If the homeowner is in default, yet would prefer to stay in their home, and has the resources to cover a reasonable monthly payment, the following Short Sale-Leaseback operation may work. The goal will be to negotiate a short sale with the lender, which if done, will result in a drastically reduced “balance” due on the house, and therefore a drastically reduced monthly cost to the homeowner. Plus, a short sale is better for the homeowner’s credit score than a foreclosure, and it should eliminate the possibility of a deficiency judgment, which a foreclosure can lead to.

The real estate term for this arrangement is a “Sale-Leaseback”, and is actually very common in the commercial real estate world, and totally legal. The twist is with the short sale.

First, locate an “investor” that would consider buying the house, if the terms are acceptable to them. The Realtor works with the investor and homeowner to write up a Purchase Contract, which is then submitted to the lender with a request for allowing a Short Sale. This negotiated sale, if executed, will need to allow the investor to realize a fair profit, while offering manageable terms for the homeowner to remain in their home.

During the short sale process, the Realtor helps negotiate the terms of a lease between the investor and the homeowner, including any option to buy in the future, should the homeowner decide to purchase the home back when their financial situation improves.

If the lender won’t agree to a reasonable short sale price, and the investor is still interested, then let it go to the sheriff’s sale and have the investor buy it for $1 more than the lender bids it up to (not likely that anyone else will bid that high in the current economy. Very few are going to anyone other than the lenders.)

There are several alternative resolutions to a default; deed-in-lieu of foreclosure, forbearance, loan modification, and short sale. The lenders are simply being unreasonable in all of these scenarios, except the short sales.

So, the key is to find someone that believes in the homeowner’s income earning capacity enough to buy it and rent it back to them. They will need to offer terms which are attractive enough to make it well worth their while. At this point in the financial markets, this tends to be around a 10% annual return, but can be structured in various ways.

The homeowner should be sure to seek legal and tax advice regarding this matter.

To discuss further, feel free to contact Steve Herb, Realtor^®.