Rent Skimming - long

Creative Real Estate Financing
13yFollow

Rent Skimming - long

Ned CareyPro Member
Moderator
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.

0Reply
86 views

Most Popular Reply

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
See this reply in the discussion

80 Replies

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

    Will Barnard the foreclosure was already started and dismissed 1 1/2 years ago. Since that time the second has bee released for no known reason. The mortgage has been transferred in the land records so I suspect a new foreclosure would have to be started.

    Only now as I write this I guess a risk I hadn't considered is perhaps the old case could be reopened which could speed up the process.

    I believe based on what the owner told me is the bank feels their is some legal technicality which would make their foreclosure invalid. I believe MERS inc is in the chain of title of the Deed of Trust. There have been all kinds of legal challenges to MERS. They are not registered to do business in Maryland.

    Absolutely agree Will. Since there is no back end at all here time to recoup has been part of my thinking from the beginning.

    Thanks for your help and comments.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Ned Carey - don't forget to check into how depreciation works under the circumstances of this acquisition. Since it will be rental, and you will own it, and you will have some basis (that is the part where I am uncertain of "how much") - you get the depreciation deduction.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Ned Carey:
    ... the foreclosure was already started and dismissed 1 1/2 years ago. Since that time the second has bee released for no known reason. The mortgage has been transferred in the land records so I suspect a new foreclosure would have to be started.

    Only now as I write this I guess a risk I hadn't considered is perhaps the old case could be reopened which could speed up the process.

    I believe based on what the owner told me is the bank feels their is some legal technicality which would make their foreclosure invalid. I believe MERS inc is in the chain of title of the Deed of Trust. There have been all kinds of legal challenges to MERS. ...

    I see assignments of mortgage happening just before foreclosure lawsuit is to be filed. The assignments from MERS sometimes happen while a foreclosure case is ongoing, then the assignee starts a new case (the old case gets stayed because it never goes forward). So the risk of foreclosure is definitely still there.

    1Reply
  • Ned CareyPro Member
    Moderator
    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    Thanks Steve Babiak, I definitely know the risk of foreclosure is still there.

    My basis will be so low the depreciation will be insignificant.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Ned Carey - you are taking on the loan "sub 2". That might be part of your basis - I'm not sure 100%, but you are taking on that debt in a way, so you could have a bigger depreciation that you are entitled to take. Here is the IRS link, and a quote from that link:

    Originally posted by IRS Pub 527:
    ...
    Cost Basis

    The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. ...

    Assumption of a mortgage. If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. ...

    http://www.irs.gov/publications/p527/ch02.html#en_US_2012_publink1000219050

    0Reply
  • Ned CareyPro Member
    Moderator
    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    Steve Babiak I'm not sure it would apply but interesting concept. I'll ask my accountant about it. Thanks

    0Reply
  • Raquel Baranow
    Tucson, AZ · Member since 2013 · 116 posts · 22 votes
    13y

    You'd also be in an adverse possession situation. Here in AZ if you did this "under color of title and paying taxes" it's three (or five) years and the house is yours.*

    I had a situation with MERS once in a tax lien foreclosure. This was when they were bundling mortgages on Wall Street . . . I sent notices to three different beneficiaries of the DOT (beneficiaries kept changing), finally the third one paid within days of losing the house.

    My DOTs say that my loan (seller carryback) is not assumable and must be paid in full upon sale, i.e., if you got a QCD the person who gave you the QCD would be in civil violation for damages.

    * 12-523 Real property in adverse possession under title or color of title; three year limitation
    12-525 Real property in adverse possession and use under duly recorded deed with possessor paying taxes; five year limitation; exception

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y
    Originally posted by Steve Babiak:
    Ned Carey - you are taking on the loan "sub 2". That might be part of your basis - I'm not sure 100%, but you are taking on that debt in a way, so you could have a bigger depreciation that you are entitled to take. Here is the IRS link, and a quote from that link:
    Originally posted by IRS Pub 527:
    ...
    Cost Basis

    The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. ...

    Assumption of a mortgage. If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. ...

    http://www.irs.gov/publications/p527/ch02.html#en_US_2012_publink1000219050

    Originally posted by Ned Carey:
    @Steve Babiak I'm not sure it would apply but interesting concept. I'll ask my accountant about it. Thanks

    If you are taking it sub 2 then yes, it would be the debt assumed and it would be basis.

    -Steven

    [email protected]224-381-2660
    0Reply
  • Arcinio Arauz
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y
    Originally posted by Raquel Baranow:
    You'd also be in an adverse possession situation. Here in AZ if you did this "under color of title and paying taxes" it's three (or five) years and the house is yours.*

    I forgot about the AP aspect but if Ned is getting the deed, he would already be the owner and no need for a quiet title in 3-5 years after paying taxes.

    0Reply
  • Ned CareyPro Member
    Moderator
    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    Raquel Baranow I have run into many situations where adverse possession would be a great way to acquire title but it takes 20 years in Maryland

    Steven Hamilton II wrote


    I am making no commitment to pay the mortgage. There are no formal assumption documents and no agreement between me an the seller that I will pay the mortgage. I have no personal liability for the debt, however if I do not pay the property is still security for the debt and I can lose the house.

    So am I "liable" as quoted from the IRS pub below?

    Thanks - Ned

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    You are not liable; however you do have a contact interest in the property, you stand to lose if the property were to be foreclosed. That would make you eligible to deduct the interest. That you are paying to keep the investment.

    -Steven

    [email protected]224-381-2660
    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Steven Hamilton II - under what circumstances can the depreciation be taken (suggest changes in how Ned Carey is doing this)?

    That's when there is a real win in doing this, because then there is even higher effective cash flow.

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    He would have to assume the debt or take it sub 2.

    -Steven

    [email protected]224-381-2660
    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    13y

    Ned, If you have a deed from prior owner and Bank truly does not want the property, then find out what it will take to buy it from the bank. If you just plan to keep the money and not fix the toilet or sink when it breaks it will become the worst kind of slum the person who gave it to you intended to avoid. If you plan to be a good landlord and keep the place up by spending money on it why not try to buy it? What we do defines who we are. At least keep the tenants fully apprised of all the facts, keeping in mind what type of tennants you might get who are willing to be part of this deal. They will not respect the house under these circumstances. They might even run to the bank and short sale it themselves. I do not know the laws on rent skimming but this type of action is what they are aimed at. Read the mortgage contract throughly because it will be recorded at the courthouse and knowledge of it will be imputed to you, so you may be bound by many portions of it even if you did not sign it. Money is important but so are reputation, and self respect. At least try to negotiate with the bank. JerryW

    0Reply
  • Ned CareyPro Member
    Moderator
    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y
    Originally posted by Jerry W.:
    Ned, If you have a deed from prior owner and Bank truly does not want the property, then find out what it will take to buy it from the bank.

    I suspect the bank is not foreclosing for a technical issue they can't resolve. When I have dealt with banks in similar situation in the past they didn't want to deal because of the technical issue.

    If the bank isn't sure they still own the note for example, they can't give a release.

    Nope not my intent at all. I will pay all the bill normally paid by an owner because I will be the owner.


    The can go to the bank but they can't buy it without going through me as I would be the owner.
    I am buying it. I am just not paying the bank for a loan they didn't make me.

    What we do defines who we are. . . . Money is important but so are reputation, and self respect.

    Absolutely, and this transaction represents who I am. Someone who is honest and ethical and can think out of the box. I have found a way to benefit from a unique situation. No one is being harmed here and all parties receive some benefit. Is this the best solution for all parties, probably not. That doesn't mean I have done anything wrong as some have implied here.
    1Reply
  • Ned CareyPro Member
    Moderator
    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    In another thread, Life estates came up.
    http://www.biggerpockets.com/forums/52/topics/85013-lifetime-lease

    In a Life estate you own the property until you die and then it automatically transfers to the "Remainderman" In essence you can buy the use of a property until you die.

    I realized my situation is similar to a life estate. I am buying the use of the property until the bank decides to foreclose. Similar to the buyer in the thread above the price is low because the amount of time is unknown.

    1Reply
  • Troy Sheets
    Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
    13y

    What happened with this @Ned Carey ?

    0Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    13y
    Originally posted by Troy Sheets:
    What happened with this @Ned Carey ?

    Ditto...

    Maybe he will reveal it as a chapter in the new book Brandon is putting together!!!

    0Reply
  • Ned CareyPro Member
    Moderator
    OP
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    13y

    @Pat L. & @Troy Sheets The minor repairs were done, and property is rented to a nice family who was concerned at the situation at first but decided the house was so nice they would go for it. We notified the bank property servicing company and they have left the property alone. We have not heard one peep out of the bank.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    @Ned Carey Thanks for the update. Are your tenants month-to-month or do they have a longer term lease? If it were me and I had no way of knowing when and/if the lender will show up, I'd record the lease for the benefit of the tenant. I think the Tenants in Foreclosure Act provisions are until the end of 2014. But who knows, as it might get extended. Regardless, that would give the tenants 90 days after foreclosure. That's assuming you are not able to negotiate a payoff and/or some kind of loan assumption or modification.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Ned: one more question/comment. In re-reading this thread, I see you mentioned insuring the property. For what purpose? For personal or entity liability, it might make sense. As for fire or hazard or theft? IMO you'll never get a claim payout as long as the property is overencumbered.
    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by K. Marie Poe:
    @Ned Carey Thanks for the update. Are your tenants month-to-month or do they have a longer term lease? If it were me and I had no way of knowing when and/if the lender will show up, I'd record the lease for the benefit of the tenant. I think the Tenants in Foreclosure Act provisions are until the end of 2014. But who knows, as it might get extended. Regardless, that would give the tenants 90 days after foreclosure. That's assuming you are not able to negotiate a payoff and/or some kind of loan assumption or modification.

    Sorry, I mis-spoke here. If the tenants have a longer term lease, I would record it so the lease term is binding on the lender or buyer at foreclosure sale. (It could also be a useful negotiating tool for a discounted payoff with the lender). The tenants are already automatically protected for 90 days by the TIFA.

    0Reply
  • Alex Baev
    Miami, FL · Member since 2013 · 98 posts · 27 votes
    13y
    Originally posted by Ned Carey:

    I realized my situation is similar to a life estate. I am buying the use of the property until the bank decides to foreclose. Similar to the buyer in the thread above the price is low because the amount of time is unknown.

    This has been a great case-study to read on how to at least try and think outside the box

    0Reply
  • Christopher Martin
    Cypress, TX · Member since 2015 · 1 post · 0 votes
    11y

    @Ned Carey

    I have a similar situation with tenants and the bank. How did everything end up working out the past couple years? Did the bank foreclose or short-sale the property? How long were you able to collect rent without having to pay the bank?

    0Reply
  • Richard Dunlop
    Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
    11y
    Originally posted by @Christopher Martin:

    @Ned Carey

    I have a similar situation with tenants and the bank. How did everything end up working out the past couple years? Did the bank foreclose or short-sale the property? How long were you able to collect rent without having to pay the bank?

     Your flag didn't highlight hopefully mine did. To get update?

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free