It's wise to ask about the legal ramifications of a lease or buyback on a short sale. In particular, you should run like the wind from any company advising you to lease back your short sale home with the intent to buy it back later. This company is not your friend. It sees you as nothing more than a profitable venture, and it's a vulture waiting to swoop in and capitalize on your misfortune.
A short sale lease and buyback is the dark side of capitalism. It is also, under many circumstances, considered to be short sale mortgage fraud. If in doubt, ask the FBI what it thinks about your home preservation company.
When it comes to homeowners in distress talking to for-profit home counselors, it's sort of like being thrown into a shark tank with a bloody leg. There's only one ending to that scenario, and it's not pretty. When you owe more than your home is worth, someone offering you a roundabout way to keep it can feel like a lifeline. But it's usually not. A short sale seems like your best bet, and it very well may be, but crooks are eager to take advantage of your inexperience.
Why It Could Be Mortgage Fraud
Mortgage fraud happens when information is withheld from your lender which, if the lender knew about it, would cause them to reject your short sale. It's called pulling the wool over the lender's eyes. It's a form of non-disclosure, and it can result in jail time.
The major banks such as Bank of America, Wells Fargo, and JP Morgan Chase have caught on to investors, shady agents and, in particular, the greedy companies formed solely to feast on the downtrodden. Following are the types of actions many banks specifically prohibit, either through the arm's length affidavit, which is signed by all parties, or through the short sale approval letter itself:
- No transfers to third parties by deed at closing
- No under-the-table special agreements between agents and principals
- No sales of subject property within a certain time period, typically 90 days after closing
- Sellers must vacate the property and cannot rent back
- Sellers cannot receive any money or profit secretly from the short sale
Be suspicious if you are asked to deed your home or transfer title to another person or a company before closing. Some unscrupulous companies will record your deed and then wheel and deal with your bank as a principal, without any involvement from you. You are still responsible for your loan, even if a company tricked you into handing over the title.
When a Short Sale Buyback Is Not Fraud
As much as you might want to view the investors as angels of mercy, it's usually the opposite. There is nothing angelic about a company that takes away your home and dictates the terms under which you can pay through the nose to buy it back. They'll sell it back to you all right—way over its market value at that time.
If your lender has full disclosure and does not object, you are free to do what you want. But the lender is likely to object. If you move forward, get it in writing from your lender that it's OK to lease back or buy back your short sale.
A Fannie Mae short sale might offer you a leaseback or buyback. Fannie Mae is a government-sponsored enterprise, so it may be able to work with you more than a private lender will. In most cases, though, a buyback is not legally permitted.
All in all, you're typically better off to sell your home as a short sale, move out and rent something else for a few years, and then buy a home similar to the one you used to own at probably half of its original cost. That game is being played out all over the country, and this one is legitimate. It's how a true "no strings attached" short sale works.