Short sale, with homeowner becoming renter?

Question

Okay here is my situation.

Ive been working with this realtor on this short sale for about 2 months. The asking price is 70k, and I got the lender to accept it for 65k. As is value for the property is about 80k. The comps show majority of the home in this area is selling for 80k+.

But unfortunately, now the owner, who is still residing in the place, decides she is not going to go through the short sale unless I agree to rent the place back to her, thus, no lapse in time. She would just sign a rental contract with me and stay. I wouldnt even have to clean the place up.

She even said she'll show her income and so forth. The property is in excellent condition. If she were to move, all I would need is carpet cleaning and paint to re-rent it out.

Has anyone done this before? I dont want to lose the deal, but Im not sure if it is a good idea to buy and let her stay. I think there is going to be conflicts about who's REALLY owns the property. What do you guys think?

Melissa Webb · Answer

Your numbers may work, Lee.  But, if the owner is threatening to not go through with the short sale unless she gets to stay, she may just be taking advantage of you.  She must know that if she doesn't go through with the short sale, then her property will most likely be taken to auction and the foreclosure will stay on her record for the next several years, she won't be able to buy another property, and her credit gets shot.  You, as the buyer, are helping her out of a bad situation that she put herself in.  You've probably told her everything she needs to hear to get the deal and she probably thinks that you can't live without her property, so she is going to dictate the terms: DON'T LET HER!  It sounds to me that she is trying to take advantage of you, plain and simple.

Jon Holdman · Answer

Not at all sure the poster in this thread is for real or not, but it gives you an idea of what you're getting into if you try this.  Keep in mind "mikeso" and "amv" are the same person.  You might be the white knight at the start of this deal, but you will soon enough turn into the evil investor.

I don't want to leave my home

Illegal? Not directly.  But the lender who approves the short sale will likely make you sign a statement that the borrower is receiving no benefit from the deal.

Another seller stays on horror story.

Noticed you said the seller is an old friend.  You can probably kiss that relationship goodbye, too, if you do this deal.

Jon Holdman · Answer

The trouble with these situations is that you're the white knight now, but will be the evil, dastardly thief who stole her property later.

It doesn't sound like there's any repurchase element here.  That's can be very bad because a judge will rule its not a sale/leaseback, but rather a loan for the amount you pay for the house.  The "rent" is the payment, and the repurchase price is a balloon payment.  When you do the math to compute the interest rate, it will be very high, and you'll be accused of usury.  You could end up losing your entire investment.

Even without the repurchase, you may be violating your agreement with the bank.  The bank will want to be sure the seller doesn't benefit from the transaction.  Renting for half the previous payment is certainly a benefit.

Perhaps you could offer to pay for movers to move her to a new place.

Otherwise, move on to the next deal.

Jeff S. · Answer

One thing leads to another then the homeowner wants a lease option then the FBI comes and says it was all a scheme to defraud a government backed lending institution.

Talked to a RE agent that had the FBI snooping around asking these kind of questions. He said renter cannot stay under any circumstances. Check it out.

Jon Holdman · Answer

I was referring to the "I don't want to leave my home" when I was saying I'm not sure this thread is for real, not your post, Tammy.

Tammy R. · Answer

How does AHP do it then?  I am new to this site, don't know the posters, and yes, I am for real.  I think I will refer my friend to AHP and see if they have a referral fee.  Doesn't hurt to try...

Account Closed · Answer

Jon you make an excellent point.  I hope any RE investors purchasing short sales read the horror story thread.

When investing or doing business it is often important to not let emotion cloud your judgment.

Tammy R. · Answer

Hello, I know this is an old message, but short sales are one of those areas in REI I haven't stepped into because I've tried to get several of them with no luck. I now have a short sale negotiator and have run into this situation that this thread discusses.

Is it still legal to rent back to the original homeowner?  I thought that the owner could have no part in being in the home on the other side of the short sale?  Am I misunderstanding something?   How does AHP do this if this is actually not legal anymore, (or is it legal?)  Does anyone know for sure?

My seller/renter is in WI.

They filed chapter 13 to try to save the home, but have a payback so their payment is $2300. Their original mortgage is with Litton, who told them just to not pay and submit their paperwork for a modification, all the while playing games with them. (wish she'd come to me first for help :( )  at a lofty 8%.  Both have steady jobs and income and could easily afford a lower rent payment.

Property was purchased 2007 at the height of the market for 225K, is worth about $175K ARV right now, needs quite a bit of work including new roof, a leaky basement, and several other repairs.  They don't care about the work needed.

I'd try to get it as a short sale for $125K, and then rent back to the owners (who happens to be a friend I've had since age 4, so there is a high degree of trust between both of us).  Is this really possible to do?

Of course, with a price of $125K and needing about $15-20K in work, I could rent it back to her and her family and still make a good profit on it monthly.

Any extra input would be greatly appreciated!

Account Closed · Answer

Short sale with sale leaseback with option can be done if you fully disclose the arrangement to the existing lenders, who may not approve. However, any increasing number of lenders are receptive to these arrangements if the net to them is otherwise acceptable. See www.ahphelp.com to learn about American Homeowner Preservation's program which does exactly what you are proposing.

The concern of the arrangement being construed as a loan typically arises when the seller has equity and receives consideration from an "equity purchaser". With a short sale, the seller has no equity and receives no consideration.

Short sale, with homeowner becoming renter?

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