The current industry trend of short sales has caused a large amount of hopeful home owners to place a hold on their dream of homeownership. So it’s no surprise that this new trend of short sale leaseback programs, popping up all over the country, seems like an answer to prayer. The exposure is overwhelming. What could be better than a distressed homeowner being able to get out of a financial hardship and keep their home?
Short sale leasebacks became a hot topic when the HAFA Supplemental Directive 12-03, was released on April 17, 2012 allowing for leasebacks. It states:
“A servicer may in its discretion approve a transaction under HAFA that provides an opportunity 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.”
So let’s take a look at how this new short sale leaseback program is supposed to work. The short sale is purchased by an investor (a non-profit organization). Instead of the owner moving out, the property is leased back to the homeowner so that the homeowner can stay for a period of time. At the end of the lease agreement, the homeowner buys the property back from the investor.
The challenge is, prior to the supplemental directive, leasebacks were considered a violation of the Arms Length Affidavit provision of most short sales due to:
- Fraud committed by sellers who are not supposed to benefit from the forgiveness of their debts
- Investors taking advantage of sellers who had hopes of purchasing their homes back
The chief issues with the short sale leaseback program are increased potential for fraud to the homeowner and other parties to the transaction which in turn causes the program to garner almost no support from the major servicers, U.S. Treasury, and GSE’s.
So what are the major lenders saying about short sale lease backs? Only one major lender has agreed to allow them, and to date (as of the date of this article), “They have only closed one” states Certified Distressed Property Expert CEO Alex Charfin. He said the major banks do not see leasebacks as viable option because they attempted pilot programs and the pilot programs were not successful.
Bank of America, one of the nation’s top mortgage holders of distressed properties, won’t allow short sale lease backs. Per a recently released memo, B of A now requires all short sale listings must be marketed in the local MLS and remain there throughout the short sale listing process until closing. Short sale lease back are not marketed in the MLS because they are sold directly to the investor.
If only a few have closed, then why does this sound like the next big answer for distressed property owners? Unfortunately, the marketing of the program, by certain companies, is very good. But their closing ratio is not. Short Sale leasebacks do not protect the homeowner or the real estate agent.
That brings us to the risk of fraud to the homeowner. The increased risk for fraud occurs when the investor purchases from homeowner, and when it’s time to buy back, the investor does not sell back to homeowner. HUD approved charities (non-profit organizations), have only closed a few, nationwide.
However, as with any big opportunity, we will see a surge of companies professing to be able to train you how to successfully close a short sale leaseback. They have done some good marketing and PR as are touting it as if it is a great and highly successful program. But the reality is they’ve literally only done a few and the flood gates of fraud will open wide.
If you are a homeowner or an agent interested in doing short sale leasebacks:
- Make sure that the company you use is a non-profit organization (http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check)
- Review all leaseback information
- Have all documents reviewed by an attorney
- Never allow a third party to have any negotiation control over the transaction – you and your broker (or your agent if you are a homeowner) are ultimately responsible for the results
- Exercise extreme caution
Know that there are many short sale leaseback training programs. The good programs will require agents to take training and to give up 1% of their commission so that they can negotiate the sale and the leaseback. But agents, before signing up for training be cautious and consider the challenge you may present to a homeowner. This is a new strategy that is completely unproven and most servicers do not have an appetite for. The property is never really in the MLS, so it’s not properly marketed and you are relying on this non-profit to negotiate the deal and provide an approval (which most lenders have already said they won’t do it), all of which may take more than the average six months because of the involvement of additional parties. Then, if there is no approval, you will have to go back to the homeowner and explain that you were unable to make that happen for them and you lose 1% of your commission in the process because you signed an agreement.
On a final note, before you sign up for any training or place any homeowner into this type of pipeline, qualify the organization. Can they show you evidence of completing transactions, can they show you the paperwork, can they show you the properties which were successfully leased back, and can they let you talk to a homeowner who is actually living in a property today and has successfully completed a short sale and has now leased their property back? Verify that before you put yourself and your client into a challenging situation. And remember; don’t get tangled up in fraud.