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

    I was referring to the OP's scenario. 100% cash flow, not any attempt to work out a deal with the bank while violating their due on sale clause.

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

    Arcinio Arauz, The bank is not going to accept partial payments from you, or the owner.

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  • Michael Lauther
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    13y

    My experience in New York is that the lender will not accept payments on a property in foreclosure . Properties here on Long Island have been sitting without any payments with the lender paying taxes and insurance for in excess of 3 years. when the owner offers to resume payments the money is returned. How does this square with the problems discussed here. The owner of the property should be able to rent the dwelling. And the bank does not yet own the property. Perhaps you could get an idea of what is possible if the current owner offers to resume payments. Will the bank accept them?

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

    Wow so much to reply to.

    I haven't looked closely at the value but I believe the house would be $150-$190K in today's market. The first mortgage is $240K. A second with the same the lender of $60K has already been released for no reason given. There is no assignment of rents in the Deed of Trust.

    Of course a short sale is a possibility. The property was already listed and the listing expired. I am not interested in doing a short sale right now but it remains an option should the lender again show interest in this property.

    Let me remind everyone that no one gets harmed in this transaction. In fact everyone gets a benefit.

    1) Seller get a out of state vacant property with no equity out of her name. Given the liability issues in Maryland and Baltimore city she is deriving a benefit.

    2) Bank still has the property as security for their loan. They have made a choice not to foreclose. My owning the property and collecting rents does not negatively affect their position at all. The bank does benefit from having the property occupied. Vandalism and theft are serious risk in Baltimore, copper pipe especially. I will also be paying for insurance and taxes.

    3) Tenant will have a beautiful large property for below market rent.

    4) I will get great cash flow with no mortgage payment.

    5) The city of Baltimore and the immediate neighborhood benefit by having one less vacant house. The city earlier actually sued banks because their negligent actions were causing homes and neighborhoods to deteriorate.

    So I ask, Who is harmed here?

    I am surprised at some of those who feel what I am doing is a bad thing or are reacting negatively to it. My impression is that those who are against it are basing it on an emotional response. I am not saying that is bad, But it makes it difficult to understand the reasons.

    No one has yet come up with a legal reason for me not to do this and I am very open to hearing that. - Ned

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

    Joel Owens wrote

    Nothing wrong with Vanilla Joel. I am sure a time will come when I wouldn't bother with a deal like this. Perhaps I should say I sure hope there comes a time I wouldn't bother. :-)

    Carlos F. wrote

    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?

    Sniff test in what sense, From a legal standpoint or from an ethical one.

    As said already I would be the legal owner and would evict.

    Carlos also wrote

    How am I violating the due on sale clause? First that would be part of the original loan docs. I am not a party to that agreement. Second the Due on Sale clause says the bank has the right to foreclose if the property transfers without paying off the loan. So the bank has another legal reason to foreclose but there is no violation.

    Aaron Norris wrote

    Well people can sue for just about any reason today. I am disclosing the situation to any prospective tenant and will probably be below market rent. I'm willing to take the risk of that suit because I believe the risk is low.

    I have a question for you Aaron. Shouldn't a tenant have the right to chose a great house at below market rent if they accept the possibility they may have to leave on short notice?

    The right I have ,is I have paid for the house and I have a deed. I am paying for the ownership rights until such time as the lender chooses to enforce their security agreement. The lender has chosen not to foreclose, (they started and stopped 1 1/2 years ago) and refused a deed in lieu of foreclosure. In such a case why shouldn't the owner be entitled to her ownership rights and be able to sell those rights to me?


    My lawyer is a lawyer, not a landlord or real estate investor. If hard money lending is so good why doesn't your dentist do it? It's kind of irrelevant.

    Not in the eyes of the law. I understand you are a lender and come from this from a different perspective. But how is the lenders position hurt here? You would have never let this situation arise becuase you would have foreclosed long ago.

    So Aaron while we don't agree I appreciate your taking the time to respond here.

    - Ned

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

    Hi Ned,

    What can be deemed legal today by a technicality or vagueness can be deemed fraud down the road by the government.

    I have seen stories before where investors thought they did everything right only later on were sucked into a nightmare battle with the government when they deemed what they were doing as fraudulent or a victimization of the public.

    I you need to get creative to grow a little money into big money then it's all up to the investor how much risk they want to take on and how creative they want to be with their business.

    I can't point to anything specific that says you can or cannot get away with doing this but me personally I do not get into anything like this.

    It's kind of like they say on shark tank. "This idea can make a bunch of money but it has a lot of potential liability attached to it down the road. For that reason I am out".

    I hope this works out for you and let us know how it goes.

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

    Ned Carey Tread carefully if you go forward based on your theory that no one is being harmed. District Attorneys and Attorneys General go after what they perceive as a threat to consumers and the public every day, regardless whether or not anyone is harmed. The law can be uncompromising sometimes, regardless of intent.

    Try to keep an open mind as you wade through the relevant law and documents. If you research this thinking that it's all good, then everything will support your idea and you won't be able to clearly analyze risks.

    1Reply
  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
    13y

    Ned Carey, yes, I am taking an ethical position when I say it fails the sniff test. I take that position irrespective of whether it's legal or not.

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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 and Joel Owens sage advice from both of you. Joel I need to watch Shark Tank more. ;-)

    K Marie, Oh I get that about district attorney's I suspect Maryland courts are very much like California's.

    Yes this can be an interesting physiological phenomenon. Any evidence can be used to support your already existing belief. Two people with exact opposite beliefs can look at the same facts and have it reinforce those opposite beliefs.

    Thanks for earlier link to the article on CA rent skimming law.

    Carlos F. While I do have some concerns about the legal risk, I don't see how this is unethical in any way. I guess we just have to agree to disagree.

    Pat L.


    That reminds me of the I Love Lucy show where Lucy and Ricky buy an old dinner. The fail miserably and sell it back to the old owner. At the end of the show someone asks the seller "So How do you make money?"
    "I keep selling this Dinner and buying it back for less."

    Will Barnard

    Well there is a valid ethical point. It is the only ethical issue that I perceive so far.
    1) I feel while I have done little to help her, I have done nothing to harm her.
    2) Short sales are not my expertise or method I enjoy. I asked her why she didn't pursue a short sale. She had listed it and it went nowhere and just didn't want to bother any more.
    3) She offered me this deal. It is not something I came up with. It was her idea.

    - Ned

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  • Jon K.
    Member since 2011 · 798 posts · 216 votes
    13y
    Originally posted by Aaron Norris:
    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.

    I agree that it sounds like squatting in some sense of the word because he's not paying for the property (or property taxes, repairs, etc.). Legal loophole, perhaps, but it doesn't sound on the up and up to me. In my area, it would be very difficult to set up utilities on something like this. I still fail to see why a bank would have to honor a non-owner's (not paying property taxes, mortgage) lease. Yes, he has a deed-- but didn't pay for the property.

    Why, then, aren't we all just letting our mortgages default under some LLC's name and collect some easy cash until the bank gets around to foreclosing?

    What if the tenant stops paying rent after he moves in? You evict a tenant for not paying rent on a property you're not paying the mortgage for?

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

    I also fail to see why a homeowner (well, mortgagee who defaulted on paying for the home) wouldn't have a short-sale even if taking a partial loss... instead of taking a full $200,000 loss.

    Why would the homeowner be willing to lose EVERYTHING instead of losing only SOMETHING (lower than market short-sale)?

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

    Ned Carey, I know you don't know me and and it's easy to read tone. I hope this is being received with the intent in which it is being delivered. I appreciate you batting it around.

    Disclosure: Our company does do private lending as well as buy at trustee sales so I'm looking at this from a few angles.

    In your opening statement, your shared lawyer asked if you wanted the property for free. I apologize if I jumped to conclusions or misread. Besides the deed transfer, what other skin do you have in the property? Are you substantially renovating it or adding value in some other way? Referral fee to lawyer? Will you be keeping the property taxes current? Insurance?

    There are times something is perfectly legal but unethical or morally questionable. Example: pushing for a gross discount on an elderly person's property (unnecessarily) to make huge profits while leaving them destitute when you know it's not their best option. Legal...yes. Ethical...no.

    I realize this case isn't so dramatic. I do understand you will be providing a service to the bank because you're keeping it occupied (whether they'd like it admit it or not). However, you are not getting the banks permission or asking for input on an asset you "own" only because you have control.

    We also buy at trustee sale. So from a selfish perspective, if I buy this property at trustee sale, I'd be stuck with your selected tenant at below market rent instead of a vacant property. If cash for keys comes into play, it's an extra expense I wouldn't have had to deal with if you didn't do this. AND, what if there's major damage I couldn't see because the renter wouldn't let me inside to inspect condition? You just cost another investor a nice chunk of change!

    If you were on the other side of the transaction you're about to create (you're the bank), would you be happy? You've lost control (again) of the property. If and when you finally are allowed to foreclosure, you have to deal with a tenant you didn't select and for below market rent.

    Have you ever explored providing this service (property management) to the bank and opening yourself up to even more deals by controlling more doors? It might not be as good of cash flow but you open up other possibilities: 1) get access to more inventory 2) advertise on the lawns of other properties 3) perhaps get in the way of liquidating the deals 4) get a chance to list as the agent 5) Influence the bank in a positive way.

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

    Ned Carey, your rebuttal to my lawyer comment is right on. Totally irrelevant. Scratch that. lol

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

    Ned, my comments (all of them) were made with the intent to protect you. I honestly have no concern about the bank. Per your info, they refused to foreclose, refused deed in lieu, so in my mind, they were given options prior to you coming along. As for morally with the homeowner, I stand by that, but do want to say, be careful. This story tosses up a red flag to me and for Your protection, move forward carefully. Homeowner tossing it on the market and not getting it sold producing only an expired listing tells me someone was not doing the job to the fullest extent it could have. In other words, not sure I believe the story Or, not sure you are not being put into a bad situation. So again, be careful.

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

    @good point Will Barnard. That is a little weird that it expired. Would be interesting to see the offers and understand if offers got submitted.

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

    Or perhaps no offers were made because the price was set too high or something is wrong with the home.

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

    First of all - Thank you for participating. I find this discussion intellectually stimulating. I reply to a lot of posts "Welcome to BP" it's nice to discuss something on a higher level.

    Jon K. wrote


    While in my original post I did say "he asked me if I wanted the property for free, " I am paying a nominal amount. But I never said I wouldn't pay property taxes, repairs etc. You are reading some sinister intent where none was stated
    I doubt this is true. In many if not most areas tenants can set up utilities with no property ownership.

    You keep saying I am not an owner, which has no basis in fact. Again you repeat the assumption I am not paying bills which I would pay as owner.

    Again, not true. although a reasonable statement give I used the term free earlier.

    Now you bring up a legitimate point - Moral hazard. The reason we don't is because we haven't made an effort to sell the house, offered the bank a deed in lieu of foreclosure and asked the bank to foreclose and they refuse, and have a vacant property which represent a liability risk. Furthermore we have a legal contract with the bank to pay the loan.

    In a situation where all of those things exist is there something wrong with collecting rent? The bank has tacitly allowed it by choosing not to foreclose.

    Arbitrarily deciding to default on your contract, not to pay your mortgage, and to rent for the sole purpose of financial benefit is wrong. We agree on that. However this is not the situation. And I as the buyer I have no agreement with the bank. I am not defaulting on anything.


    What does whether I am paying a mortgage have to do with it. So are you saying everyone who owns a property free and clear has not right to evict? Keep in mind I owe the lender nothing. I have no agreement with the lender.

    Are you saying that a tenant gets to stay for free because I am not meeting my obligations? So why don't you go to the grocery store and steal food from the Grocer because he is behind on his bills to his supplier? (I am meeting my obligations but for arguments sake)


    In a short sale the homeowner gets nothing. Not much difference to the homeowner under today's rules allowing write offs for forgiven debt.

    Again see above. Why wouldn't she pursue more aggressively a short sale? A good short sale agent should have been able to do a better job that the expired listing. I can't answer that other than to say "Motivated Seller"

    - Ned

    1Reply
  • Jon K.
    Member since 2011 · 798 posts · 216 votes
    13y

    It sounds like you're very determined to go through with the deal regardless of any risk or ethical quandary. Good luck. I hope it doesn't turn into a nightmare. Maybe it won't. I wouldn't get into a deal like that, for ethnics first and risk second, if nothing else.

    You said you had a "free" property earlier, making it an easy assumption that you also wouldn't pay property taxes or other bills that owner's pay. So, the mortgagee defaulted on a loan, you paid the mortgage defaulter cash, and she then again paid the mortgage holder nothing, now you get free rental income? What if everyone did that?

    I still wonder about back taxes, unpaid utilities/water, etc. that can stick with a property.

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  • Jon K.
    Member since 2011 · 798 posts · 216 votes
    13y
    Originally posted by K. Marie Poe:
    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.

    Ok. Why wouldn't someone in this situation just make a 5 or 10 year lease, not pay for the place, and collect rent for 5 or 10 years? How is it in good faith to make any lease knowing a foreclosure was started-- even if not completed?

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

    I am dying to know if you're going to
    "Just do it" :)
    The adventure could turn into an interesting blog !!!

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

    Jon K., you keep referring to the Mortgagor, as the Mortgagee.
    As to leases, a 5-10 year lease is not protected, only a max one year lease. Also, after foreclosure, the rent payments go to the new owner. The law is intended to protect tennants from landlords in foreclosure, not to give non paying landlords a free ride.

    1Reply
  • Arcinio Arauz
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    Concerning this thread…I’m happy to know that even though there are differences in opinion as we share our thoughts, convictions and ideas, the thread stays clean. Ned and I seem to be on the same page, while others in the middle, some in disagreement and a few in question. Even so, thank you all for allowing this to stay in the arena of suitable, responsible and professional adults. If I take my dive and Ned his, I’m sure we’ll be able to post a blog here on BP of the positive outcome and great return in cash. Just the same, in the negative we’ll post our outcome if we get served and issued fines and jail time. LOL. Thanks again for keeping a good spirit everyone.

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

    Jon K. wrote

    now you get free rental income?
    I still wonder about back taxes, unpaid utilities/water, etc. that can stick with a property.

    No I don't get "free rental income". In addition to any price I pay for the house I have to pay transfer and recording taxes and catch up all those back taxes water bills etc. The property also needs some roof and gutter repairs.

    I will be spending money on a property I could lose at any time. All of the money is "at risk" and I have no equity in the property. In return I get not "free rental income" but it is inexpensive rental income.

    Will Barnard wrote


    Understood and appreciated.

    I would say no question about that. The listing could have been two years ago. A lot of agent had no idea how to do short sales when this mess started and it could be a case of no one including the owner tried very hard.

    Aaron Norris wrote


    In hind site that is a great idea. It seem obvious when you say it but I should have contacted the listing agent.

    Thanks guys - Ned

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  • Ned CareyPro Member
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    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y
    Originally posted by Aaron Norris:
    I apologize if I jumped to conclusions or misread.

    No apology needed. For clarity I left out details that I thought superfluous. However they became pertinent very quickly.
    This is where I should have been more clear. While there are no significant repairs needed (I hope) there is some roof and gutter work needed. I also will be paying all the normal expenses of owning a property, taxes insurance ongoing repairs etc.

    My skin in the game as you say is very modest. However it is principal that I will never get back. I am giving up future return of my principal and the possibility of any future capital gain for cash flow now.


    That is a fair question and I can't answer because I don't know why the bank hasn't foreclosed. My guess is If someone was collecting rent and I hadn't foreclosed, I would have no sympathy and I would move ahead with my foreclosure. If for some technical reason I couldn't foreclose I don't know if I would care. I'd just be mad I couldn't foreclose.

    While I have only once been a lender I have been on the other side. As a tax lien investor I have run into similar situations.

    Currently I have a judgement for foreclosure on a property financed by a hard money lender. Because he has assignments of rents a middleman worked out a rent to own deal for a tenant and had been collecting rent while the tenant has been doing property improvements. Sadly the middleman has no agreement with the hard money lender. The tenant is getting screwed.

    My ethical dilemma is even though I didn't put the rent to own tenant in place I feel responsible in helping him out.

    An excellent idea but not a direction I want to go.

    I think you and I are more alike than this would have been thought at the start of this thread. I really believe in keeping high ethical standards. I just don't in any way have an ethical problem with this deal. I am very much a libertarian - anything is fair as long as all parties agree.

    Take care - Ned

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

    Ned, do you know how far off the foreclosure is? Is there a date set yet? If not, great, if so, I would be concerned for you that you would be placing some money into minor repairs and advertising for tenants and not having enough time to recoup rent to cover expenses paid.

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