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Does She or Doesn't She? Another Short Sale Perspective

Everybody is talking about short sales these days as if that is all we can do.

So I got thinking about this situation. Who is buying all these short sales?

Is it owner occupiers? Is it investors?

Well, I don't know exactly where all these short sale properties are located but if I had to guess I would say that the bulk of them are in lower to lower middle-class neighborhoods. Now what does that mean in reference to my initial question? Who is buying all these houses?

Probably investors are buying these houses because the owner occupiers in these neighborhoods are having a hard time qualifying, even with the reduced sales prices because interest rates are up, 100% sub-prime is all but a memory, and underwriting standards are tougher.

Now you say that's not our concern. We just want to help our sellers get out of a bad situation and we want to earn a commission. Don't forget we want to earn a commission part.

Well I think that if we really want to help our sellers we would be looking for a way to avoid a short sale. Short sales can have disastrous effects on the borrower. See my other posts on this subject: Short Sales Re-visited and Short Sales Re-visited Again.

If we really cared about our neighborhoods we would be looking for a way to maintain home ownership, not turn everybody into renters.

So what can we do? After all these "sellers" are about to lose their homes to foreclosure. It's hard to think of them as sellers when they are going to walk away with nothing. Oh well, back to the problem. Let's first see if there is a way for them to keep their home.

I participated in a webinar that Brian Brady did the other day on Lease Options. Basically the program was for an investor to buy a house and immediately "sell" it to a tenant utilizing an option to be exercised in three years. If the program was good for the investor, he shouldn't care who the tenant was as long as he paid his rent, maintained the property, and was able to exercise the option in three years so that the investor could get his money back with his interest.

My first thought was that this program could really "capitalize" on all the short sales available.

My second thought was "why can't the current owner be the optionee?"

From the investor's point of view this could be very good. It will probably take less money to "cure" the existing loan that to get a new loan. The "owner" would probably jump at the chance to keep their house.

Three years ago the prospects for this owner looked good. That is why they bought their house. In another three years there is a good chance that their prospects will be good again. Everything goes in cycles.

Now the deal just has to be structured so that we get paid. I'm open to suggestions on this. There is potentially two "sales" here.

Posted by Bill Roberts - "Baby Boomer" Retirement Planning on 07/20/2007 04:24 PM

Comments (16)

short sale, investor, lease option

16 Comments on Does She or Doesn't She? Another Short Sale Perspective

JUL

2007

Hello Bill, very good ideas and some of them I am working on right now. Some of my short sell clients do not want the home anymore for lots of reasons. Those are easy on me, help them out, do my job and get paid, very good for us all! But, my heart really goes out to some of them that have lived in the home for 20 years or more. They do not want to lose their home! I have a small group that will buy a home like that because the owners are not going anywhere and they will be great tenants. They have kept the property up all those years haven't they? They work out a lease to own option for when things improve. I get paid by offering a fee of 10% of the first years lease or 1 months rent, whichever is greater. The investor usually just gives me the security deposit, he has it anyway and no money out of his pocket. And, like you said, we sell it back to the original owner somewhere down the road. But, you are wrong at where these homes are, at least in NE Ohio. We have $500,000 homes and higher in this predicament. ARM's for the most part and a stagnant economy in Ohio. Regards and a great post for us REALTOR®'s in this business. David

Hi Bill~

I'm new to AR...so forgive me if I make any blog-comment faux pas here. That said, I'd like to give you a little heads up on the theory in this post.

I'm in title, and what you've just described is something that has been going on for a while in "foreclosure rescue" attempts. Litigation began in CA when the owners-turned-tenants couldn't complete the terms to exercise their option. So the former owner is now the evicted tenant.

And of course, the litigation began when a few bad apples spoiled the barrel. In many cases, these were ligit investors trying to turn a potentially devastating event into a win-win scenario by bailing out the owners from foreclosure, giving them a chance to keep their home, and making a profit in the meantime...like what you've described above. However, enter the fraudulent "investors" that were preying on desperate owners about to lose their home to foreclosure....and it's lawsuits galore.

And the judges have been sympathetic to the owners-turned-tenants. Nevermind the fact that the owners signed all sorts of paperwork clearly stating the terms. Nevermind the fact that we are talking about people who weren't paying their bills in the first place. Nevermind that in many cases, the trend continued and they neglected to pay their rent as well.

Nope...the judges decided that the Big-Bad-Real-Estate-Investor took advantage of poor helpless "I'm about to lose my American Dream" homeowner.

So to make a long comment longer, I'll conclude by telling you that many title companies (at least in Arizona) will not even touch these types of foreclosure rescue deals any longer. The legal pitfalls are too great, and the risk is too high.

So be careful if the plan that you posted is something you are seriously considering pursuing. Just a friendly heads up!

Jacki

David, thank you very much for your comments. Have you had any of these deals turn sour? It probably hasn't been long enough but I would like to know if there is a "profile" of a successful lease optio0n candidate.

Bill Roberts

Hi Jacki,

I appreciate your "heads up" but why would this happen if they are in foreclosure and willing to "sell" on a short sale where they CANNOT receive any proceeds.

There must have been something more to these cases. If you work for a Title company maybe you can get an analysis of the various cases.

Anything would be helpful.

Thanks,

Bill Roberts

What is happening is that the owners are signing the paperwork and selling to the investor, then leasing back. However, like anything, there are terms to their lease, and terms to be able to exercise their option.

So in many cases, the now-tenants cannot fulfill their obligation. So it has nothing to do with whether or not the former owner was able to make a profit on the sale. It's the lease terms that become the problem. Let's not forget that we're talking about people who are having financial difficulties. And while it is idealistic that they are just on hard times and overall have good payment history, that is not frequently the case. So when they default on the terms, the investor now has to evict. And even though most of the lease options are written to give the former owner every chance to get their home back, the "bad apples" that I mentioned have written up the deals to really give the former owner no chance.

So...the barrel is now spoiled because no matter how tenant-friendly these deals are being written, the investor is under fire. And the sympathy is going to the former owners...who claim to be taken advantage of.

I'll try to get you the specific cases...but I can tell you that most title companies in my area have taken on company policies that are not allowing these deals. Just a heads up for you...maybe before representing clients on these types of deals, I would recommend having a foreclosure attorney advise you of what is going on in your area.

OK Jacki, I look forward to getting more precise information. It seems to me that it is all about "selection." The investor needs to be properly selectd and the seller/optionee needs to be looked at very closely.

Just what is it that the Title companies won't do? They won't insure the title on the purchase from the seller? Or they won't insure the title on the exercise of the option and re-sale of the property?

I can't imagine a title company not insuring the title if the "purchase" is clean. Maybe these "purchases" weren't straight forward enough to satisfy the title company that it was a legitimate transaction.

Maybe these transactons need to be separated into "stand alone" transactions.

Bill Roberts

Hi Bill, I have had 4 deals like this, this summer alone. All good. I do not work with any investor, these investor clients are like my friends now and I would trust them with my own deal! They want these home owners to succeed. Some of these home owners could not get a deal from the Bank even though they were back to work, healthy or whatever reason got them in this position. The bank would want 15k to 20k to just catch up. They weren't in that good of a position. Who is after 2-3 years of a bad time, but they could make their payments again. I do not work with bad apples because I don't look in the barrel! Regards all, David

JUL

2007

David, thanks again. How do you decide if the home owner is a good guy or a bad apple? I think this approach might be viable.

Bill Roberts

Bill,

Good post with the exception of where the deals are located. they are not the bottom of the barrel homes that people are losing. New homes, executive homes, pool homes, homes in the most desirable neighborhoods.

Bad loans did not just seek out poor neighborhood. Many caught the fever and now they are paying the price.

I have been wanting to investigate the lease option side of investing for some time now - wish I had known about Brian's Webinar.

John

JUL

2007

Hi John, I'll go over it with you when I see you. Thanks for your comments.

Bill Roberts

OCT

2007

I am a homeowner who was recently offered a short -sale lease -option deal from an investor. I also have been in the mortgage industry for the last 10 years. I have an immaculate pool home in Florida that I bought 2 years ago adding about 30,000 in upgrades. I have fallen behind 30 days late on my mortgage about 6 months ago and have not been able to catch up. My loan terms were an 80/20 $305000 and $75000 respectivly. The first mortgage just adjusted this month and my payment has increased by $700 making it more difficult to catch up. My credit has taken the biggest hit for these lates making refinancing impossible especially because my house is only worth $380,000. What I was told was that this investor would offer my bank 305,000 to purchase the home. If accepted this would effectively eliminate my second mortgage. The investor would then offer me a lease option to buy back my home in one years time. Now even though I would not own this home for a year the investor is still requiring me to pay property taxes and insurance on this home which doesn't make sense. Furthermore, the lease option agreement is signed after the clean purchase agreement goes through. What is to keep the investor from reneging and deciding not to lease my home back to me and walking awy from the deal with my leagally purchased home. Even if this doesn't happen in one year I would have to qualify for a 100% mortgage to excercise the option. Which we know are very hard to come by today and maybe impossible to get in one year even with improved credit. If I had to come up with even 5% down I could lose my home because I dont have that kind of money. There are many unscrupulous people in this world and I cannot risk losing everything to one of them especially because real estate is my profession. I would love to get rid of my second mortgage and the lates on my report and have a 305,000 new mortgage. But are the risks worth it?

OCT

2007

These deals are under allot of scrutiny at this time. Federal agents are currently in Utah investigating companies that sell these type of investment strategies. The person who leases one of these homes is in a poor position, and the investor can often find themselves over their head as well. I'd make sure you have an iron clad strategy before entering into one of these deals.

Bill, you always bring up great issues in your blogs. The concept is a remarkable one - the comments of real life experiences blow me away. What a logical solution that rotten apples on both sides have turned bad.

HA, Your situation doesn't sound too good to me. It seems that you are suggesting that you would keep the house if the second went away. This is illegal. It is called "equity stripping" and is a form of loan fraud.

The only legal way to do this is to "re-instate" both loans and then keep them current. An investor may be able to "pay-off" both loans, and replace them with a better loan.

Good luck, but be careful.

Bill Roberts

Karl, You are absolutely correct. Too many scammers have entered this area. Everybody needs to be VERY CAREFUL in structuring any kind of lease option, and be sure that it is not fraudulent. "Equity Stripping" is a felony and is being diligently prosecuted.

Bill Roberts

Kate, Just to make sure everybody understands, this is not a short sale strategy, but rather an alternative to a short sale. The lenders must be "made whole" if the original seller is going to re-acquire the property.

I would suggest an option period of at least three years yo allow for home values to come back and the sellers (optionee) credit to be reestablished.

If the option period is too short there is virtually no way that the optionee will be able to effect the repurchase.

An investor that participates in this process needs to have a reasonable profit goal (return on investment) and not expect too much or the seller won't be able to do the deal.

Bill Roberts

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