Rent back to owner?

Real Estate Investing
1

Hi,

I’m looking to purchase a house that’s going to foreclosure. The bank had denied the current owner a loan mod not because they can’t pay but because they own two properties and the bank can only approve one. The owner chose the other one to have the loan mod done but decide to lose the second one (the one I’m buying). They really would like to stay and rent from me. They lived there over 10 years now. The house is in a so so condition. My question is is it wise to rent back to the owner assuming they are capable of paying the rent? Any advices you have would be greatly appreciated!

Thanks.

2

Historically it is a bad idea. The idea that a house they owned for 10 years will suddenly be one they see as your property is a stretch.

Is the other home a rental or a 2nd home? Why do they want to live in this one? Clearly they are willing to lose this one. If that happened what was there plan?

3

The other house is their daughter’s house which is why they are in foreclosure. They, like millions others, took equity out during the boom and bought stuff with it. At least these people were smart and bought a second house instead of a money pit like a fancy car.

That was my concern that since it’s no longer their house and they are now renters maybe they will fabricate some accident in the house and sue me. I don’t know how realistic this can be because this will be my first rental property. Don’t have the experience of a landlord so I can only imagine the worst possible thing that can happen.

There are three adults all with jobs and 2 little children living in the house. So I don’ think rent will be an issue, at least I hope not. And talking to them today, I feel that they really don’t want to leave. But the fact that it’s been their house for 10 years and now they are renting their own house might cause resentment towards themselves and me and create problems. Again, my lack of landlording experience is surfacing again.

How would you assess this situation? Am I overly concerned as a potential landlord here?

4

You wrote that they really do not want to leave.

If they miss the rent are you going to evict them? If you try to evict will they go quietly or will they try other ways to stay in the property?

I would not rent to them. A house rule you might say. Others might. Let’s see if others who have done so actually reply.

5

Dont do it.

There is no good way to structure the deal, and should the tennant (previous owner) stop paying rent, you will have to evict them.
Unfortunatly, during the eviction, should they mount even a half hearted defense through local legal aid; there is a very, very, high probability that the “foreclosure bail out/ rent back” plan will be viewed as a scam.
Right or wrong, once that is established, the continuation that has the higest probability of actually happening will be this -

The court will view the situation not as a purchase/sale, but as though you only provided a new loan to the original owner, and you will be required to foreclose upon them before you can proceed with an eviction.

Its possible the above can be avoided, especially if your “rent back” does not include an option to buy or somthing similar, but probabilities are against you, and frankly when your just starting out, your number one priority should be survival, not management of very high risk deals.

6

I only read the title…

NO!!

7

I apologize for leaving this bit of detail out but don’t know if it matters or not but this is a short sale property. The agent is trying to sell the house. So I am buying it and thinking about renting it back to the previous owner who really wants to stay. I will make them sign a lease agreement once I take over. If they don’t pay, I will post on their door or send them a certified “Pay or Quit” notice. And there will be no option to buy back. It will be a straight lease. So knowing this, can they still mount any kind of defense AmotoXracer?

[QUOTE=AmotoXracer;883947]Dont do it.

There is no good way to structure the deal, and should the tennant (previous owner) stop paying rent, you will have to evict them.
Unfortunatly, during the eviction, should they mount even a half hearted defense through local legal aid; there is a very, very, high probability that the “foreclosure bail out/ rent back” plan will be viewed as a scam.
Right or wrong, once that is established, the continuation that has the higest probability of actually happening will be this -

The court will view the situation not as a purchase/sale, but as though you only provided a new loan to the original owner, and you will be required to foreclose upon them before you can proceed with an eviction.

Its possible the above can be avoided, especially if your “rent back” does not include an option to buy or somthing similar, but probabilities are against you, and frankly when your just starting out, your number one priority should be survival, not management of very high risk deals.[/QUOTE]

8

I still wouldnt do it.

Even though I like the deal alot better with a realtor and title company involved.
The problem is there is no additional reward for taking on the added risk of the rent back. So, you might as well demand occupancy at closing.
I suppose if you are getting an over the top, unbelieveable deal on the property then you have to consider it a bit more seriously, but under any other circumstances, you should view the rent back as “Return free risk”.

Short sale, realtor, bailout ect … I would keep looking at property, before i pulled the trigger on this one.

9

It’s a decent deal. I’ll consider the risk involved before pulling the trigger on this one. Thanks!

10

Hey Newbie - don’t do it!

I’ve lost many a deal over the years to other investors who were willing to rent back to the people who couldn’t afford the house in the first place.

A lot of those investors are out of business, and I sleep very soundly at night.

And, BTW, it doesn’t matter what the people tell you, because people in a desperate situation will say ANYTHING. I can assure you that their outlook will change if they perceive that things aren’t going their way later.

–Natalie

11

The previous owner can still give me problem even if I bought this as a short sale? If this is the case, then I would really have to reconsider this deal. But on the other hand, if I rent it to a different family, then I should be ok?

12

If anything, the short sale makes things worse as it relates to the current owner, so put the idea of renting back to the current owner right out of your mind.
Make it clear to the realtors you want occupancy at closing. Have them put that in the purchase agreement or on an addendum. Inspect the vaccant property the morning of the closing. Dont close untill its vaccant.
After you have possession, find a new tennant. Preferably, one who has their own appliances. Renters who are lugging their own appliances around tend to stay in houses for years instead of months.

13

Great tip about the renter lugging their own appliances around AmotoXracer! They might be a little harder to find but a great idea. Thanks!

14

[QUOTE=newbie;883975]Great tip about the renter lugging their own appliances around AmotoXracer! They might be a little harder to find but a great idea. Thanks![/QUOTE]

I would not expect them to be harder to find. Many times a family that rents a house has furniture including their own appliances. They like their stuff and they do not like to move all that often if they can avoid it.

Depending on the house, a refrig might be something that is built in or an odd size. Or it might make sense for the landlord to provide a washer so that it is hooked up correctly to the water supply. I prefer not to offer any appliances and then work a deal if the tenant wants something. Or I will refer them to a local supplier (one for new and one for used) so they can buy their own direct.

Independent of the idea that they will move less often when they have a lot to move is the issue of maintenance. If the landlord supplies the appliances there is more that could break. If the tenant supplies the appliance they will sort any issues and not even bother you.

15

[QUOTE=John_Corey;883979]I would not expect them to be harder to find. Many times a family that rents a house has furniture including their own appliances. They like their stuff and they do not like to move all that often if they can avoid it.

Depending on the house, a refrig might be something that is built in or an odd size. Or it might make sense for the landlord to provide a washer so that it is hooked up correctly to the water supply. I prefer not to offer any appliances and then work a deal if the tenant wants something. Or I will refer them to a local supplier (one for new and one for used) so they can buy their own direct.

Independent of the idea that they will move less often when they have a lot to move is the issue of maintenance. If the landlord supplies the appliances there is more that could break. If the tenant supplies the appliance they will sort any issues and not even bother you.[/QUOTE]

Great point! Thank you!

16

From my understanding! Sellers are not allowed to rent back the property from the buyer in Short Sale! There is a requirement form that you have to sign relate to this issue prior lenders approval!

17

I’m surprised the agent didn’t mention this to me. I’ll ask him about it. Thanks Jleecare.

18

Rent Back - not advised, but sometimes ok…

I think you got a good advice by most of the posts, the best is to be done with the previous owner and get the occupancy at closing.

“Rent back with an option to buy back” is a big NO even if when it’s not prohibited by your State’s statute. It’s always a very bad idea to get a homeowner in foreclosure to sell you the house by promising them to buy back. High possibility of losing in a lawsuit, plus it’s unfair anyway. So NO.

Straight rental (what you’re talking) back to the owner is never advised, because you could have little more complications than with a regular tenant, HOWEVER, if you closed with a title company and especially when the seller is cashed out (when you don’t use Sub2 and use their loan), if you have a valid lease agreement you will be OK.

I have purchased many foreclosures Sub2, reinstated their loan, and ALWAYS tried to get the seller out before the closing… but many times I had to let them stay when it was not possible for them to move in a few days, and probably 50% of those times I had to evict them… AND never had a major issue because I had it all properly documented.

Yes, a few times they lied in the court that they didn’t know they sold the house because I did a “kitchen table” closing in a local UPS Store because it was a few days before foreclosure sale and not enough time to open escrow w/ a title co. It was not fair from them because I helped them a lot, AND their claim didn’t stand even that I closed like that because all my disclosures and paperwork was very clear so the judge didn’t believe them.

Plus, they gave me a nice “notarized” testimonial thanking me for buying their house – (getting a notarized testimonial helped me in evictions more than once, and BTW a “notarized” testimonial is a very good marketing tool…)

Here’s my point… what do you do when you’re 4 days before the f. auction, and they can’t move in 4 days… do you pass?

The answer is… if the equity is slim, you pass on the possible hassle. But if there’s a lot of equity, then you calculate for the worse case scenario - for example, you estimate that it may take you 6 - 8 mo to get them out (assume they’ll fight you) and add that cost of eviction and holding cost, and if there’s still plenty of profit left, you do it and properly document everything.

As I said, if in the worse case scenario, there’s still $30-50k in profit, I do NOT pass.

It all comes to having it all properly documented, plus it doesn’t hurt to voice record the closings.

Remember, you’re not doing anything wrong by buying the house at a discount as long as the seller is aware that he/she is selling at a discount and such a sale benefits them. If everyone wins, it’s a good deal.

And there’s nothing wrong with renting to whoever you want, including the seller, but it has to be all documented.

Again, the old principle stands here: ONLY DO DEALS WHERE EVERYONE WINS!! It has to be win win for the seller too. But document because they may turn into not as honest one later.

Summary: move the seller out before the closing whenever that’s possible. Consider renting back only when there’s a lot of equity and it’s not possible to move them out before the closing even when you tried hard-then document well

good luck!
M

19

6 to 8 months to get anyone out is rediculous. Im so glad I live in a pro-landlord state.

20

Thanks Marko! Great advices!