Q: I am currently negotiating with a homeowner who is in foreclosure. I want him to deed the property over to me. I will pay the amount due on the mortgage to bring the loan current and then be the owner of the home.
The current owner will have the mortgage on the property and when I refinance the property later on, I’ll take the equity out of the property and share it with him.
What are the tax implications of this transaction? Is this action illegal? Does it violate the Real Estate Settlement Procedures Act (RESPA)?
I’ve been trying to talk to title companies about working with me on this deal, but IÃ¢â‚¬â„¢m finding that the whole idea scares them. How can I better explain the deal to them so they will help me close the transaction?
A: Frankly, what you’re proposing sounds pretty scary. A number of schemes similar to yours have crossed our desks in recent months.
Here’s how they typically work: the homeowners are asked to sell the home to an investor who promises to allow them to repurchase the home later on when they get back on their feet financially. In many cases, reports indicate that the homeowners are unable to repurchase the home, and ultimately lose it to the investor.
Your situation differs only in that the current homeowner has a mortgage on his home. If a homeowner wants to get equity out of the property, he should sell the home to a willing buyer, pay off his debts and start fresh. The homeowner will still be on the hook for the old mortgage.
In this situation, because the current owner is in foreclosure, his credit is tarnished. You’re trying to take advantage of the situation, but you’re not offering the current owner anything that benefits his situation Ã¢â‚¬â€œ in fact, what you’re proposing makes it worse.
You want ownership of the property, but you want the current owner to continue to keep the mortgage in his name. First, if the deed were to be transferred to you, it would trigger the due-on-sale clause in the current owner’s mortgage. He would be obligated to repay everything that is owed. He cannot keep the mortgage and transfer ownership of the property to you.
And, what’s to stop you, once you own this property free and clear (if the current owner was foolish enough to transfer the deed into your name) from mortgaging it to the hilt and taking off with all the cash? Or, perhaps you’d simply sell the property outright?
In the scenario you describe, the current homeowner doesn’t seem to benefit financially. He would be better off trying to get out from under the burden of his current loan by selling the home. If there is any equity left after paying off the mortgage, he would be able to use it to try and rebuild his financial life.
As far as the legalities are concerned, there are a number of Attorney General’s offices that are looking into these types of arrangements and in some cases they have decided that they are unlawful.
It’s difficult to know whether the way you have structured your deal is unlawful or not. But any homeowner who receives an offer such as yours should run in the opposite direction.
If you’re truly interested in helping out the homeowner, you can offer to purchase the house for maybe $10,000 more than what is owed on the mortgage. The homeowner would be able to walk away with a little bit of cash in his pocket, and you would gain all the equity in the house.