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Yes George, Short Sale Buy Backs ARE Illegal

By Wendy Smith

Real Estate Broker/Owner with Wendy Smith Real Estate

March 12, 2008 08:59 AM

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.

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Rob Jacobs

Short sale pathways - Rockwood, MI

Short Sale Specialist

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.

Mar 12, 2008 03:34 PM

Wendy Smith

Wendy Smith Real Estate - Ocala, FL

Real Estate Advisor

the illegal part is when the short sale is not at arm's length.

Jul 22, 2008 12:20 PM

Richard Vetstein

Vetstein Law Group, P.C., TitleHub Closing Services LLC - Framingham, MA

It's bank fraud, plain and simple.

Oct 20, 2009 03:57 PM

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.

Mar 05, 2011 03:42 AM

Daniel H. Fisher

www.FisherHermanRealty.com (704) 617-3544 - Charlotte, NC

MCRP - Charlotte Real Estate, NC or SC

New regulations make the short sale lease buy-back a possiblity in some cases.

Nov 16, 2011 09:04 AM

Shannon Adams

First Class Realty - Laguna Niguel, CA

"Exceeding Your Expectations"

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.

Dec 31, 2011 04:36 PM

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.

Jan 02, 2012 01:09 AM

Yes George, Short Sale Buy Backs ARE Illegal

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