Renting homes in Bankruptcy or preforeclosure until bank takes it

Wholesaler · Delmar, NY · Member since 2016 · 83 posts · 9 votes

Has anyone heard of this strategy where you find a owner in bankruptcy or pre foreclosure and you get a quit claim deed and rent out the property until the bank forecloses? What are your thoughts?

Brian

0 Reply

26 views

Most Popular Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@Brian Degener this is simply known as ripping rents.

@Rich Baer Rich not sure about east coast mortgage documents.. however in the Trust Deed states we play in... there is clearly an assignment of rents clause.

I know some folks that do this.. mainly with BK trustee's deeding the property to them.. then they go at it with the lender usually bringing a MERS type complaint against them.. and trying for a cram down.. in the meantime the home is rented and they are receiving the rents.

I think if you do this with private folks this could defiantly get you in hot water.

And of course your tenants would be squirrely... I see it as ( and of course I am a lender by trade) as a sleazy thing to do to lenders who put up money in good faith and either want to get paid as agreed or get the asset back.. having some third party come in who gets on title for next to nothing then rips rents just leads to more and more regulation that hurts the industry in my personal opinion.

So if I was the lender and this happened to me ( and its happened to me many times) I file for assignment of rents... Either a very pointed letter to the PM and usually can bluff them as I tell them I will own this eventually. OR I knock on the door show the docs to the tenant.. and they will start paying me.. and if the owner try's to evict we have a cause of action against them. they are not going to get any love trying to defend that position.

The courts though have been gracious with those that can prove lender issues..

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

1 Reply

See this reply in the discussion

6 Replies

Jump to latestLatest

Sort by

Paul Choate
Attorney · Shawnee, OK · Member since 2013 · 350 posts · 230 votes
10y
I am a bankruptcy attorney. Everything that follows is theoretical. I have no personal experience or training in this subject and do not know the laws of any state beyond my own. Get legal counsel for your specific situation. Now to the fun stuff!
I have often wondered about this strategy but have not pursued it because I obviously am too close to the owners I know. It seems like it is a waste of economic capital to have these houses sitting vacant and deteriorating. I briefly looked into the possibility and everything I ran into seemed negative. I don't know of anything that would stop someone from doing it. If someone has direct knowledge from the lender side I would love to know the reason or statutes that prevent it. I assume there are some consumer protection laws that prevent it but since no one does it that I am aware of, I have not ran across the law before.
Positives-
For the owner it is out of their name and and they do not need to worry about nuisance claims or taxes etc. (This would solve the "zombie mortgage" problem. A zombie mortgage is where the owner leaves the home generally under threat from the mortgage holder and then the mortgage holder never files a foreclosure so the taxes and city fines accumulate against the owner. Banks are under no obligation to act so they get the best of both worlds. In some jurisdictions this can result in a warrant for the owner's arrest.)
For the bank, the home is occupied and a minimal level of habitability is maintained.
Negatives-
Whatever contractual or statutory provisions against the practice which may be in existence.
Management- dealing with tenants who are willing to live in this unstable situation. You can give them a month or two notice if you learn the foreclosure process. Many people will have a problem with the whole situation if they are getting legal notices all of the time. This might be a good strategy for a short term rental on Airbnb etc. Then you would have to furnish it.
There is also little to no reason to maintain the home beyond minimal maintenance and upkeep. The cap ex expense would rarely be maintained. The banks can mitigate this by enforcing their rights in a timely manor. The former owner would only have an issue if the bank pursues a deficiency against them. Many states do not allow that or limit it.
Those are my thoughts let me know if you pursue it as I would like to learn about it.
0 Reply
Rich Baer
Real Estate Investment Attorney · Kingsville, MD · Member since 2016 · 643 posts · 408 votes
10y
@Brian Degener
Brian,
Simply looking at it from a legal perspective, it seems to me you asking for trouble. You may be looking at various Consumer Protection Law violations from the people you rent to especially if you don't record the deed. A good Lawyer will haul you into Court at some point if you do a bunch of these. Also the Banks may come after you for abridging their rights. If you were my Client I would not advise you to do it.
Rich Baer, Attorney
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Brian Degener this is simply known as ripping rents.
@Rich Baer Rich not sure about east coast mortgage documents.. however in the Trust Deed states we play in... there is clearly an assignment of rents clause.
I know some folks that do this.. mainly with BK trustee's deeding the property to them.. then they go at it with the lender usually bringing a MERS type complaint against them.. and trying for a cram down.. in the meantime the home is rented and they are receiving the rents.
I think if you do this with private folks this could defiantly get you in hot water.
And of course your tenants would be squirrely... I see it as ( and of course I am a lender by trade) as a sleazy thing to do to lenders who put up money in good faith and either want to get paid as agreed or get the asset back.. having some third party come in who gets on title for next to nothing then rips rents just leads to more and more regulation that hurts the industry in my personal opinion.
So if I was the lender and this happened to me ( and its happened to me many times) I file for assignment of rents... Either a very pointed letter to the PM and usually can bluff them as I tell them I will own this eventually. OR I knock on the door show the docs to the tenant.. and they will start paying me.. and if the owner try's to evict we have a cause of action against them. they are not going to get any love trying to defend that position.
The courts though have been gracious with those that can prove lender issues..
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Brian Degener PS I new a guy in Oregon.. who did this and ended up in Jail with multiple felonies.
as it was his intention Never pay once he got into title. If you made a business of this and you were leaving a trail of despair behind you.. I can see some regulators really going at it hard.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Brian Degener PSS these were all homeowners in foreclosure.. Not getting deeds from BK trustee's
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
10y
It's an old strategy, that only sounds new to people who haven't heard of it. Do two of them in FL, and you can qualify for a felony charge. Look up rent skimming.
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.