How can a homeowner get back/buy back the house after shortsale?

Question

Here is a situation. The house is underwater and the owner is willing to do shortsale or any strategies to stay at the house and have a chance to buy the house back.

Is the above homeowner's wish possible?

To newbie's eyes like mine, it's possible. I'm thinking about shortsale with an option to buy back or rent-to-own. But not sure, may be there is a trap somewhere along the line.

Please advise, thanks

Jon Holdman · Answer

If the short sale agreement with the lender says the former owner can't benefit, they can't benefit.  If you lease/option the house to a relative, and they former owner moves in, that's a benefit, don't you think?

If the short sale agreement doesn't prohibit a deal with them after the short sale is completed, AND they have cash (not a chance) or can get a loan (also not a chance) then turn around and sell it to them.

If you lease option it to them you are going to turn from being the white knight into the evil villain before long.

There are tons of deals out there.  If the owner wants to stay, let them find someone else to help with their deal.  Move on.

Again, to be a profitable rental the rent has to be 2X the P&I payment on the new mortgage.  That's assuming 100% financing.  With a down payment, it has to be even higher or else the down payment money is working for free.

To be affordable to the former owner, the rent has to be significantly less than the payment they couldn't make.  Combine those two facts and the investor would need to buy at a HUGE discount from the amount owed.  Unlikely a bank will agree to that deal.

OTOH, if the owner can in fact afford the note, but want's to do a strategic default to get rid of a big loan, what investor would be foolish enough to sign up to do a lease/option (e.g., what is effectively a loan) to the same person?  Especially if includes the chance to be accused of fraud by the former lender?

Dale T. · Answer

Yes it can be done but I think they are all saying that it may not be a good Idea because they may not be stellar tenants. But yes, a relative or any other outside person can buy it. The bank does not want the Homeowner to buy it back (for good reasons) but people are doing it all the time. A cousin or relative with a different name makes an offer with cash and a few months later flip it back to the original Homeowner. Most of the time nobody hears about it until after the fact. But it is being done everywhere right now. Not your place or anyone else to police what anyone does after a sale.

Jon Holdman · Answer

As J Scott says, its probably prohibited by the short sale documents.

Even if its not, ONLY do it if they can purchase outright.  DO NOT do a rent-to-own.  A deal like this can be turned into a loan by a judge.

They've already proven they can't afford this house.  Profitable rentals are those where the rent is at least double the P&I.  Investor loans are more expensive than OO loans.  So for this to both be profitable and significantly cheaper than what they currently should be paying, you'll need to buy it at 20-30% of the current loan amount.

If they don't pay you, and you try to evict, they can fight you.  A judge may rule this is an equitable mortgage.  That is, you made a loan equal to the amount of the short sale.  You collected payments equal to the rent.  The loan had a balloon payment equal to the proposed buy-back amount.  Do the math, and it almost always works out to be usury.

Short sale equals owners move out.  If they're not willing to move out, you should move on.  You'll have two more shots at the property.  Once at the sheriff's sale and a second time if it becomes a REO.

Account Closed · Answer

The issue isn't which party rents to the former owners.  The issue is the short sale affidavit/statement that says there are no side deals and that the sellers will not be renting or buying back or remaining in possession of the house.  You can read most of the lender's short sale affidavits online.  They are very clear and comprehensive. It's possible to do a short sale without such an affidavit (I did one) but it's not likely with the major banks.

If the OPs borrower/seller's mortgage is an upside reverse mortgage guaranteed by HUD, there are no 3rd party or arms-length sales requirements for the buyer.  Even the borrower is allowed to pay off at current market value.

Steven Soto · Answer

So what if there is a third party involved who rents to own too the original homeowner? Can that be done?

Jeff S. · Answer

When you work with the owner on a deal like this it can be construed that you and the owner conspired to stick it to the bank for the 2 of you to profit. If the homeowner profits and you help them profit at the expense of the bank, and you profit too, it is not looked at kindly by federal officials.

Was talking to an agent in Vegas that specializes in SS, flips etc in a big way and he said the FBI was asking a lot of questions about the relationships they had with SS owners.

Torsten Holmgren · Answer

I have done many short sales and you are required to sign an arms length addendum. It specifically says that the property can not be leased back to the owners. It is a pretty well thought out addendum. I do not think that their is any way that a homeowner can sale lease back buy.

Scott Hubbard · Answer

Jon touched on the premise of a short sale which is the seller cannot benefit from a short sale and in eschange the lender agrees to take a loss.

The contemplation of a prior agreement, where the seller and the buyer strike an accord by which the seller is somehow to receive a benefit, may fall under the description of mortgage fraud. This benefit may include proceeds or monies to the seller, but also could be defined as allowing seller or any of their relatives to remain in the property.

The lender will likely have you and any third-parties sign an Arms Length Transaction Affidavit which will address the above scenario.  This affidavit may contain verbiage which could forbid the buyer from allowing the seller to remain in the property including any immeidate family members.

Although I have see several which allows a non-immediate relative of the seller to rent or purchase the property, it will more than likely disallow any relative by marriage or by blood.

Most attorney's agree that mortgage fraud is difficult to prove, but certainly having a prior agreement with the seller, even one where their sister or brother is to live in the property, could be construed as fraud.  This is especially true if the seller or buyer agreed not to.

While you might be able to accomplish what you seek, you will likely not know for sure until you have a chance to read all of the closing documents as well as your state laws.

Good Luck

Pat A · Answer

Thank you for the input.

Per Jon, [ONLY do it if they can purchase outright]

What does it mean by "purchase outright? Does it need to be cash buyer or mortgage is ok? The thing is....

There is a person (relative of the homeowner) who want to buy this house using traditional shortsale. But the relative isn't qualified for that amount. So, I'm think....

An investor can do shortsale, then rent-to-own to the relative. Would this be a good idea or not?

My mind just say yes, it's a good idea. What do you guys think?

Thank you again for all the comments.

J Scott · Answer

I believe many short-sale addendums contain a clause that says the property can not be leased back to the owners.

You'll want to check the document that you sign that indicates that the sale is an arms-length transaction -- that will tell you if leasing back to the owners is prohibited (if it doesn't say that it's prohibited, it should be fine).

How can a homeowner get back/buy back the house after shortsale?

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