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This post is dedicated to a local Realtor engaged in the very dangerous practice of structuring short sale buy-back/lease backs.

For those not familiar, a short sale buy back is where the Seller/Borrower (who is in foreclosure) enters into a Purchase Agreement with a relative, friend or whomever to buy the [distressed] property at a short sale discount.  Unbeknownst to the lender, the buyer's intention is to buy the house at the short sale discount, allow the seller to remain in the house and then enter into an agreement with the seller (who is now a tenant) to buy back the house at a significant savings (but more than the short sale purchase price of course).  

The investor/buyer (1) gets a great deal on the house via the short sale, and (2) will make more money when the seller-turn-tenant-turn-buyer exercises the option to buy-back the property.  Both the investor and the homeowner have gotten what they wanted - it's the lender that loses thousands of dollars in this scheme.

And, yes, it is a scheme.   I believe the correct word is fraud.

Buy backs have gotten a bad reputation due to the dishonesty of investors who literally bilked homeowners out of their home and equity.  Homeowners that feel "cheated" many months, sometimes years after being "saved from foreclosure" appear regularly on the 6 o'clock news.   Most Realtors and investors that I know won't even do a buy-back anymore.

Add a short sale to the mix and you have a recipe for disaster.

In the State of Florida, a Realtor can be held accountable for his or her actions for up to five years.  That gives a homeowner plenty of time to feel "cheated". 

George, there are plenty of honest ways to earn commission - please don't add to the foreclosure, mortgage & housing crisis by dishonest dealing.

 
This post has been included in Florida Real Estate News

13 Comments on Yes George, Short Sale Buy Backs ARE Illegal

MAR
12
2008
 When this whole foreclosure fiasco works itself out in a couple of years, there will be plenty of blame to go around. We are already seeing plenty of finger pointing and passing the buck. Eventually there will be a windfall from all of the fraud that has happened and is still happening today. I think that any smart agent needs to look closely at how some of these deals today are getting closed and stear clear of the shady dealings. As this crisis deepens there will be a demand for accountability.
10:34pm • #1
JUL
17
2008

if the new purchaser discloses the subject as non-owner occupied investment property what makes this transaction illegal?
Certainly unethical but...
1:23pm • #2
JUL
22
2008

the illegal part is when the short sale is not at arm's length. 
7:20pm • #3
AUG
04
2008

As a Realtor that has a short sale listing, if personally submit a low ball offer and its gets accepted by the bank, would it be legal to re-sell it to a buyer that comes along just before or just after my short sale gets approved?  Ex:  I have a listing for $100,000 and I get a short sale approved for $50,00, can I then re-sell it to an interested buyer at $70,000 and make a cool $20,000? 
Cliff
12:31am • #4
OCT
20
2009
3 Featured Posts

It's bank fraud, plain and simple.
10:57pm • #5
JAN
26
2010

Banks are the reason for the decline in real estate prices and the downfall of our economy, plain and simple. Banks should not be able to put a property up for sale at a price under the current appraised value. Once the goverment outlaws this practice we will see a quick increase in home prices.
soln
9:06am • #6
JAN
12
2011

I wanted to purchase a property that 13630 van doren manassas va , the property was listed last year in october 31.2010 for $360.000 the contract was kick out .. the house went on the market on january 6 , 2011 for $480.000 I summit my offer for $460.000 putting 20% downpayment .. on January 9,2011.. 4 days after the listing .. the agent that is selling the house told me that he summit my offer but that he had 7 other offers, and one was higher than my... and that the owners of the house aprove it.. I ask the owner of the house how much was the offer for and it was for 485.000. i ask them if i can summit another offer offering more,, and they told me there was nothing i could do that most likely the bank was gona aprove the other offers.. it dosesnt make sence as a short sale am asuming the seller would like to get the higher offer.. what can i do is there a way i can find out the bank and deal direct with the
jeymy
12:03pm • #7
MAR
03

I came across a site that will assist you in answering the queston about Buying Back Short Sale at <a href="http://www.optiontobuyshortsale.com">OptionToBuyShortSale.com</a>  Well worth looking over for your short sale questons
Lisa gomez
10:07pm • #8
MAR
05

Wow, it seems like such a long time ago when I posted this about buy-backs.  Since then I have done a couple of transactions that included an indirect buyback by the owner - all full full disclosure. 

 An investor buyers the house, the [former] owner remains in the house paying rent to the new owner.  the rental agreement is written up much like any other lease with option to buy and includes pre-determined sales prices and rent increases over a five year period. 

5 years is plenty time for the former owner now tenants to re-establish credit and repurchase the house.  in the event the tenant elects not to purchase, the house is sold and proceeds split according to the terms of the agreement. 

The [short sale] bank has full disclosure including a copy of the proposed buy back by the mortgagor.

It works out for everybody but not all banks will participate.
11:42am • #9
NOV
16
156,728 Points 1 Featured Post Called Shot Master

New regulations make the short sale lease buy-back a possiblity in some cases.
5:04pm • #10
DEC
07

I was sure happy to see your most recent post following your original take on Short Sale BuyBacks. I realize on a political or Government Economical level that this is frowned upon in the Conservative Community. I too, in a General Sense understand the overall appearance of banks and homeowners taking this road,  but in the end,  we all are left to fend for ourselves, and the addage of "Fight to the Death"  or  "Kill, or be Killed" is in deed Very real and Very True.
Kelli
2:20pm • #11
JAN
01

I hate to tell you all this, but a short sale with a lease back to the original owner is LEGAL.  I just did alot of research including calling the CAR Hotline.  The new HAFA Directive Section 1V - 7.3 says if a "non-profit organization buys the property they can do so with the purpose to rent-back and ultimately sell back to the homeowner" (read for yourself, not exact words)

So there is a non-profit consisting of investors who buy the property cash, they do the negotiating, and when the deal is closed the create a lease option with the original owner.  The dubious part for me is the upfront fee of $1995, but they label 'Hud Counseling' on one website, and on another they say it is the fee to set-up a trust fund for the buyer, and is non-refundable.  MMMmmmm doesn't cost that much to set-up a trust fund.  But regardless, the seller is now getting their home back at current market value.  Problem is, even though the principle is reduced the payments are not reduced much, so if the homeowner was not in a financial position to keep up his past payments, how will he keep up the new ones.  I think this works for a strategic short seller.  Who can afford the payments but just doesn't want to pay for a house that has depreciated 50%.

Read the details at www.shortsalebuyback.com  The agent is an Active Rain member.  There are others also marketing this program on the internet. 
12:36am • #12
JAN
02

Hey Shannon -  Buy backs are indeed legal when there is FULL disclosure.  

Setting up trust funds or dummy corporations for the purpose of getting around full disclosure is certainly not ethical nor legal.  In many states, collecting any fee up front from distressed homeowners is illegal, it doesn't matter what the fee is called.

Many lenders will not approve a short sale that has the borrower remaining in the property whether is is a mere rental or a lease option (aka buy back). 

There is a legit company out of Ohio that has a successful buy-back program but unfortunately is encountering denials from the banks due to the lease-option provision of the purchase contract.

One recent experience with Fifth Third:  the short sale was denied because the buyer was the girlfriend of the adult son of the borrower.  Despite the fact that the purchase price was acceptable & at FMV, the short sale was denied.  The property is a vacant lot - not much demand in this area for vacant lots but Fifth Third's ALT policy prohibits the buyer having ANY relationship with the borrower - no matter how remote.  The lot remains unsold. 

As a Realtor, I will not jeopardize my license by being a part of circumventing the ALT of any lender.  It's just not worth it.
9:09am • #13

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