Short Sales Coupled With Lease-Buyback Option A Way To Help Those Facing Foreclosure Stay In Their Homes?

In Manteca, California, The Stockton Record reports on local homeowner Rachael Vasquez and her attempt to stay in her home despite a pending foreclosure on her family's three-bedroom home:

• Vasquez has opted for what appears to be a growing trend - albeit one that should be approached with caution and isn't without its down side - in the Central Valley for struggling homeowners. She struck a deal with an investor to purchase her home as a short sale then entered into a lease-option agreement to buy it back in three years. Vasquez will pay rent for 36 months and will then repurchase her home for $234,000, 130 percent of what she sold it for on short sale.

• Manteca ReMax agent Christine Papworth, [...] crafted the local lease-buyback program a year ago, and has completed about 65 sales with investors. Papworth has worked the deals with one main investor, the Land Group of Modesto. She also is close to reaching an agreement with a group of Stockton investors represented by Grupe Real Estate broker Jerry Abbott. Abbott said his group has two lawyers reviewing the program to make sure there are no pitfalls.(1) [...] He added that he worries banks would reject offers once they know a lease/buyback is being offered to the seller that it approved for a hardship.(2)

For more, see Home program savior or sketchy? (Buyback investor deals risky, some experts say).

(1) One potential pitfall for the investor is that the deal could be recharacterized as an equitable mortgage (and possibly, an usurious equitable mortgage, if the overall profit to the investor exceeds any applicable limit on the charging of interest under state law). In that case the homeowner, in the event of a default or failed buyback attempt, can only be ousted from the home after a lawsuit to foreclose the investor's equitable mortgage, and not through a tenant eviction action. Go here for some case law on Equitable Mortgage Doctrine In California.

(2) Failure to fully disclose any contemporaneous side deals to the lender/loan servicer approving the short sale, or any lender financing the short sale, could land the participants in these deals in hot water. See:

• U.S. Attorney (Bridgeport, Connecticut) press release: Two Connecticut Real Estate Agents Charged with Engaging In Short Sale Mortgage Fraud Schemes,
• U.S. Attorney (Manhattan/NYC) press release: Four Indicted In $3 Million Mortgage Fraud And Foreclosure Rescue Scheme. sale leaseback