Can an Investor Buy Your Home if You’re in Foreclosure and Sell It Back to You?
Government initiatives have helped to facilitate widespread and legitimate alternatives to foreclosure, such as short sales. Lenders work with homeowners to sell their home for less than the balance owed and accept the sale proceeds as settlement. Homeowners in foreclosure are financially distressed and often desperate to keep their home. Investors take advantage of short sales to make money off of financially distressed homeowners by re-selling the home to them for a profit.
Short sales take place in the pre-foreclosure stage and sometimes before the homeowner defaults. This is because the lender is convinced the homeowner’s financial circumstances will cause him to end up in foreclosure eventually. Nonetheless, convincing a lender to short sell a home is not easy. The transaction takes several months to complete, requires full documentation of the homeowner’s financial situation, marketing of the property and negotiating sales price and terms with the lender. Lenders prohibit homeowners from benefiting from the short sale by living in the home after the sale.
Lenders consider a homeowner who remains in the home after a short sale as a tenant or buyer a participant in mortgage fraud. When short sales rise, so does fraud, says Freddie Mac, one of the major owners of the nation’s mortgages. As a result, most lenders require homeowners to sign an Arm’s Length Affidavit, a disclosure provided to all parties to the transaction before the close of escrow. It stipulates that behind-the-scenes arrangements that allow the homeowner to benefit financially from the short sale are illegal. In a typical short sale fraud, as detailed in a CNN report, a real estate agent obtains a legitimate bid on a short-sale home. The agent sandbags the bid while presenting the bank a lower bid from an accomplice scammer. After the bank accepts the low bid, the real estate agent sells the home to the original higher bidder, thus cheating the bank and pocketing the profit.
A homeowner in foreclosure cannot afford to pay the mortgage he already has and therefore cannot acquire a new mortgage in the near future. The impact of missed payments and the short sale itself diminishes credit. Furthermore, a waiting period set by lender seasoning requirements prevents a borrower with a prior short sale from obtaining a new mortgage for at least several years. If the homeowner buys back his home with cash, the lender may consider it fraud because he claimed financial hardship before the short sale.
The real estate professional selling your home is aware of the Arm’s Length Affidavit and that he may also be held liable for any involvement or knowledge of a short sale scheme in the transaction. If an investor approaches you directly with the plan, the real estate agent is required to act in your best interest, not the investor’s, and support you in rejecting the offer.