Anyone Familiar with Residential Short Sale/Foreclosure Leasebacks?

Question

ALL:

Good morning and Happy Father's Day to all the fathers here on BP. I have a question concerning residential short sale/foreclosure leasebacks. Recently, I contacted someone looking for a realtor specializing in short sales and during the conversation, the person mentioned the concept of leasebacks. Have any of you done this on a short sale or foreclosure and if so, how did it work out for you in the end?

I researched the concept and came across information stating that in order to participate in something such as a Short Sale Lease Back Program, the real estate professional handling the process has to be certified with one or more approved non-profit organizations to offer such a program. The investor told me that from an investor's standpoint, it's doesn't apply because as an investor, you can buy and sell real estate without a license for self wealth.

If you're familiar with this type of investing, please share your experiences and any information you feel is important when handling these types of deals.

Thanks in advance.

Jon Holdman · Answer

You're talking about buying a REO, not a short sale.  Very different things.  You won't have the leaseback or any of the other restrictions that get put onto short sales.

That said, its almost certainly a bad idea.  The new tenant/former owner has already proven they can't afford the house.  Profitable rentals require the rent to be MUCH higher than the mortgage payment.  They couldn't handle the mortgage payment, how are they going to handle the rent?

Now, perhaps they were into the property at a very high price and had some horrible loan.  Maybe you're able to buy it much cheaper and get a much better loan.  So, perhaps you could charge them rent something like their old mortgage payment and make a profit.  Even in that case, they're going to have a distroted view of the situation.  They view it as "their home".  They will think you should be just charging them the amount your paying the lender.  Now, that won't stop them from calling if the AC breaks down or anything else.  But they won't want to see you making a profit.

And, you have to make a profit to be in this business.

If the house has been foreclosed and taken by the bank, where have they been living?  This process takes months and months.  Have they been squatting in the house?

The number you mentioned to me in your PM was scary.  You said this house was $335K.  $335K SFRs rarely make good rentals.  They need high rents to cover the cost of the house and rarely can get those rents.

Tara L. · Answer

Thank you all for your comments. It sounds as if I should not pursue this at all. When I was told what the person thought they could buy the home for($335,000), I had concerns. I don't want to extend myself that far on my first investment, especially with the risk involved. I will get started soon enough in real estate investing, but I don't think this is the best approach. Again, thank you all.

Mark Ferguson · Answer

If it is selling as an Reo there is a 99% chance the former owners have been evicted or left on their own through a cash for keys or voluntary.   You could rent it back to former owners but Why would you rent back to them?  There are still
Some restrictions to an Reo sale.  Most banks won't sell to any immediate family of the former owners or the former owners themselves.

If you are buying it at the foreclosure sale then you can do whatever you want.

Tara L. · Answer

Thank you all for your responses.

Wayne Brooks · Answer

As Doug says, if you buy an REO, you don't have any leasing restrictions.

Bill Gulley · Answer

The trick is to use a non-profit. Seller finance to the non-profit or sub-2, the non-profit does the leasing. Check on the specifics as to title requirement, but housing non-profits have advantages that mortals don't. 
;)

Doug Heise · Answer

Tara, what they are telling you is absolutely correct at the closing all parties will need to sign an Arm's Length Affidavit that states among many things is that the property will not be sold or leased back to the seller and that the seller is not receiving any money or any form of compensation from the sale that has not been disclosed to the lender.

If you have never seen an affidavit such as this then email me and I will provide you with one.

Now if you buy it from the Auction as an REO then you can lease it to whom ever you like. That is if the Hedge funds don't out bid you.

Hope this helps.

Tara L. · Answer

Thank you both for responding. If I were to purchase the home from the bank after it has gone into foreclosure, can I do a leaseback to the original homeowners without getting into any trouble? Please forgive me, but I'm new to all of this and want to make sure I don't do anything wrong.

Mehran K. · Answer

Yeah, to buy the property as a shortsale you'll have to sign an agreement stating that you will NOT leaseback. Best not to even think about it :)

If it's a great buy, you won't have to worry about finding a tenant. The current owner will benefit from the shortsale but cannot eat their cake and have it too! (proverb is not reversed, that was how it was originally written) lol

Wayne Brooks · Answer

You can not legally do it.  The "certifications" for agents for this are all useless, self serving, schemes.  Only a certified non profit organization can buy the property and lease it back to the owner in a short sale.

Anyone Familiar with Residential Short Sale/Foreclosure Leasebacks?

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