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

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

Joshua S.
Beaverton, OR · Member since 2012 · 41 posts · 23 votes

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?

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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.

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  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    13y

    Don't worry Joshua. I understand your question and don't judge you for for it. There are a lot of people who advocate lease/options and those are predatory toward unsophisticated buyers (for the most part) but you don't hear any moral questioning about these investment vehicles. There are those that argue wholesaling is a way to skirt around having a broker's license (which I tend to agree with), yet this site is probably 2/3 people who are (or trying to be) wholesalers. Then you have subject-to deals where, no doubt, most investors don't have the slightest intention of paying off a called loan - thus leaving a seller totally screwed who might have otherwise made different decisions.

    Generally speaking, when a deal sounds too good to be true, like the "win-win" of a lease option, the "no-money" required for wholesaling and subject-to, the money is usually made by carefully skirting around the law. So high returns (percentage wise) on little money invested, but with lots of risk - legally. Some people do alright at these schemes, but it requires a lot of work - not my idea of "investing".

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  • Kevin Yeats
    Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
    13y

    Joshua, with so many ways ... clearly legitimate ways to make money in real estate AND with so much free info and advice on how to make money found here on BP, why do you even want to get close to the questionable line?

    I could see your idea working once although not necessarily profitably. It is tough to do two such "deals" concurrently or even consecutively without raising a lot of red flags, especially if you have to appear in court.

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  • Joshua S.
    OP
    Beaverton, OR · Member since 2012 · 41 posts · 23 votes
    13y

    Look, I don't know how else to put it, I was never considering trying this. It was a thought experiment, nothing more. As you can see in my profile, I am a complete newbie. I've never done a single real estate deal. I have thousands of questions and business ideas roaming around in my head, most of which aren't even remotely "sketchy" like this one. I thought it might make an interesting discussion, which it did :)

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

    I'm with Brian Hoyt, in that I don't judge you for asking questions in order to work though possible angles and why something seems to good to be true. I am inpatient, however, with people who don't do at least a tiny bit of research.

    This thread revealed some important things. 1) It appears many experienced investors don't know how the PTFA of 2009 and Dodd Frank of 2010 changes the long standing practice and assumption that leases are automatically wiped out at foreclosure. Dodd Frank goes through 2014, but it could go longer. Trustee's sale buyers have to plan for that. 2) There is also the other side of the equation, the tenant side. The law was written to protect tenants. If you think about it, it's hard to believe that until 2009, most tenancy's were at the mercy of their landlord's ability to pay their loan. In CA, the PTFA gives tenants without a lease and whose landlords are in foreclosure a better deal (90 days), than tenants whose landlord sells the property and terminates a tenancy (30 to 60 days depending upon length of tenancy). If you were a tenant and knew there was a law that would have to honor a long term lease, tell me you wouldn't ask your landlord in foreclosure for one.

    I appreciate a provoking question that forwards everyone's thinking.

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  • Sekelle O.
    Real Estate Investor · Irmo, SC · Member since 2012 · 106 posts · 90 votes
    12y

    @Joshua S.

    Thank you for asking this question. I read through the entire thread and learned lots of valuable information.

    BTW, I understand what it is like to have an idea or concept take root in your mind, a question seeking an answer, giving neither rest nor quarter until that answer is found. There are lots of ideas out there that everyone knew would never work until it did. I think you did the right thing. You had an idea, and you sought advice from the experts. It won't work in this incarnation, and if there really is nothing to your idea, it will probably die a natural death and never darken the doorways of your mind again. Or perhaps, there is a kernel of potential there as yet unrealized by your rational mind but perceived by your intuition. In which case, the idea may instead be more like the grain of sand, irritating until layered upon with thought, further research, innovation, courage, daring and even good luck to perchance become a pearl.

    (did not intend to wax poetic but couldn't help myself once I had gotten started, but I thing y'all get the gist.)

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