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Sunday, October 30, 2011
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16 comments:
What are your thoughts on the following situation (real life):
I am closing on a short in a couple of weeks. The owner lost his job 6 months ago and has been unable to secure a new one. He is a responsible member of society. He has maintained the home in very good condition. He has not sold all the appliances, hvac unit, etc.
Of the shorts that I purchased in the past 30 months, I have either inherited a tenant or the place was vacant.
In a broad-brushed effort to prevent fraud/collusion between buyer's and seller's of shorts, banks prohibit (under the threat of Bank Fraud) the lease-back to a short-seller. In other words, I must evict this person into the streets regardless of the fact that he can pay a fair market rent.
I had never met him and knew nothing about him when I signed the contract to buy his home. His circumstance is compelling to me. He will have a terrible problem finding anyone who will lease to him (due to his credit and the short).
He has some things he can barter with me or sell to get him thru the next few months. Children are involved. Both of us face Federal Bank Fraud if I fail to throw him out on the street. Does this make any sense to anyone? There has been a ton of fraud on short sales and the result is this sweeping restriction. I am totally constrained. I can't help him. I guess he and his family are off to a shelter and welfare.
Comments?
Post the situation on Craigslist and see if anyone looking for a tenant bites.
OK. Throw him out. Is that your answer? CL LL's (or most LL's) don't care. I think it should be relevant if the current ccupant can afford the rent.
VA_I,
Are there any loopholes in the law? Like if the owner moves out for 30 days (say temporary hotel living) and then comes back it's okay? Or maybe if the new lease is in his wife's name or some name not associated with the previous owner's name?
Where do the banks' fraud protection end, and property owner's rights begin?
My $0.02
I'm a LL who uses CL - my rental is further out west than most posters on this blog. I have seen an increase in people with bad credit due to housing situations where it used to only be the random bankruptcy or hospital dings dragging credit down. I have found ways to help my tenants in difficult times and I have gone too far on occasion. Messing with the law without seeking an attorney's advice qualifies as something I would not do. If you want to be sneaky you could come up with an easy scam - have a brother-in-law or cousin sign the lease for the guy or act as though you are his employer when LLs call for a reference. (Good question - would anyone on here be willing to sign the lease with you so that this guy can stay in the house? If that seems too risky to us, how risky is it for you?)
I bet that he is preparing to move and is dealing with it responsibly on his own. Simply having sold the house is a great relief to many people going through short sales.
And if he is a great guy then would he allow you to risk bank fraud...? Is it "evicting" someone when they sell you their house and move out? Especially in a situation where if they don't move out you could get charged with fraud? I think most normal people could understand why they were moving. The fact that he is forced by law to move speaks more highly to the state of our current systems than on the moral obligations of either parties.
I still say you throw the situation out to the community and see if anyone is interested in assisting. If he can pay fair market rent then I'm sure there are some other homeowners in tight situations looking for this fellow. It's a good first step. I have a large (enourmous) workplace billboard and would be willing to post.
Shnaz,
Thanks. I thought your earlier post was insincere. I just think that it's wrong to throw a blanket "fraud" on any lease-back. I was unaware of the restrictions until I read the bank addendum and did some research.
Yes, I too am a little too unbusinesslike at times. I put this out on a large investor forum and found that very few would even consider this guy for a vacancy. You are correct that there is no way I would do anything approaching bank fraud. Should an arms-length transaction be bank fraud? I am not the one to test this in court. I'm just thinking that this is very messed up.
VAI said...In other words, I must evict this person into the streets regardless of the fact that he can pay a fair market rent.
That sucks VAI. Re: the bank fraud rule, is there an exemption? (you know more about it than I do)
Can the bank sign off on it? Is there a mechanism whereby you get an opinion re: fair market rent?
VA_Investor,
I think if you'd like to find a way to help the owner, that you should.
But I kind of think it might be better for him and his family to emotionally detach from the house that they no longer own. Just my 2 cents.
VA_I
Could you sell the property to
someone on an equal exchange?
do a 1031 to some other investor?
that wipes your contractual obligation?
Also, while the bank could issue a fraud charge, you could issue the bank a notice that you do not intend to evict the tenant, and are charging fair market rent. State that you find the policy abomnibadle and contrary to public policy and unenforcable.
State you have no interest in this man beyond humanitarianism, but the strict enforcement of this policy would lead to a publically unacceptable outcome. That tenant has contacted X landlords and is unable to find a willing landlord, while, you are willing to assume a risk.
it's not bank fraud if you openly notify the bank and FHA.
There are no exceptions. The Bank addenda signed by me and him is very clear (no benefit to seller, no lease back to him or relatives, etc.). I signed it. He signed it. I didn't pay much attention as I haven't had an issue such as this occur.
I did some research after he asked to stay for a little while. Other LL's said it would be bad from a business standpoint - regardless of the fraud issue. Many (the vast majority) wouldn't let him stay regardless (proven dead-beat, etc.). My hands are tied. In my 53 yrs on this earth, I have had one speeding ticket. I'm not about to become a felon because I want to help a fellow human being.
pat,
I'm not going to jump thru a bunch of expensive hoops to end up at the same place - bank fraud.
Jane,
You have a point there.
Anon and MTC,
I've looked at it from every angle and can't find a way around it that is "legal". He has to go. I have no choice.
Contrarian,
I have no vacancies and no "normal" LL is going to take him.
Schnaz,
I'll suggest he put it all out on CL. Who knows?
VA Ivestor,
This is really tough. I feel for you. I would be feeling distressed too.
This is why we need some kind of safety net for people who fall through the cracks. As you said, he may not be able to rent another place. If he has no income or savings to pay a good 6 months of rent in advance, I doubt many would take him and his family. Hopefully they have family with whom they can live for a while until they get back on their feet.
"VAI said...
Anon and MTC,
I've looked at it from every angle and can't find a way around it that is "legal". He has to go. I have no choice."
VAI -- sorry I wasnt clearer last night on what I was trying to get at.
I have heard of businesses whereby companies buy property and then rentback to the seller for an extended duration of time. It is very well possible that this is illegal and that neither the company nor the rentback/seller is aware they are breaking the law.
However, my understanding (and I very well could be wrong about this) was that this rentback arrangement is not fraudulent provided that the rentback/seller is paying full market rent, and that the 2 parties are treating each other as they would in any other arms length transaction.
Now, my guess (and again its just a guess - I have no knowledge here) is that the banks do not want to get involved in determining what constitutes "full market rent" or "arms length transactions". Therefore, they will say in point blank, bright line rule style:
Any leaseback is prohibited under penalty of fraud/collusion in accordance with the law!!!!!
Even though the reality is, there are shades of grey to that law, and the banks (understandably) dont want to deal with those shades.
Thus, if you have not actually looked at the law in detail, it might be worth your time to do so. Look up one of those leasback companies, explain your situaiton, and ask them (merely as a common courtesy) how do they do it? Is there a section of the law they can point to that gives them the power to do what they do? Is there a governing body you can call and they can explain how it is you can allow this guy to stay with their blessing?
Bottom line, if you look into it, there very well could be an exemption to this law. However at the end of the day it very well be that it is so difficult to jump through all of those hoops that it is worth neither the time nor the energy (and perhaps this is why banks make the bright line rule "no leasebacks").
Anon,
This is a one page "bank short sale addendum" prepared by BOA and incorporated into the sales contract. I'm quite sure that all banks have a similar restriction. There has been a ton of fraud in both reo's and shorts.
It is very explicit and cites "bank fraud" for violations/misrepresentations. Now, I suppose I could somehow try to talk to the asset manager (fat chance) and ask for an exception (fat chance). I brought up the issue with the lister who told me "I can't hear about any of this".
I can think of all matter of fraud that this is directed at. It's probably best to just ban leasebacks. The addendum addresses any benefit to the seller, not just lease-back.
I am showing the place tonight to a lady whose current rental was foreclosed-upon. She was month to month and could not benefit from the tenant protection laws as her lease only required a 30 day notice to terminate.
Surely there's another new short-sale/foreclosure owner who would love to have a solid tenant out there. You should put this situation out on craigslist - maybe you'll even get a similar referral in return.
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