A newer trend we are seeing in the short sale world is called Short Sale Leasebacks.
So what is a Short Sale Leaseback? A homeowner is living in the property. An investor purchases the property in a short sale transaction. The investor leases the property back to the homeowner for a period of time, usually with a promise to sell the property back to the homeowner.
Some of the organizations involved in this type of transaction are charities, but most are for profit investors. Fannie Mae along with most other investors has made it clear that they do not support for profit investors purchasing for a leaseback. Some confusion about the possible legitimacy of this opportunity entered in when the US Treasury Dep’t issued the HAFA Supplemental Directive 12-03 dated April 17, 2012, allowing for lease backs involving non-profit organizations in the following statement.
“A servicer may in its sole discretion approve a transaction under HAFA that provides an option for the property to be sold to a non-profit organization with the stated purpose that the property will be rented or resold to the borrower so long as all other HAFA program requirements are met.”
Prior to this supplemental directive leasebacks were considered a violation of the “Arm’s Length Transaction” provision of most short sale approvals, due to two primary factors:
1. Fraud committed by sellers who are not supposed to benefit from the forgiveness of their debts by getting the property back at a lower price while the lender/investor takes a loss.
EXAMPLE: A property is purchased by a ”Straw Buyer” (Family, friend, anyone the seller has an arrangement with) Instead of moving the homeowner stays in the home and buys the property back from the “Straw Buyer”
2. Investors taking advantage of sellers who had hopes of purchasing their home back. This same type of fraud is occurring in many “so called” leaseback short sale arrangements.
EXAMPLE: Short Sale is purchased by an investor with the agreement that the homeowner will remain in the property and buy their home back. But when it comes time to buy, the investor decides they’re not going to sell the home back to the original homeowner. They either keep the property or sell to a different buyer for a better profit.
The reality is very few lenders will allow short sale leasebacks because there is so much opportunity for fraud. Anyone involved in short sale leasebacks needs to be sure the buyer is a legitimate non-profit organization and exercise EXTREME CAUTION! Many Existing Leaseback Programs require specific training and that a commission be paid back to the program for negotiation of the leaseback with the servicer. Most of these programs use a non-profit organization as a front of with a for profit investor behind the scenes. None of the major lenders and investors have an appetite for these programs and the few pilot programs previously initiated by some lenders were unsuccessful.
As a short sale specialist my primary objective is to assist a distressed homeowner to avoid the catastrophic affects of foreclosure and have them successfully walk away from the short sale closing table as unscathed as possible, with a full release from any deficiency and hopefully a little cash in their pocket for relocation expenses. Starting the conversation by getting their hopes up to stay in the home via a leaseback arrangement, and putting them in a scenario with much less chance of negotiating a short sale and higher possibility of ending up with a foreclosure is not in alignment with my primary objective. The last thing I want to do is go back to a homeowner after raising their expectations to stay in the home and tell them that they are going to have to move after all or worse, they are out of time and the property is going to foreclosure auction.
For anyone who is still determined to take the risk and get involved in leasebacks here are a few tips:
- Verify the buyer is a documented non-profit. Look them up at http://www.irs.gov/Charities-&-Non-Profits/Search-for-Charities
- Review all leaseback information carefully.
- Have all documents reviewed by an attorney that represents the seller.
- Don’t put the negotiation of the short sale in the hands of a third party negotiator. Ultimately we as real estate brokers are responsible for the outcome.