't do this himself if it's such a great idea. You are a squatter.

    I'm a private lender. I think of having to tell a private money source that on top of losses they've received, a squatter and opportunist swooped in and is further taking advantage of an unfortunate situation. Imagine if this was a family member of yours.

    2Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Aaron Norris

    Originally posted by Aaron Norris:
    I do have issue with this transaction for a few reasons:

    1) Whether the bank has to honor the rental agreement or not, you could potentially place the tenants in a tough situation with having to move, frustration with people posting on the door, and door knockers. Can a tenant sue you if for knowingly put them in this situation and it was far more stressful then you had led on?

    2) Ethics. While this transaction might create great cash flow for you, what true right do you have? Curious to know why the lawyer doesn't do this himself if it's such a great idea. You are a squatter.

    I'm a private lender. I think of having to tell a private money source that on top of losses they've received, a squatter and opportunist swooped in and is further taking advantage of an unfortunate situation. Imagine if this was a family member of yours.

    Aaron: thank you for posting from a lender's perspective. I'm curious why you say the OP would be be a squatter. He is getting the deed so he would be the owner, having taken the property subject to a defaulted senior lien. Surely you've had investor borrowers default on some of your loans, some of who were collecting rents. Are they squatters? Are all landlord borrowers who are collecting rents and have defaulted mortgages squatters? Or just the OP? As a lender, wouldn't you just utilize your assignment of rents in the DOT and/or foreclose?

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  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    13y

    I understand he's getting the deed and we're in the gray zone. He's receiving benefits of ownership without taking on the full responsibilities of ownership since he's not making payments on the debt owed on the property. That's why I'm calling it squatting, just a different sort. We're all playing in a gray area here. Just because we're playing with technicalities doesn't mean it's ethical.

    If there is ever a ruling on such actions, you'll have a track record of saying this was your plan on this public forum.

    Correct, we would foreclose. If we were able to intercept the rents, we would remit that to our private lenders.

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y
    This is true but the lease or rental agreement had to be made in good faith and at arms length to be valid. A lease under your proposed situation would likely not qualify as a lease in good faith.

    Here are my thoughts regarding Aaron's concerns. When purchasing a property sub2, you typically are contractually obligated (between buyer and seller) to pay the underlying debt service and by having some agreement that you will not take this responsibility on, you have created a grey area that could, potentially, in a court of law be deemed as predatory.

    Lets get more info here. What is the actual true current market value of the home? If it is well below the underlying debt amount, then why not work a short sale as you as the buyer? Or take title sub2 and then work the short sale with the lender?

    The other reason (Im assuming) Aaron is against this is that the mortgage note likely has some provisions of assignment of rents and thus, you are not entitle to collect any.

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  • Arcinio Arauz
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y
    Originally posted by Carlos F.:

    Nevertheless, just out of curiosity, what would you do if the tenant quit paying rent after moving in?

    What does any property owner do someone stops paying rent...eviction and get another tenant.

    Aaron Norris
    I appreciate your feedback and piont of view. Let me make it clear that we are not falling into the propensity of not making attempts to pay back the mortgage. In fact my plan is to give 60% of the rents to the lender and use some the rents to make repairs to house while negotiating a payoff. Thus, my profits will be little at first but the end payday will be bigger. As far as ethics...what ill would I cause when

    1. I keep my tenant in the loop on everything and legally have the deed
    2. Make neighbors happy by restoring a vacant house
    3. Bring house into codeing compliance per the city
    4. Alleviate the original owner from the burden of being the owner of a distress
    5. Make partial payments on existing mortgage while working to settle

    Why don't lawyers do this? Beacause lawyers don't want to be landlords and they do very well in their profession already.
    Sounds to me that is more a of good Samaritian act vs squatting. I can agree and see your view only if the "skimmer" was just collecting...not my case.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    The last item in question would be morally. As a respected and responsible investor, don't you agree that rather than taking full advantage of free cash flow, you should act more in the best interests of this homeowner? In other words, find a way for her to get out from under this loan and property through short sale or any notched legal and viable means?

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    2Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    13y
    Originally posted by K. Marie Poe:

    Pat L. In your SFH example, were you the lien holder in 2nd position? And was the first mortgage in foreclosure?

    No Marie
    I owned the property but had sold it to these buyers with $8,000 down & held the first mortgage. After they abandoned it I initiated the foreclosure. Within 6 months they realized their credit had taken a BIG hit & they wanted to resolve it asap., hence the belated deed-in-lieu of.

    as an aside......
    I bought this SFH (out of foreclosure for $15,000 cash) 12 years ago & have since taken it back deed-in-lieu of & resold it 4 times.
    Truckers love it because of the 800 ft deep lot with a turn around & 2 large garages with wood burning stoves.
    It's in a commercial area, has absolutely NO redeeming qualities & lacks any form of curb appeal but it has sold consistently for $32,000-$42,000 plus costs, (I add in my legal costs to take it back).
    I have never spent any money on it, but over the years the various 'owners' have replaced the roof, the furnace, HW tanks, new kitchen & added a 20x20 Florida room. The current owner just put in an above ground pool. I never advertise it for sale I just drop a flyer off at the local trucking companies & it sells immediately.

    It's an 'old cash whore' of a building that always comes back to haunt me :)

    0Reply
  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
    13y
    Originally posted by Arcinio Arauz:
    Originally posted by Carlos F.:

    Nevertheless, just out of curiosity, what would you do if the tenant quit paying rent after moving in?

    What does any property owner do someone stops paying rent...eviction and get another tenant.

    I can see the tenant's response to the court now. Tenant claims LL said it was ok since he doesn't really own the house anyway ... and no one is making mortgage payments.

    0Reply
  • Arcinio Arauz
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    Carlos F.
    I have the deed, pay the taxes, insurance and repairs. Therefore, I am the owner and I really do own the house. Also, I will be making partial payments to defaulted loan.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Will Barnard:
    This is true but the lease or rental agreement had to be made in good faith and at arms length to be valid. A lease under your proposed situation would likely not qualify as a lease in good faith.

    I can't speak for Maryland, but CA case law had already looked at leases executed while the borrower/owner was in foreclosure and has upheld them as valid, thereby allowing tenants to stay. Until the TIFA expires at the end of 2014 or is extended, properly executed leases will allow the tenant to stay. Unfortunately for tenants, the exception is if an owner occupant buyer purchases the property at foreclosure sale.

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