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How Lenders Recognize Buy and Bail Borrowers

By Elizabeth Weintraub Sacramento Broker

Real Estate Agent with Elizabeth Anne Weintraub, Broker DRE #00697006

June 18, 2008 01:17 PM

First, I want to thank Teri Ellis for her excellent post about buy and bail. It's a practice that has been going on for some time and only recently are lenders catching on to it. It's important for real estate agents to be aware of this new trend and make sure you and your clients are protected from potential fraud issues.

Buy and bail happens when a home owner intentionally decides to buy a new home, based on the borrower's excellent credit and, after the new home closes, deliberately goes into foreclosure on the old home. Some borrowers see nothing wrong with lying on a loan application, producing false documents such as a fake rental agreement to the lender and committing mortgage fraud. And I have outlined the reasons why a home owner might decide buy and bail is an acceptable route on my homebuying site at About.com.

A buyer called me last week to ask about buying another home in Sacramento, particularly since home values have dropped. His intention -- and it might have been a completely honest and innocent purpose -- was to rent out his existing home and buy a home in another neighborhood. He didn't like the neighborhood where he was living. He had good credit and appeared motivated.

I looked up his existing home in MLS and ran the comparable sales on it. Suffice to say that home was now worth considerably less than this buyer paid for it a few years ago, and much less than the existing encumbrances. That put a screeching halt to things. Not only is such a transaction highly unlikely to close, but I value my real estate license.

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Colleen Fischesser Northwest Property Shop

NextHome Experience - Chelan, WA

A Tradition of Trust in the Pacific NW since 1990!

I can't say that we've seen this practice going on here...yet. But as I've told you before, we do tend to trend the CA market. It seems some owners are electing to rent their existing homes rather than sell them, but I haven't seen a great number of these with the intent to then buy and "bail" on the 2nd one. I sure hope I don't experience it!

Jun 18, 2008 01:22 PM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Well, Colleen, I recommend running the comps on homes your buyers intend to rent out. They could have the best of intentions, and it could still come back to bite you and them.

Jun 18, 2008 01:27 PM

Barbara S. Duncan

RE/MAX Advantage - Searcy, AR

GRI, e-PRO, Executive Broker, Searcy AR

Buy and bail is a good term. It's hard to believe people will actually set out to do this but we have had similar incidents in our little town.

Jun 18, 2008 02:26 PM

Gary Woltal

Keller Williams Realty - Flower Mound, TX

Assoc. Broker Realtor SFR Dallas Ft. Worth

Elizabeth, thanks for this overview, and I had read it elsewhere, but your Buy and Bail term was a new one. I haven't seen this around our area thus far, or I am unaware of it.

Jun 18, 2008 02:33 PM

Jon Zolsky, Daytona Beach, FL

Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL

Buy Daytona condos for heavenly good prices

Elizabeth,

Help me with that. What triggers your reaction? The fact that their existing property lost its value is not surprising. Can the buyer be buying a new house because the prices are great, how do you know that he intends to drop the other home?

Also, what if he tells you that he wants to buy another home as investment, and then later moves to htis home and leaves the other slip into foreclosure.

I am not sure I can be a judge without a particular sign. Also, if I know that the mortgage people know about this possible situation, and approve, why would I lose the license?

Jun 18, 2008 04:06 PM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Because, Jon, the home he wants to buy is worth less than he paid for his existing home. Because his existing home will not command enough rent to cover the mortgage, which means it will negative cash flow. But most of all because a lender will pull the same stats and make a judgment about the deal, most likely denying it. But, if for some reason, the buyer, say, is able to pull the wool over the lender's eyes, the same stats will come up later if and when it goes into foreclosure -- and at that point, a REALTOR's involvement will be brought to the table.

If you didn't know, the argument will go, you should have known. You should pull comps on your buyer's home. It's part of your professional duty.

Jun 18, 2008 04:12 PM

Robert Machado

HomePointe Property Management, CRMC - Sacramento, CA

CPM MPM - Property Manager and Property Management

Elizabeth: I am still not clear on connecting the dots back to you. If the buyer is qualifed by a lender for the new home and wants to maintain the current home even with negative cash flow, I do not see anyone coming after the agent. I get it that there is possibility of a future foreclosure but it is not guaranteed. This is an interesting issue for sure.

Jun 18, 2008 05:18 PM

Mesa, Arizona Real Estate Mesa Arizona Realtor

Homes Arizona Real Estate LLC - Mesa, AZ

AzLadyInRed

Elizabeth, good, succinct post. I will definitely be in the look out. Now that I know this term, I'm finding all kinds of info on the buy-and-bail. Just read another article in the CRS news, and our department of real estate is putting another substantive policy in place regarding mortgage fraud.

Jun 19, 2008 03:12 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Robert: People who buy and ball generally stop making mortgage payments on their existing home the moment escrow closes on their new home. "But your Honor, my agent planned this for me and told me to stop paying as soon as we closed."

Hi Teri: Good to hear that Arizona is taking action. I'm confident CA is doing something as well.

Jun 19, 2008 07:17 AM

Susan Manning

Realty Executives - Temecula, CA

Elizabeth, thank for a balanced look at this issue. Its a fine line that we toe when representing our client's best interest.

Jun 19, 2008 09:30 AM

Jon Zolsky, Daytona Beach, FL

Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL

Buy Daytona condos for heavenly good prices

My clients situation may not be clear to me. I may not know how many properties he has, and I may not have the information on properties out of our county.

Nor do I think it is my duty to investigate his intentions. Unless I am coaching the buyer on how to screw the system, he would have to be alone in front of "Your Honor".

I am not sure I can tell the client that I will not work with them for that reason. This legally would be my assumption. If the Lender decides that he qualifies, knowing what I and they know, then they are within their risk. As long as I do not hide the facts, I should be OK. When I start interpreting the facts, I might be liable for my actions or inactions.

I have slients who come and say it is a good time to buy and they want a house. So I have to automatically assume that he is a candidate for what you call it - Buy and Bail? Many of them are investing.

Maybe I need to tell them that this practice is illegal, so they are warned.

Of course, this is just a personal opinion.

Jun 19, 2008 06:42 PM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

See, this is what is so GREAT about the Internet, Jon. It preserves our thoughts.

As many agents have discovered, when their clients end up in court, those clients get lonely. They don't enjoy standing in front of the judge all by themselves. They want company, they want their dedicated real estate team to stand right by their side to hold their hands. By the time they get to court, however, their memories tend to turn fuzzy. It's hard to remember who said what to whom and when -- heck, I can't even remember where I left my cell phone half the time. I end up calling my cell from a land line, and when I don't hear it ring, I know where it is -- in the garage.

Lucky for you, though, a quick search on Google, will bring up this post.

Jun 20, 2008 02:34 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Susan: It's not only a fine line, it's a line cluttered with orange cones and yellow tape.

Jun 20, 2008 02:49 AM

Chris Ann Cleland

Long and Foster Real Estate - Gainesville, VA

Associate Broker, Bristow, VA

Elizabeth: I have several neighbors who have bought and bailed. It's sad. My husband and I wonder if the banks will ever actually take the time to catch these guys. Besides which, what happened to honoring your financial commitments. I'm afraid we are learning some dangerous behavior here.

Jun 20, 2008 03:46 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Chris: Well, I read that the FBI has more than 50,000 mortgage fraud cases pending and arrested a slew of suspects yesterday. People don't stop to think that what they are doing will come back to bite them.

Jun 20, 2008 04:07 AM

Jon Zolsky, Daytona Beach, FL

Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL

Buy Daytona condos for heavenly good prices

This is an interesting angle. I tend to forget to think of it this way, but you are right, it preserves our statements. The funny thing that what you wrote now lives its own life and you can't do anything about it.

Thanks for this fine point

Jun 20, 2008 01:10 PM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Jon: Thank goodness for the "delete" button. :)

Jun 20, 2008 01:30 PM

Anonymous

Machismo

Mortgage fraud in obtaining the new loan prior to a bail? Only if you produced a fake Rental Agreement, or answered an application's question "Do you intend to <paraphrasing here> buy and bail?" no, and end up doing precisely that. If I'm a buyer, great credit, can show that I can indeed pay for both mortgages WITHOUT renting the existing property, and the new lender approves (which happens everyday), and I then bail on the old loan, nobody can come after me for SQUAT. There's no FBI. There's no judge. There's no CASE. I haven't produced any fraudulent rental document. I haven't fraudulently answered a single question. I simply decide that yes, I'm going to take the credit punch for the next seven years. I agree with the posts suggesting fraud and criminal consequences when something like a false rental agreement has been produced. But when that's not the case, there's only a MORAL implication around it... not a legal one.

Aug 06, 2008 11:56 AM

#19

Mary Strang

Viroqua, WI

Wow, Just when you think things might be getting better a new scam comes along. Sound like gap loans will be harder to get for those who really need one.

Aug 07, 2008 12:46 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Mary: Yup, there are scammers at every corner and on every doorstep, including those who believe their own interpretation of the law supercedes the law of the land.