Tell me why this wouldn't work. (Disclaimer: It's high-risk and pretty shady!)

Investor · Cary, NC · Member since 2008 · 78 posts · 14 votes

Fyi, that law expires in 2014. You would not be a bonafide tenant and will get a 90-day vacate notice. Rent needs to be at or near market for you to be bonafide tenant..

I sure hope you are not considering this:)

0 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

Haha! Nope, not considering! But the idea has been buzzing around in my head, and was really just hoping for a good reason why it WOULDN'T work ;)

So, the law states that it must be a bona-fide tenant, at near or close to market rent eh? That seems to leave a lot of room for speculation, and wouldn't the bank need to take legal action to prove/disprove? Do you think they'd bother with all of that?

0 Reply

Don KonipolBusiness Member

Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

13y

Joshua S., I see you haven't started investing yet. I don't know if you have potential as a real estate investor, but I can see you have great potential as a real estate guru.

Private Mortgage Financing Partners, LLC

Website View Page

9 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

Good one Don.

0 Reply

Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

13y

There was a fairly recent thread where this act was discussed:

http://www.biggerpockets.com/forums/41/topics/78036-tenant-after-foreclosure-sale

The issue I see here is that both the homeowner and the leasee are rent skimming. Both are collecting rent but not paying the mortgage. I think the probably moves it from the "shady" category to the "illegal" category.

4 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

Thanks for the link Jon! Lots of relevant info there. To be clear, the leasee/investor would continue paying rent to the bank after they take the house, so as to preclude any illegal rent skimming.

So far I'm not seeing a solid reason why it can't be done, aside from the "bona-fide tenant at market rent" stipulation, which is kind of a grey area...

0 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

There's a lot of flaws in the strategy. You might want to read at least a little of Tenants in Foreclosure Act. God helps those who use google.

Borrowers and their family members are not bonafide tenants. So, a lender getting a property back or a third party buying at foreclosure sale can evict the borrowers per the state's eviction laws that address former owners/borrowers after foreclosure. Tenants are only protected if they are paying fair market rent. So even leases with bonafide tenants are subject-to this part of the law.

If it were me, and if I bought the property at trustee's sale I would request your lease and any subtenant's lease. If you weren't bonafide tenants and/or if you weren't paying fair market rent, I'd file for eviction. You'd have to answer and if you didn't I'd win by default. What would you answer with? I'd only lose a month or two, and more than likey have scared you off way before sheriff lock-out.

As for rent skimming, that may or may not apply. Some state's eviction laws were written in order to protect borrowers and lenders from investors taking over/getting the deed to properties subject-to existing mortgages and not applying the rent to the mortgage payments. The rent skimming laws I've read cover collecting rents after a title transfer. The "strategy" presented here doesn't have the investor taking title, but rather becoming a lessee, and then sub-leasing. Depending on the specific terms of the loan, and state laws, the borrower may well be in their rights to execute a lease prior to "notice of foreclosure" per the federal law. Recent CA case law determined that "notice of foreclosure" is the date of the trustee's sale and tenants were allowed to complete their long term lease as their rent was sufficiently close to fair market. The execution of the lease was during the foreclosure process and the owners/borrowers did it to protect their tenants from eviction after foreclosure. The courts in that case came to the conclusion that the lease was valid. We'll see what happens in future cases. The feds really screwed up with that "notice of foreclosure" thing.

So, IMO your idea is the Grand Canyon of snake pits.

4 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

Great point Kristine, I didn't even consider the fact that the property could be bought by a third party at auction! It would be a huge pain in the neck for them, and if they planned on using it as their primary residence, then according to the the Tenants in Foreclosure Act the lease becomes invalid and they just give a 90-day notice instead. Which would suck for the sub-leasee, if they were under the impression that they had a place to live for the next year, or whatever the terms of the lease were. So basically, a losing situation for everyone involved. It's a crappy strategy, and irresponsible too. Case closed. Now I'll be able to sleep at night lol

0 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

Originally posted by Joshua S.:

Great point Kristine, I didn't even consider the fact that the property could be bought by a third party at auction!

If you really didn't consider this, you need to learn more about foreclosure, and specifically foreclosure stats for your area. I've noticed similar thinking in other threads and message boards and it assumes that all the props go back to banks. And that they don't bother to file law suits or don't evict. First, while some properties do fall through the cracks, the major lenders getting properties back at sale have plenty of resources at their disposal and a whole slew of contracted management companies to do everything from to serve notices, collect rents, secure properties, etc. Secondly, in my farms, a fair number of properties are going to 3rd parties. That's where all the flips come from. :) Many of those buyers, especially the major players, also know what they are doing and have legal teams. So you can only slow them down so much with the tenant with a lease thing. That being said, I know of some new buyers at sale who have struggled with borrowers claiming they are tenants and producing fraudulent long term leases. Their biggest mistake in my opinion, was wasting time by not filing an unlawful detainer immediately. Like I said above, the tenant has to answer. Most are not going to show up in court with their fake leases.

BTW, IMO the fair market rent requirement in the law is not a gray area. A plaintiff suing to get occupancy based on an invalid lease would have to prove that the rent in the lease is outside the range of FM rents. While some rural or unusual properties might be difficult to comp, the average SFH in an average neighborhood usually have comps that can be turned into evidence. In the case law I mentioned above, the plaintiff, who was a 3rd party investor buyer at sale, failed to provide sufficient evidence to convince the court that the long term lease was below FM rents.

0 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

Yep you're right, I do need to learn more about foreclosure... and real estate in general! That's why I'm here on these forums interacting with you folks who know your stuff. Lurking is fine, but personally I learn a lot more from actually getting out there and asking (sometimes stupid) questions and bouncing ideas off of people. Sometimes that means taking a few jabs but I'm cool with that as long as I learn something.

0 Reply

Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

13y

Joshua I know you are just brainstorming but you will find it is rare for an idea to pop up that nobody has thought of before with real estate.

The problem with grey areas or interpreting things the way you would like them to be to convince yourself you are in the right and making money is that later on the banks and the government step in. They do not have the same interpretation that you will.

They have fraud, illegal, etc. running through their minds whether you are doing that or not. I have actually heard of people working grey areas only to have a nightmare years later when they are pursued and the pain begins.

I like vanilla stuff. You get to close to the flame with the grey areas and you will get burned pretty bad. Some get caught and some do not right away but eventually it all comes crashing down.

Podcast Guest on Show #47

NNN Invest53 Reviews

Website View Page

2 Reply

Joffrey Long

Lender · Los Angeles, CA · Member since 2012 · 147 posts · 76 votes

13y

This doesn't look like a gray area. I once again agree with Jon H.

I hate to use the "F" word, but it's fraud. The intent of the parties is to deceive the lender into honoring what they're led to believe is a legitimate lease.

The most likely place for this to unravel is if the delinquent owner later decides he/she does not like the deal they entered in to. That could happen if the rental works out well, value goes up, they get 2nd thoughts about having entered into the deal. They go to the defrauded lender, regulators, attorneys, and the witch hunt begins.

I compliment you on "throwing yourself to the lions" here at BP, where the damage to you is far less than if you actually did something like this.

Just keep in mind that deals where the profit is made at the expense of someone else (human or big corporation) who is deceived or deliberately made to believe in a set of circumstances other than those that actually exist........is fraud.

Joffrey Long

3 Reply

Wayne Brooks

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

13y

K Poe,
I'm sure you and/or Jon know this....doesn't the "tenant can remain until end of the lease" clause, and the entire Act itself, only apply in the case of Fed backed/insured loans anyway. And Joshua, the banks know the law too and they're really not just a bunch of dumb asses that would let it go. They're well aware of most of the tricks that investors/mortgagors/buyers use to get over on them.

0 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

It looks like I really rocked the boat here! I've taken the liberty of summarizing the key quotes from the thread:

"I sure hope you are not considering this"

-Tara G

"I don't know if you have potential as a real estate investor, but I can see you have great potential as a real estate guru."

-Don K

"Illegal."

-Jon H

"The Grand Canyon of snake pits."

-K Marie Poe

"Fraud, illegal"

-Joel O

"FRAUD"

-Joffrey L

Gotcha, loud and clear guys, thanks! Hahahaha I'm really starting to love this place

0 Reply

Ibrahim Hughes

Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes

13y

In NJ this wouldn't fly if the lease was executed AFTER the complaint and subsequent lis pendens was filed. Most agreements (leases, mortgages, deeds etc.) executed after the fact are subordinate to the lis pendens. Meaning they wouldn't survive the foreclosure anyway.

At least that has always been my understanding. Did something change?

0 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

Ibrahim S While the state courts were (and are in some cases) still dealing with the definition of "notice of foreclosure" in the PTIFA, the Dodd Frank Act clarified and defined it is as "the date on which complete title to a property has been made to a successor entity or person.....". That's the feds saying that leases executed before transfer of title are valid. Here in CA it would be the trustee's sale date. In the case of a judicial foreclosure it would be the date of the court order. I don't why they called it "notice of foreclosure if that's not what they meant. :)

2 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

Originally posted by Wayne Brooks:

K Poe,
I'm sure you and/or Jon know this....doesn't the "tenant can remain until end of the lease" clause, and the entire Act itself, only apply in the case of Fed backed/insured loans anyway. And Joshua, the banks know the law too and they're really not just a bunch of dumb asses that would let it go. They're well aware of most of the tricks that investors/mortgagors/buyers use to get over on them.

Nope. Read the Act. It applies to mortgages on all residential SFHs, 1-4 unit dwellings.

0 Reply

Tara G.

Investor · Cary, NC · Member since 2008 · 78 posts · 14 votes

13y

Originally posted by K. Marie Poe:

Ibrahim S While the state courts were (and are in some cases) still dealing with the definition of "notice of foreclosure" in the PTIFA, the Dodd Frank Act clarified and defined it is as "the date on which complete title to a property has been made to a successor entity or person.....". That's the feds saying that leases executed before transfer of title are valid. Here in CA it would be the trustee's sale date. In the case of a judicial foreclosure it would be the date of the court order. I don't why they called it "notice of foreclosure if that's not what they meant. :)

I think federal law trumps state law if it is more stringent in favor of the bonafide tenant and vice versa. It truly is a "Protection of Tenants" law.. Did some research on this for a property we just bought.

0 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

Originally posted by Joshua S.:

So I wanted to explore an idea here, and see if anyone has heard of anyone else doing it. But before I go there, I want to make clear that I'm not ADVOCATING this or any other shady business practices; I'm simply wanting to explore a hypothetical. With that aside...

This idea revolves around exploiting a law that was recently passed that protects a tenant from being kicked out in the event of their landlord going into foreclosure. The law states that the bank must honor the lease of the current tenant until it expires. Couldn't an opportunistic investor approach homeowners who are facing imminent foreclosure, and get them to sign a lease to rent out their home? He might offer them some cash to sweeten the deal, perhaps enough to cover their moving expenses. He would then have a lease at a STEEP discount to do with as he pleases. He could move in himself, or he could sub-lease to other renters and make a handsome cashflow. The new tenants win because they could be getting a nice house at a below-market rent. The foreclosee wins because he's getting cash to move, can collect rent from you for a month or two until the house is taken, and he feels like he's "sticking it to the bank" for whatever it's worth. The only loser is the bank, who as far as I can tell, wouldn't really have any legal recourse... Thoughts?

I think your expolration speaks volumes even with your disclaimer, why post it?

Obviously you didn't read the law. The lease must have been made PRIOR to notice of foreclosure, the owner would need to know the notice was and when it would be given.

The lease must be made at FAIR MARKET rent

The lease must be VALID and made in GOOG FAITH.

Rents must be CURRENT and paid to the bank beyond the possession after foreclosure

So, basicly, the "shaddy" thinking you have isn't even based on reality.

0 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

Notice of foreclosure is the first step taken by a lender, the notice of demand, the accelration of the note calling the full balance due and payable and cure. The notice is effectively given in most states with non-judicial foreclsoure upon the mailing, the postmark by registered or certified mail.

It's been months since I read the law, but as I recall the lease had to have been made prior to notice to be considered eligible.

I see some are saying possession. I believe that was with judicial foreclosure, you're required to go to court. In such a case you can bet that the issue of a tenant would be brought up and the judge would rule on any existing lease. Having a lease less than a month or two old will probably be viewed closely, probably woundn't fly as being valid, but if it were, the extension is 6 months and payments must be kept current. You're probably helping the bank with fair market rents!

0 Reply

Tara G.

Investor · Cary, NC · Member since 2008 · 78 posts · 14 votes

13y

Bill, The law was updated in 2010 with a clear definition of NOtice of Foreclosure. It is the day the deed is transferred to new owner. SO not the date of initial notice of intent to foreclose, not the date of the foreclosure filing, not even the date of the foreclosure auction itself, but the day the property changes hands..

Joshua, there are so many legal, decent and considerate ways to make a good living in real estate. There really isnt any need to be walking the fine line of what is ethically and morally wrong! Good Luck!

1 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

Thanks for updating me! You mean all that was from memory that long ago? Well, my comments, intent I guess still apply.

I doubt they changed the valid aspects. The plan suggested wouldn't fly, IMO.

0 Reply

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

13y

Originally posted by K. Marie Poe:

Ibrahim S While the state courts were (and are in some cases) still dealing with the definition of "notice of foreclosure" in the PTIFA, the Dodd Frank Act clarified and defined it is as "the date on which complete title to a property has been made to a successor entity or person.....". That's the feds saying that leases executed before transfer of title are valid. Here in CA it would be the trustee's sale date. In the case of a judicial foreclosure it would be the date of the court order. I don't why they called it "notice of foreclosure if that's not what they meant. :)

I agree for the most part with what was posted in that quote. Since I am in a judicial foreclosure state (PA), I can say that the date of the court order probably isn't the date - at least it isn't in my state. The first court order is the "writ of execution" which basically says put the property into sheriff sale. Then there is the date of the sheriff sale. Then there is the challenge period (where parties and lien holders can challenge the validity of the sheriff sale or the scheduled distribution of proceeds from the sheriff sale); a court order might arise as a result. Then a Sheriff's Deed is issued and recorded - and that is the date for PTFA. Which could be months of wait (6 weeks to 3 months from date of Sheriff's Sale to get Sheriff's Deed when the challenge isn't upheld, longer if there is something valid to the challenge).

0 Reply

Account Closed

Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

Steve Babiak I was summarizing when I said the date of "notice of foreclosure" would be a court order in a judicial state. Dodd Frank says the date of a notice of foreclosure is defined as the date on which complete title to a property is transferred to a successor entity or person as a result of a court order or pursuant to the provisions in a mortgage, deed of trust or security deed. So whatever deed or court order completes this transfer in your state is the date. The point of quoting Dodd Frank is that "notice of foreclosure" has been defined, by federal law, to be something totally different than most of us in RE would logically conclude.

The importance of knowing this date, especially if one is a foreclosure sale buyer, is that it means a valid lease could be executed by the borrower as lessor pretty much right up to the last minute before the property is transferred to the foreclosing lender or third party buyer. I think it's hard to predict how many people will try to take advantage of this. Regardless, it's a another risk of foreclosure sale buying and hopefully it will be over by 2014.

0 Reply

Joshua S.

OP

Beaverton, OR · Member since 2012 · 41 posts · 23 votes

13y

Give me a break Bill. I was simply asking why this idea wouldn't work, and I found it. It's not like I'm trying to get BP members to conspire to deal drugs here.

As for being based in reality, well, I disagree with you there. It's definitely feasible. In fact, I'll go ahead and say I take zero credit for the idea. A couple years ago, I heard from a friend of a friend that there was a guy in Arizona doing a version of this. It was working so well that banks were offering him "cash for keys" repeatedly to move him from properties. They didn't try to sue him because it wasn't illegal, it simply became routine, and he was making money hand over fist. Now, that's the STORY. For all I know, it's made up. Or maybe he's in jail now... lol. I didn't know what to expect when posting this idea on BP, I expected to catch a little flak, but for all I knew somebody could have jumped in and been like "Oh yeah, that's a perfectly legit strategy, totally legal, lots of people here do it, it's called XXXXX."

But regardless, because I asked the question, I learned all kinds of new information from the knowledgeable members here, and I learned enough to know that even if it could work from time to time, it would be unethical for several reasons OTHER than being an inconvenience to the banks.

0 Reply

Tell me why this wouldn't work. (Disclaimer: It's high-risk and pretty shady!)

Tell me why this wouldn't work. (Disclaimer: It's high-risk and pretty shady!)

Most Popular Reply

30 Replies