People Want To Stay
Any ideas on how to handle tremendous equity deals when the homeowners in foreclosure want to stay? I am running into this problem on a weekly basis and I need a viable solution. My partner does not like these lease back situations and frankly neither do I.
What exactly is the situation Dawg?
Give us the specifics of the deal.
One question I would have is if they have alot of equity why are they in foreclosure?
Careful!
B. Bronchick posted an article here on lease back and usury. This is a bad deal if the tenant pushes it. i.e. you take his house with 50k in equity and give him 5k and then lease him the house with the option to buy in 1 year. He gets an attorney at the year mark and gets a judge to classify it as a loan. As such it violates usury laws as asking him to pay the 50k in equity for the 5k you gave him is 1000% interest. The whole thing gets tossed out and you lose everything including the 5k.
Many real estate investors have been brought up n raqueteering in this venue.
here is the copy of the article on this site "can foreclosure investing be criminal?"
. If the court agrees, the loan is illegal, since it is usurious.
I recently attended a "free" seminar on how to "get rich quick" in foreclosures. The speaker had a different angle than the usual "steal it from the homeowner" method.
The speaker suggested that you approach the homeowner with the following plan:
Tell the homeowner you will make up his back payments and give him some cash
Take title to the property.
Lease it back to the former owner with an option to buy it back for one year.
The speaker suggested that after one year, the house would be yours if the former owner didn't exercise his option. Sounds great doesn't it? You could beat out all your competition who are trying to "steal" the same house.
Well, here's the catch. The poor homeowner in foreclosure will be your best friend when you make up his back payments. However, when the year is up and he can't get his house back, the trouble will begin.
In a number of cases, these homeowners will go to court and claim that the "sale/leaseback" was really just a disguised loan. He or his attorney will ask the court to "re-characterize" the transaction as a loan and place title to the property back in his name (for an in-depth discussion of sale/leaseback re-characterizations, read "How to Structure Sale-Leaseback Transactions"
Here's how it works: Let's say that you find a house in foreclosure worth $100k. The balance of the loan $50k, and the homeowner is behind $5k. You agree to make up the back payments of $5k and take title. You then lease it back to the homeowner with an option to buy it back for $100k, its fair market value. What's the problem?
The problem is that if the court re-characterizes the transaction from a sale/leaseback to a loan, you have loaned the homeowner $5k at 1000% interest! Think about it . . . you give him $5k, and he has to pay $50k ($100k option price minus the $50k loan balance) to get his equity back. 1000% interest is usury, and the court will set aside the loan. You will lose the house AND your $5k.
If you're not familiar with the word "usury," it means charging more interest than permitted by law. The consequences of a usurious loan are usually civil; the court will declare the loan void and the borrower won't have to pay it back. If you get caught making usurious loans on a regular basis, you'll be hearing the words "loan-sharking" and "racketeering." These are CRIMINAL acts that will get you in jail. Many foreclosure real estate investors have been indicted on racketeering charges for doing exactly what I described above.
Note:
William Bronchick Esq. is a an attorney that specializes in Real Estate transactions and Asset Protection. For more information about his courses click here
All people in pre-foreclosure want to stay. You have to get them over their wanting to stay. It never works out well and is illegal in most states.
If they don't have money to make their mortgage payments, they don't have money to afford an even HIGHER amount to rent the place.
You can tell them that you will give them money to MOVE and for a SECURITY DEPOSIT. Even give them a couple hundred bucks in spending cash to go out for a nice meal to celebrate their move and the start of the bright new shiny life! WITHOUT those evil mortgage companies trying to take away their home. Go to an apartment finder place and find them a place, pay the first couple of months rent.
(This also assures that they actually move out!)
Say that they need to save money, rebuild their credit so they can buy a house in another few years. You will help them by keeping the foreclosure off of their credit record and help them save money by moving them into a more affordable place.
Hope This Helps!
Mrs. Meltzer