“I have a home that I cannot afford to keep. I owe more on the loans than my home is worth. I would really love to keep my home, and I was approached by someone that told me that he would buy my home in a short sale. I could then rent it for two years, and buy it back from them. Is that legal?”
Yes, no, and maybe.
What you are talking about is commonly referred to as a short sale lease back. The short sale lease back real estate transaction sounds like it would be an ideal situation for many upside down or underwater borrowers looking for a way to stay in their home while also finding a solution to their current mortgage situation.
However, just like many other things in life, certain things are too good to be true. And, in most cases, the short sale lease back is one of those things.
According to the Treasury guidelines for a HAFA short sale that came out in early 2011, servicers (like Bank of America, Chase, and Wells Fargo for example) have “the discretion to approve sales to non-profit organizations with the stated purpose that the property will be rented and resold to the buyer, so long as all other HAFA program requirements are met.” What this means is that the Treasury has given mortgage servicers the right to set their own policies with respect to short sale leasebacks that involve purchases by non-profit organizations only.
That being said, it appears as if all of the major servicers that participate in HAFA have opted not to embrace short sale leasebacks. Each of the major servicers has an Arm’s Length Transaction Affidavit that states (in some form or another) that no party to the transaction can have any business agreement outside of the purchase contract that has been submitted to the short sale lender. Additionally, no two parties can be related to one another. For example, a sister cannot buy her brother’s home and then rent it back to him.
Sellers that are interested in a short sale lease back need to be 100% certain that the buyer is a non-profit organization and will not benefit financially at any time in the future from the resale of the subject property. However, as a real estate aficionado, I know that most real estate investors are into real estate in order to make a buck. With that fact in mind, you have got to carefully investigate the buyer and ascertain whether the nonprofit organization is legitimate and why this “non-profit” would be interested in purchasing the property.
While there may be small lending institutions that would approve of the short sale lease back, it seems that those are few and far between. Additionally, the probability of fraud being perpetrated against short sale sellers seems to be one reason that many lenders might avoid the short sale lease back.
If you, your clients, or anyone you know if considering a short sale leaseback, you may want to think twice. Nobody wants to be a victim of fraud.