Negotiating a short sale can we rent the property in the interim?

Question

Negotiating a short sale can we rent the property in the interim? the investor who is facilitating the short sale has rented us the property, but he is not the owner of the property. how can he rent it to us? he also said we can buy it on contract from him, but the short sale has not been negotiated yet. he keeps asking me to give him more money outside our original agreement, is this ethical?

Jon Holdman · Answer

Every contract has laws and decisions behind it. Just putting something down on paper is meaningless without the law and history to back up that paper. You and I can write a contract with each other to buy or sell any possible property. That could use all the standard forms, include earnest money and anything else that would make it a valid contract. If the one of us that's selling has no interest in the property, though, the buyer has no recourse to acquire the property. In this case, the seller is in foreclosure. They have stopped making payments. They've "sold" the property to this investor with a land contract. At best that contract is junior to whatever lien is being foreclosed and will be wiped out by the foreclosure proceedings. If the investor does negotiate a successful short sale, there will be a normal purchase contract to finalize that transaction. In either case, that land contract will never stand up. That's what I mean by its not worth the paper its written on. Think about a subject to deal. The seller gives the buyer an actual deed. The bank then forecloses the loan. Do you really think the bank won't take the house from the buyer because they have a deed? That land contract is not as strong as the deed. Now, you are correct that the tentant really isn't being harmed by this arrangement. They have place to live, they're paying rent, and they realize they could be kicked out with only a few days notice. I still contend this is, at best, unethical on the part of the investor. This is the kind of bad business practice that gives investors a bad name. We're probably going to have to just agree to disagree here. You may be entirely correct that this is perfectly legal. Even if it is, I don't think its right.

Mitch Freed · Answer

The tenant can't get kicked out at a moments notice if there is no auction date assigned and the lease is short term or month to month. I agree, there are wrong ways to do this...but there is subsequently a right way. Of course, the tenant always has the option, in any lease agreement, to stop paying rent. In these cases I would probably not pursue an eviction or attempt to ruin that tenants credit history or make their life difficult...too much time wasted... but at least when the BPO is done...the agent will note that there are non paying tenants in the house...who probably didn't grant access...therefore who knows what the interior will look like...result being a lower offer and a better short sale negotation. In the end the tenant will have probably lived in the house for a few months rent free and the investor will have negotiated a better price. But this doesn't forgive or justify the default on the rental obligation...the market rent of the house wasn't automatically reduced to zero because the mortgage went unpaid.

Jon Holdman · Answer

Any reasonably well written lease option would contain a provision voiding the option if the tenant buyer defaulted on the lease. You're right. There are other ways to convey an ownership interest in a property. The OP did say the investor was buying from the owner on a contract. I assume that means an installment land contract. If the seller was current on their obligation or owned the property free and clear, that's a legitimate way to convey title. Most people buy cars exactly like this. However, the owner has already moved out. The investor is negotiating a short sale. Think either of these two parties making any payments on the debt on this property? I'd guess no. Now I could be wrong. If the investor had brought the loan current, and is making the payments while negotiating a short sale, then fine, this seems legitimate. If the owner's not making payments, and the investors not making payments, but is collecting rent, then that's rent skimming! Maybe it doesn't meet a precise legal definition, and maybe a good lawyer could get the investor off the hook, but its certainly immoral. We've read stories here about squatters moving into vacant houses that are in foreclosure. I think we all feel outrage at this theft. How is this investor who's not making any payments but collecting rent any different? If a landlord is collecting rent and not making the payments, isn't that rent skimming? Maybe the investor here has managed to wrap some paper work around it. But until he brings that note current and picks up the obligation, he's no different than the landlord who's stopped making his payments or the squatter who's moved into an empty house.

Jon Holdman · Answer

I'm not a lawyer, and I don't know all the ins and outs of landlord tenant law. No doubt in a convoluted situation like this the outcome in court would depend on the lawyers and the judge. Nevertheless, if you buy an investment property with an investor loan, it will have an "assignments of rent" clause that says the lender has a claim on any rents. "Rent skimming" is defined as collecting rents and not paying the mortgage. Here you have exactly that situation. Rents are being collected, and the mortgage is not being paid. That land contract isn't worth the paper its written on. Everything I read here and other wise says shorts sale negotiations aren't all that successful. Its far from a sure bet the investor will close this purchase. I'd even say its more likely this will go to auction that it will be purchased by the investor. In the mean time, the investor pockets this rent. Apply what ever rationalization you want. And, it may not meet the specific legal definition. But, its rent skimming.

Mitch Freed · Answer

Jon, If there is no damage to the tenant...i.e.no forceful eviction or unknown auction date that causes damage to the tenant...and the lease agreement discloses that a short sale is being negotiated...and the lease agreement is short term...either 3 months, or month to month...how is the situation different then any other lease? Renters have to pay rent...no matter what house they live in...its not like there is a rent free house across the street. There is need no hook to get off of...if there is no damage incurred. You approach this situation with the best interest of the lender in mind...but they have nothing to do with landlord tenant law.

Mitch Freed · Answer

I'm sorry but if contracts aren't worth they paper they are written on then why do we use them? And from my experience negotiating shorts and the investors I know here in Oregon...we close our deals and our contracts are worth more than the paper they are written on. Once again, what difference does it make to the tenant where the money goes...no matter where they live...they have to pay rent!!!!

Mitch Freed · Answer

I would defintely negotiate whatever deal you can BEFORE you sign an agreement. And ownership is not only conveyed by a deed...there are many other ways to own property. I knew a person who signed a lease in a situation like this...everything was disclosed to them in the beginning...but they had some sort of scumbag revelation after a month and decided to stop paying...a real loser. It was a short term lease and all...like 3 months...property wasn't even officially in default so there was no auction date assigned. As I recall the tenant was actually a contract buyer but then decided during the lease the they were going default on their rental obligation...who would sell a property on contract to a defaulting renter?

Mindy Ann · Answer

OMG one of the people in that thread is the investor i am dealing with. Unbelievable! thanks

Jon Holdman · Answer

Hmmm. I'd certainly negotiate for below market rent given you could end up moving out on short notice. I'd minimize any deposits since if this goes belly up he'll likely disappear. Honestly, I'm not sure I'd do this. It was discussed a couple of months ago in this thread. People will be in the house because this investor is probably trying to sell it. If he can't close the short sale, it will go to foreclosure, and you could end up hearing about it only when it actually happens. You could end up having to move with only a few days notice.

Mindy Ann · Answer

i am not the owner. the owners move out a few months ago. the investor showed the house as if he was the owner... but is not. he claims he is buying it on contract from the owner while negotiating a short sale with the bank.