Usurious Interest On L/O
I was just wondering...
The chorus seems near unanimous in suggesting that it is a very bad idea to lease back a house to a former owner. One of the MANY reasons given for this is that even if they do go through and pay everything as planned, it is quite possible that a court could rule that the L/O was a disguised sale, and that viewed in such light, the "interest rate" would be viewed as usurious, and... well let's just say that's not a good thing...
... however, I guess I'm failing to see how a L/O under that circumstance would be viewed as such, and under other circumstances would not. In other words, If a L/O is a disguised sale, and if it's rate is therefore predatory, then what does that have to do with whether the TB was a former owner of that house, or a former owner of another house?
This makes me wonder... have L/O contracts been thrown out in this way when the TB was not the former owner? If so, was it just due to poor wording? Is it much more likely that the seller in a L/O would be nailed by the courts if he is doing a leaseback, or is this always a risk in any L/O scenereo?[ Edited by thestudentisready on Date 05/23/2004 ]
No, in other circumstances L/O's are not viewed as "disguised sells," unless the contracts are very poorly written (usually because of not having them attorney approved).
Why it becomes an issue with an owner is because of the buy and resell. Example:
Property value = $100K, you buy from a seller in foreclosure for $70K, and immediately resell to them for $110K. Looks good on paper. The problem comes when this seller gets back on his feet, and decides that instead of being that "saviour" that you were when you bought the place, you're now just a scam artist, and decides to sue you to get back possession of the property.
At that point, whether you win or lose is really not important, because you will have to spend money to defend yourself. And even if all of your paperwork is legal and correct to the letter, you still stand a very good chance of losing. Why? because judges don't like people who "prey" on poor homeowners (whether you actually did or not), and will find any reason available to rule against you.
In short, the risks outweigh the benefits of doing it.
Roger