In my opinion.....no...it’s not.
And here’s why. The Lenders want as much money as possible for the property. They want the property exposed on the open market to attract a Buyer at the highest price possible. They want it to be an “Arm’s Length Transaction”. The Landlord (Seller/borrower) and the Tenant have a “business relationship”. In direct conflict with most “Arm’s Length Transaction Affidavits” they “Share a business interest”.
Now folks, I know there are exceptions. I know that some lenders in some cases will allow the Tenant to purchase the property. But what’s the advantage to the Seller? I can’t think of any. To me it’s just an easy fix to try and soothe a Tenant that doesn’t want to move.
And it’s risky. What if the Seller spends several months trying to have this exception approved by the Lender only to have the Short Sale denied over it? Now they have just wasted good time that could have been spent finding an “Arm’s Length” Buyer.
Recently I had a Seller who was being pressured so hard by the Tenant to sell her the house that the Seller almost cancelled the listing over it. The Tenant who is staying in the property, at a reduced rent, is telling the Seller that the price doesn’t matter and that the Lender will have no problem with it and blah blah blah. The main problem is that the Tenant can’t afford the property and is trying to pressure the Seller into accepting a offer that will cost the Lender about $25,000. This is EXACTLY why Lenders do not want the Seller to sell the house to the Tenant.
This particular Short Sale is a Bank of America Florida Enhanced Co-op Short Sale. It gives the Seller a full “Waiver of Deficiency” and is paying the Seller more than $10,000. Because of these great incentives Bank of America gets to control the price and wants an “Arm’s Length Transaction”. Isn’t that fair? I think so and I’m glad the Seller finally agreed.
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Replies
Hi Bryant -
I've had pretty good luck selling short sales to tenants. In all cases, they made the highest offer and the listing was advertised on the MLS and others were allowed to view the property. I don't feel like it took longer to get the short sale approved either. Keeping the tenant in place helps the owner to continue to pay as well -- which many lenders like.
I had one horror story that didn't work out, but I told the seller up front that it wasn't a good fit. The tenants were difficult people and wanted the property for a steal. He insisted on dealing with them AND they were the only offer. So, when his short sale ended up taking months, we knew why.
But, I do think it can work out. And in some states and localities, tenants have first right of refusal on a sale. I would imagine if the tenant was financially able and willing to pay the highest price that would still apply in a short sale situation.
Has anyone weighed in on that?
Tni
I have been sucessful in closing 3 short sales with Tenants as purchasers.
ALL signed offers to purchase BEFORE they became tenants.
Sellers were leaving area...job transfer... and did not want property vacant.
Worked out well for all involved including lenders as property was NOT vandalized.
Selling a short sale to a tenant is typically not a great idea. That being said, from time to time we have been in a situation where a seller needs to sell and there is a long term lease. I have found it a best strategy to advise the seller to accept an offer from the tenant in these situations and start the negotiating process. In this scenario, even if the bank rejects the tenant as a non arms length transaction at least you can get a lot of the work done to get a second buyer after the lease expires and the tenant vacates.
http://greetingsvirginia.com/short-sale-ebook/
This is a tough one. Here in California, I would market it as usual, and if their offer were the best for the Lender, I would present it as such. However, I also am VERY careful about listing tenant occupied Short Sales as I have had trouble with the TEnant allowing access for Inspections etc.
You can just ask the negotiator if they will allow it.If they do, get it by email. Also, remember, we cannot be private investigators, doing detective work to find out if there is some sort of business relationship between the parties what the definition of business relationship is, etc.
I would list the property on the MLS and then talk to the tenant about their purchase offer. If the tenant is willing to pay a price that will fall in line with my proposed BPO value, then I would go with it and put the property under deposit. Investors buy short sales all the time that where never even listed on the mls. It's not a big deal 99% of the time if the BPO value is in line with the purchase offer.
short sales have to be listed in the MLS - even if its only for show.
Not always. When I was working with Cash Investors 2-3 years ago, they used to market to foreclosure lists and negotiate the short sale of their own offers.
I've been advised as follows: We have to remember that different States have very different Landlord/Tenant rules/laws. In Arizona, our Landlord/Tenant laws are quite strict making a tenant-occupied short sale much more difficult to accomplish. Because of Tenant rights, a lockbox cannot be placed on the property. And like everything else in short sales in AZ, there is some additional monitoring going on, or so I'm told. Many agents believe that the tenant can sign a waiver, but our state is governed by statute and a tenant can't waive the law - no one can. This also means that the 48-hour notice can't be waived - not technically and legally, anyway. Once the short sale is approved, the tenant, if still in the home, has no obligation under the purchase contract, as they are not a party to the contract. So, inspections, appraisals, walk-throughs, etc are subject to that same 48 hour notice - and good luck with that. I proceed with caution with any tenant-occupied short sale - ie - I don't take the listing. But, I'm a rule follower - not everyone is. With that said, there is nothing wrong with widely marketing a property to everyone, including the tenant. The Phoenix market is so low on inventory that multiple offers come in a day or less. The bottom line is to get the best offer to submit to the bank and proceed from there. If your tenant is not a relative of the seller and has the best offer (the best offer is the one with the highest probablility of a successful close), there's no reason to exclude them as a viable buyer, in my opinion. If the tenant doesn't want to purchase the property, the seller should consider releasing the tenant from their lease (maybe even helping with moving costs to get the release) in order to give the short sale the highest probability of success - in my opinion.
About 95% of the short sales I have worked on require the 'Arms Length Affidavit', so selling to the Tenant would not be possible in those cases. If you ask the lender up front if it would be okay for the Tenant to also be the Buyer, they will most likely tell you either 'no' or that they do not know...because it will be too early in the process, as you will be speaking with a customer service rep. IMO, the best (and safest route) is to exclude the Tenants. Now, if the Tenant's parents can purchase the home in their name and as an investment property, then file a quitclaim deed and sign it over to the kids, then....