Foreclosure in 40208>Question Details

Naynay, Home Buyer in Louisville, KY

If you are facing foreclosure in the state of Kentucky-Is it legal for someone to purchase your property and then lease it back to you?

Asked by Naynay, Louisville, KY Thu Sep 29, 2011

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You can see from the different answers not everyone agrees on this issue. Basically it boils down to one simple step : has it been disclosed to the bank ? if not it is fraud.Also does it feel right to you ? Investors are not lic. and maynot be aware of all the rules and laws they just see other investors doing it and follow in thier path. I know several investors who have wanted me to work with them on doing this same thing and I have passed. New lending requirements also state you have a 3 year window after a foreclosure ( 6 mos . behind on pymts ) . I have a lease to own program but you need to be 18 months from the foreclosure date to be enrolled.
0 votes Thank Flag Link Mon Oct 3, 2011
Most approval letters now include some type of verbiage that there are no side deals between the buyer and seller. This would include the buyer/investor leasing the house back to the seller (you). The issue being - on the one hand you are telling your lender you can no longer afford this house, but now you can afford to rent it?
0 votes Thank Flag Link Sun Oct 2, 2011
It is frowned upon, but not necessarily illegal IF the buyer is not someone close to you. A criteria for short-sales it that the buyer be someone who is an "arms-length" relationship to the seller.

I have known investors to do it in this area.
0 votes Thank Flag Link Fri Sep 30, 2011
The reason is that there are way to many scams out there taking advantage of people, nothing to do with you, but that is why the banks forbid it and so does the law in many places.
0 votes Thank Flag Link Fri Sep 30, 2011
I believe it is illegal to do that anywhere in America. I specialize I am a short sale negotiator, see my website for short sale tips and advise: , and almost every short sale approval letter I get specifically forbids buy-lease-backs.

I believe it is forbidden in any type of foreclosure transaction..
0 votes Thank Flag Link Fri Sep 30, 2011
I don't know. And the answer can be tricky. A number of states (Maryland, for example . . . and it patterned its law after other existing state laws) don't allow it under many conditions. Violation is a felony. So, please consult a real estate attorney familiar with Kentucky law before doing anything.

Also, it's generally a bad idea from the investor's standpoint . . . leaving aside the legal risks. You've identified yourself as "Home Buyer," so presumably you're the one who'd be buying. Consider: The seller bought the house and now is unable to make payments. The seller almost definitely has missed a number of payments, so in addition to the monthly mortgage, the seller owes thousands in arrearages.

You want to buy. There are two ways to do that: Conventionally and creatively. Let's consider conventionally first. I'm just making these numbers up as an example. Let's say the seller bought the house 5 years ago for $300,000. Assume a 30-year mortgage at 6%. Back then there was 100% financing, so assume the seller started off with no equity. The principle and interest would be about $1,800 a month. (Not including taxes and insurance.) But you're telling me that the seller couldn't afford $1,800 a month.

Fast forward to today. In the first few years of a mortgage, there's almost no equity build-up. And in the past 5 years, house prices in many areas have declined. I don't know about Kentucky. Let's say it's gone down only slightly--5%, or $15,000. The house is now worth $285,000. And it's facing foreclosure, so let's assume the seller is 6 months behind in payments. That's $10,800 in back payments, not counting interest and penalties.

So the seller owes about $310,800 on a property that's now worth $285,000. You want to buy it as an investor. Practically, you'll need to pay off the back payments ($10,000), cover the drop in value ($15,000), and then put 20% down ($57,000). So can you come up with $82,000?

Let's assume you can. Now you have a mortgage of $228,000. Let's say you can get a mortgage at 6% as an investor. Your monthly principle and interest will be $1,367. But you'd also like to get some sort of return on that $82,000 you've put into the house. What's a fair number? You could put it into the bank and earn 1.5%. But that's risk free. Investors would like 20% or more. But let's be real, real conservative. Maybe you'd be happy with just a 5% return. That works out to $342 a month. So, just to cover your mortgage and to get a 5% return on the $82,000 you've invested, you need to charge $1,709 a month. (Plus taxes and insurance.)

Uh oh. The sellers couldn't afford $1,800 a month. Now you're going to charge them $1,709 AND they're going to have to pay utilities AND they're not going to get the tax deductions that come with home ownership (worth about $500 a month . . . and you think they'll be able to pay you? No way. When you factor in the loss of tax benefits, they're paying MORE than when they owned the house. If they couldn't afford $1,800 a month, how will they be able to afford $2,200 a month? Answer: They can't.

So conventional financing is out.

What about creative financing? You do a "subject to" deal. They deed their house over to you. And you make up the arrearages. The mortgage remains in their name. Using the numbers above, you only have to come up with $10,000 (plus possible interest and penalties). Congratulations. You now are responsible for $300,000 worth of payments on a property worth $285,000. So you make their $1,800 a month payments. Plus you'd like some return on your $10,000. At 5%, that's $42 a month. So you need to collect $1,842 from your new tenants.

Uh oh. They couldn't afford $1,800 a month payments. Now they need to pay you $1,842. And you're $15,000 under water.

Those numbers aren't as horrific as buying conventionally, but they still spell doom for your tenants. And once they stop paying the rent, you'd be wise to stop paying their mortgage. The foreclosure process would start again (on them, not you), and you'd be out the $10,000 you put up to get them out of foreclosure the first time.

So, likely there isn't a happy ending with either scenario.

Don't do it.
0 votes Thank Flag Link Fri Sep 30, 2011
Don Tepper, Real Estate Pro in Burke, VA
We sell many foreclosures and short sales. Often an investor will purchase the house and rent it back to the former owner. No problem.
0 votes Thank Flag Link Fri Sep 30, 2011
You are asking a legal question, which is something for an attorney to answer. From a lender’s perspective there is nothing wrong with it on your side as long as your existing mortgage is paid in full. In all probability there is a due on sale clause in your existing mortgage, could be a mess if you convey title and then the loan gets called due. I closed a similar one last month so if your buyer needs a loan let me know. Good luck,
0 votes Thank Flag Link Fri Sep 30, 2011
Without knowing who the party is offering to buy the home, I can say there are many scams out now. The current owner should check with their lender, and upon the lenders approval they could have a document drawn up to insure the lender receives the monthly mortgage payments. What has been occurring is the person or company buying the property takes the sellers "rent" payments and does not forward the mortgage payment to the mortgage lender, thus the seller finds themselves in a worse situation.
0 votes Thank Flag Link Fri Sep 30, 2011
In most ways this shouldn't be a problem. However, there are a couple of "catches". You should check the current payoff amount of your loan. If you are in default right now, the fees and penalties added to your loan may have resulted in a payoff much higher than what it was before you went into default. If the buyer of your home is honest with the lender (and tells the lender it won't be "owner occupied"), they will consider it an "investment" property (in most cases), meaning the buyer will probably have to come up with a 25% +/- down payment. FInally, the buyer will of course have to have financial strength adequate to own your home and his/hers.
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0 votes Thank Flag Link Fri Sep 30, 2011
Sure as long as the lender gets paid off they could care less if the home is rented or not.
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0 votes Thank Flag Link Fri Sep 30, 2011
Generally speaking. Yes. I would need to know all of the conditions before I could say for certain.
0 votes Thank Flag Link Thu Sep 29, 2011
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