Home & Garden >
Real Estate (Other)
Get a Widget for this title
RSS FeedDo "sell and rent back" deals help or hurt homeowners facing foreclosure?
Results so far:
| Hurt | 45% | 101 votes | Total: 223 votes | |
| Help | 55% | 122 votes |
Hurt
Write now
Print
Invite a writer™
Add to FavoritesSale and lease back deals typically hurt homeowners facing foreclosure. They also are not an effective means to accomplish the goal of the sale and lease back, which is to remain in the home. Homeowners facing foreclosure should consider other better options to sale and lease backs.
1)Homeowners Can Lose Equity in Sale and Lease Back Deals
In sale and lease back deals hurt homeowners with equity in their home. Sale and lease back are used to engage in equity stripping. Equity stripping is a fraudulent scheme used by lenders to purchase homes that are in foreclosure, where there is a significant difference between the home's market price and the mortgage. For example, a homeowner has a mortgage of $80,000 on a home worth $200,000.00. In an equity stripping sale and lease back, the purchaser would buy the home for $80,000 and attempt to resell it to the homeowner or someone else for $200,000. For additional information on equity stripping see the Minnesota Attorney General's notice at http://www.ag.state. mn.us/Brochures/pubH omeEquityStripping.p df.
2) They May Not Accomplish The Chief Goal of Sale and Lease Back
Sale and lease backs may not accomplish the homeowner's main goal of staying in the home. First, if the former homeowner could not pay the mortgage, the homeowner may not be able to pay rent either unless rent is significantly less expensive. Second, even if the rent is low at first, the new owner can raise it, perhaps to levels that are unaffordable. Third, the new owner can sell the home to someone else, eventually forcing the homeowner to move.
While a homeowner might seek to prevent these events from happening by carefully negotiating the lease terms, that is not realistic. Many homeowners may not understand fully the terms and conditions of the lease being offered them. Even if the homeowner understands the terms, a homeowner in foreclosure has a lot less leverage to negotiate lease terms than the purchaser.
3) Homeowners Facing Foreclosure Have Other Better Options
A homeowner in foreclosure should consider the following options: a) Offer to renegotiate the terms of the mortgage with the bank; b)Offer to bank to put the home on the market; and c) consider filing for bankruptcy.
a) The homeowner on a defaulting mortgage should contact their bank and attempt to try to obtain better terms that will allow them to avoid foreclosure. Homeowners re-negotiating their mortgages have significant leverage with banks because in foreclosure the bank will incur significant costs to foreclose the home and bank may be faced with selling the foreclosed home at a loss in the current real estate climate. These conditions make it favorable for the homeowner and the banker to work out a scenario that reduces the mortgage payment to allow the homeowner to stay in the home and the bank to lose less money.
For more on renegotiating the terms of the mortgage see: http://acornhousing. org/TEXT/wwa.php and http://www.virtuosit ypro.com/stop-forecl osure.html.
b) The homeowner should contact the bank and offer to list and sell the home. A bank is likely to accept as this allows the bank to avoid the costs of foreclosure. The homeowner stays in the home and has an opportunity to take any equity that they have in the home at the sale.
c) The homeowner should consider bankruptcy as a last resort, if the homeowner has large debts in addition to the mortgage. While bankruptcy will only temporarily stop foreclosure of the home, it does give the homeowner time to work out things out with their lenders. Homeowners burdened with high credit card debt or other debts may benefit from bankruptcy because after discharging those debts, they may be able to make their mortgage payments. Bankruptcy is not be taken lightly and the homeowner should seek counsel from a bankruptcy lawyer before deciding to file.
Learn more about this author, GCM.
Click here to send this author comments or questions.
Help
Sale-leaseback scenarios can sometimes be the only option to avoid bankruptcy or foreclosure for homeowners in financial distress. These deals allow the homeowner to get out from under the mortgage on their home, while giving them the opportunity to stay where they are, renting from the purchaser.
As with many of the "remedies" for homeowners in danger of losing their property to the lender, some unscrupulous businesses and individuals have entered the sale-leaseback arena, so homeowners should do their homework before entering into any such agreement.
The positives to selling and then renting a property are many, and weigh much heavier than any negatives, such as loss of the real estate investment or having to live under the tenets of a landlord. The fact is, by the time a homeowner would be considering a sale-leaseback, they have exhausted most of their resources and are desperately trying to salvage what remains.
By being able to stay in their present residence as renters, the former homeowners avoid costly moving expenses and the hassle of relocating. That's only if they could find another place to live. With late or missed mortgage payments, credit ratings plummet. People facing foreclosure rarely have a credit score or payment history that would qualify them to buy another residence, or even to rent at many apartment complexes.
Furthermor e, late mortgage payments are bad enough on a credit report, and affect home-buying power for a minimum of two years per Fannie Mae and Freddie Mac underwriting guidelines. But that's nothing compared to the damage that occurs to a credit score when a borrower defaults on a mortgage and the lender forecloses. And when a person files for bankruptcy, whether they file for Chapter 7 and erase debts, or Chapter 13 and redeem via a payment plan, the negative credit history from that remains on a credit report for seven to 10 years.
When a real estate investor chooses to enter into a sale-leaseback agreement, they are doing so because it appears to be a wise business decision to them, not usually just out of the kindness of their heart. Most of the time they are able to negotiate a price for the property that is well below appraisal because the homeowner needs a quick sale (or a short sale is permitted by the bank, which does not pay off the mortgage in full, but covers enough to be a favorable option over the impending foreclosure and possible auction at greater losses). They also have a ready renter, and set a monthly payment at a modest profit in a declining real estate market. Of course, the purchaser may require some financial credentials from the former homeowners to determine their ability to pay.
Regardless, a sell and rent back deal is not harmful to a homeowner facing foreclosure unless, like in any transaction, they deal with a disreputable purchaser. By executing due diligence in finding a suitable person or company to enter into such an agreement, the homeowner may avoid the prospects of foreclosure and/or bankruptcy. As a result, they cut their losses and minimize future financial damage.
Learn more about this author, E.L. Miller.
Click here to send this author comments or questions.
Difference of opinion? Debate now.
