Cheap rental to get SS buyer to stay in deal??
Hi, I had a bit of a crazy idea that I wanted to run by some collegues.
I have a seller who has a first w/ PNC, house is approx $80K underwater. They just bought a second home and moved into it. They want to SS the first house, but are considering renting the house very cheaply to a prospective SS buyer to get them into the house quickly and give them some incentive to stay (too lazy to move out once they are in there) and not back out of the SS deal. They would rent to a buyer for $300-$400/mo less than the going market price in this area until the SS deal was approved. They say that if the deal with the bank falls through, then the renter could stay until the house was SS'ed or foreclosed on.
Buyers have a medical hardship, but lots of income and are not too afraid of a foreclosure. They just want to unload the old house ASAP.
First question: Has anyone ever tried this and how did it go?
Second question: Any PNC stories or advice for me?
Replies to This Discussion
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Permalink Reply by Smitty on
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I would never recommend a seller "rent" their house to a buyer. To many things can go wrong. It's completely legal but NOT in the best interest of your seller. I would ALSO check the laws in your state as some states are passing legislation that once a house goes into foreclosure status, you can't start renting it.
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Absolutely not. No way would I ever recommend that. A buyer could get in and start to trash the place, or not pay rent and then you have squatters and the short sale may not get approved and the house DOESN'T go to foreclosure and then the seller is in the position of having to evict. I've had this same conversation with MANY lawyers and ALL of them say DON'T DO IT.
A buyer who doesn't care about a foreclosure, likely doesn't care about paying rent, or taking care of property. What if the sale falls through? Financing falls through? Ok, let's get new buyers to look at the place while you have to get the buyers you rented to out of the house...that won't be fun.Let's not forget about the good old ALT. Now most ALT's specify you don't have a relationship with the buyer, but if you're renting to that person, is that considered a business relationship? Not up for me to decide...just the courts.
A true qualified buyer won't need to rent. They will just take title as spelled out in the purchase contract.
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Permalink Reply by Eric Mieles on
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I have to agree with smitty on this one. Also as an agent wouldn't you want to sell the home and help your clients avoid foreclosure!!
If the deal falls through why would you totally close yourself off to finding a new buyer right away and getting a deal done?
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Permalink Reply by obed montez on
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the whole idea is so gray that it is almost black. Doing business a little bit in the gray area might not get you in trouble but what you are sugguesting sound like possible trouble for seller as well as broker knowing that the scenario you discribe is to defraud the bank. That type of activety only will make it hard for the people that really need to do a short sale. how can a person have a lot of money coming in and have a hard time making the payment,. I think a medical hardship has to be coupled with a financial hardship. I just do not belief that every time a person gets sick they can do a short sale. I would never be a part of such an idea
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Permalink Reply by Wendy Rulnick on
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I leave early occupancy decisions to the sellers. I am not in the property management business. I've had some short sale sellers agree to it, and haven't had issues. Of course, there are risks as in any early occupancy or lease situation. Advise they seek legal counsel and get a strong lease. I wrote this piece"Is Early Occupancy OK for Short Sales?"
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Permalink Reply by Pat Chadwell on
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My comment and it does not even answer you questions. It sounds like the sellers are doing a strategic default. Bought a 2nd home and now let the 1st go. Then trying to stragegize how to make income by renting? They have "lots of income". Hmm... If that is the case I frankly value my integrity more than helping make the scene worse for the lender they want to short. I could be completely wrong and you can let me know to pound salt. We are all trying to get some stability in the market and adding strategic defaults to the other defaults will not help. I will get off my soap box now. This is a great place to get answers.
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Permalink Reply by joe beauchamp on
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It always sounds good - helping the buyers, they get to save money for closing, helping the investor, the property is protected, helping the seller, probably pocketing the rent. But, the 3 times I've seen this happen, well, 1 decided that she really didn't want the house after getting the approval (so, got months of very cheap rent). 1 started fixing the property and lost something like $10K and work put into it before the bank denied the sale. The 3rd, like a scumbag tenant, didn't save any of the money, couldn't get a loan even after NOT spending a normal amount on a mortgage, trashed the place and left. (Don't forget, he could have stayed there until you got him evicted, too.)
Sounds good, but any buyer who is lazy, isn't into saving or paying a reasonable amount probably is not going through with the sale. I would make them pay a low rent but make the payment around what a mortgage would cost and escrow the rest for closing - they skate, no return. Give them a reason to be serious, keep them from trashing the place, force savings if they are people who have to spend anything that they have in their pockets, too. Scumbags won't go for this. Good luck.
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What about Arns length issues? You might have issues with the bank approving or saying this isn't arms lenght.
-Joe
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I have yet to see a bank complain because of arms-length due to a tenant. If you think this is bad, what about the long term tenant who wants to buy via short sale? Banks have no issue with that. Their concerns are someone skimming money while they are losing money - like an agent getting something more than commission so is suspect in the dealing; and a buyer set up to buy the property and sell it back to the seller thus wiping the extra debt off of it.
Arms-length means a couple of interesting things: the bank admits it doesn't know what the property is worth or it wouldn't care what anyone made to bring it a good deal; and the bank wants to punish the homeowner. If the bank is getting $100K from a buyer, why should it care if that is from the current owner, his brother or a stranger? It is still $100K. The current owner can go out and buy another place for $100K, free from this extra debt (assuming a release of debt, etc.), so all this arms-length is doing is forcing the homeowner to move instead of be a solution to a way overpriced property being on the investor's books. Arms-length means that the bank is incompetent to know a reasonable deal and that they want to go out of their way to punish the homeowner.
Pretty screwed up, eh? Yeah, it's going to be a long time before we get this housing mess back on track...
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Yes, I just did this and the tenant/buyer is closing this week. I was the selling agent.
I did offer them less than going rate for the rental (about $300 a month) since if there were any repairs the seller refused to accept fixing them. I also did full disclosure and waiver that neither the owner or the tenant/buyer would hold the RE agents responsible if the short sale was not approved. We also requested cash for keys if the lender did foreclosure and offered it to the renter to move. No deposits were given but we did have $1200 in earnest money with title company and just so everyone knows, we did a standard lease agreement and did NOT do pre possession agreement.
I will tell you though that it wasn't without some stress... Not sure I would do it again but my buyers needed a place to live and would have had to move again anyway if they didn't move in to the house so it was a win situation for them. the bank came back with a price that was higher than we offered and I was sure it wouldn't appraise but it did squeak by somehow. I think this type of situation works in the right circumstances thats for sure.
PNC is TERRIBLE just so you know... and it sounds like these people did a strategic default which PNC will find very distasteful and will most likely hold the sale up for a cash contribution from the seller. I have never worked with them on a first, just a second mortgage but they cost my seller a short sale and it went to foreclosure because of their stupid negotiator. They could have had $6000 but ended up with ZIP.
also, your email said the buyers have a medical hardship.. did you mean seller's??
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Permalink Reply by Michael Teneyck on
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I would advise against renting to any potential SS buyers, For all of the reasons stated above. In addition, if the buyers are purchasing using FHA, and are renting, they will be required to put down 15% not the 3.5%. I would seek legal advise prior to doing this.
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