Lease Option With A Pre-Foreclosure Is It Illegal?
I have a client who is in Pre-Foreclosure. She can not refinance because of her credit. Shes owes $57K and ARV is $130K Can you bring the payments up to date and lease option the property and sell it back to her in 12 to 36 months? Someone told me this process was illegal, because the client can come back and claim YOU TOOK MY EQUITY.
Please Help
It is not illegal.
Can they come back later and cry wolf? Absolutely.
Can they find someone to feel sorry for them? Probably.
Everything in real estate is a risk. You just have to protect yourself accordingly and go about a legal and ethical business.
My understanding is that it could be considered usary, which by my humble understanding, is charging more than the allowable interest rate. You gave them a loan of say 9k to bring their loan current, then 12 months later you are making 70k on the sale back to the same person.
I have just started renting back to the owner with the verbal understanding that I would sell the house back to them at market price any time that they wanted. But I will not write anything down that states I am obligated to sell it back to them. They seem to understand that it would put you in bind to state it in writing and that it makes sense that you would want to sell the house back to them at market price because it would save you from marketing and listing the property. I will let you know how it goes.
Brenda
You need to check your state laws regarding this.
For example, in California the civil code is VERY strict about dealing with people in foreclosure, and if you don’t follow it exactly this kind of deal could definitely backfire on you.
If your client can afford to rent back from you, then your client can afford the mortgage payment. Perhaps a temporary setback put your client in arrears, and the client can not make up the arrears, but could continue to make the regular monthly payments.
In this case, the client should seek a forebearance agreement that adds the arrearages to the loan balance and then the loan is recast for the new balance over the remaining loan term. The monthly payment will go up a little bit, but should still be affordable.
I had a very similar situation a few years ago. I avoided the usury question by not giving them an option to buy back as a condition of my purchase of the property. On their own they tried to buy the house back, however, they never could get the loan they needed.
As long as you just rent the house back to them, you should have no legal problem. You can verbally tell them you will allow them to buy the house back at market value at any time during the Lease, but never put that in writing (verbal assertions are meaningless when a written Agreement is present). Of course, you will keep your word. But no court will hear verbal promises and rule only on what is in writing, so you should be safe.
[addsig]
I would buy for less than 180k purchase price. After your costs to buy and sell, you will not make 20k.
Well, you have a house and you gotta do something with it. Why not run an ad or two as an experiment, maybe try something different? If you need more oomph to get above-market rents, use "Build equity!" in it too. Even if you only give $20-50 rent credit each month--and it could be more--it still is more than the principal pay-down would be if it was a mortgage loan deal. Plus, no closing costs when they lease-option with you, at least not until they have to exercise the option and cash you out. Selling on Contract for Deed is still an option for you, too.