Short Sale Rent Back on Your Home? Don’t Even Think About It

Welcome to,  class today is (once again) on the topic of short sales, yet with a different twist.

Southern Cal Short SalesRecently I had a conversation with a long time friend and client who mentioned a program which involves a homeowner short sale to a third party/investor (with lender approval) along with a provision allowing the home owner to potentially rent the home back after the sale takes place. In addition the plan provided for the former homeowner to possibly buy the home back at a later date, probably a period of a few years  at a reduced price.

Presumably this would benefit the former homeowner by eliminating/reducing the loan on an over encumbered property, and benefit the third party investor who purchased the property at a reduced price who also has a built-in renter. Then somewhere later down the line, the homeowner could re-purchase the property at a lower price (than the former loan balance) but high enough presumably pay a return to the third-party who negotiated the short sale, who also became the owner/landlord and eventually the home seller. Oh and did I mention the homeowner also paid an upfront/out-of-pocket fee to the third party to negotiate the transaction?

For me personally there are so many red flags here I almost don’t know where to begin, but here goes: First red flag, paying anyone an upfront fee to anyone to negotiate your short sale. I’ve personally  known troubled homeowners being taken advantaged of by paying up front fees who received absolutely nothing…zip, zilch, nada…nothing at all in return (I hope you get the picture here). The last couple that contacted me (after the fact) saying they paid $5,000 to a Southern Cal law office only to find out they lost their family home to foreclosure. Even worse…they lost almost $100,000 in equity, because they weren’t upside down on value vs. loan, but experienced employment cutbacks and couldn’t make the newly adjusted increased payments.

However let’s assume the third-party investor is successful negotiating a reduced payoff on the short sale, red flag #2  did anyone bother to advise the sellers they would be required to sign an Affadavidt of “Arm’s Legnth Transfer” maybe, or maybe not?

  • Arm’s Legnth Transfer or Arm’s Legnth Transaction = A transaction that has been negotiated by non-related parties (among other things) no family members to the seller (s)  seller’s agent or company and the SELLER (S) CANNOT REMAIN IN POSSESSION AS TENANTS.

Anyone bother to explain to the sellers this is now a Freddie Mac requirement and that the majority of residential loans today are  Freddie or Fannie loans?  And even if it’s not a Freddie/Fannie loan it normal to expect to see the same requirment of other lenders in a short sale situation.

Recently from Freddie: Short sale fraud has become the top priority for Freddie Mac’s fraud investigation unit… ” These affidavits not only deter individual participation but also give us a stronger legal path to enforce our rights,” according to a Freddie Mac representative.

And yet if you get that far, (another red flag) what’s to stop the investor/owner from selling the home at a later date to the highest bidder after you’ve lovingly taken care of the home through those years?

Bottom line…don’t even think about it! If you need to do a short sale just do it. Or if you can negotiate a loan modification…then do it yourself even if you get turned down the first or second time.

If you’re looking for knowledgeable, competent  real estate help in So Cal, contact me,

Written by Class Instructor: Lynda Eisenmann

I maintains an active residential re-sale brokerage in Brea, CA, located in Orange County, about 20 minutes north of Disneyland. Contact Lynda directly at (714) 595-1494, or Lynda@PreferredHomeBrokers.comCA License #00402040

This article has 2 comments

  1. Donna Ommolina Reply

    Thank you for the info. Hate to say it, but I don’t read all the fine print on these documents and we rely on the professionals we hire to inform us of the legalities. At the end of the day, however, we are legally responsible to “be in the know” on these matters.

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