Sale and leaseback deals typically hurt homeowners facing foreclosure. They also are not an effective means to accomplish the goal of the sale and leaseback, which is to remain in the home. Homeowners facing foreclosure should consider other better options for sale and leasebacks.
1)Homeowners Can Lose Equity in Sale and Leaseback Deals
In the sale and leaseback deals hurt homeowners with equity in their home. Sale and leaseback are used to engage in equity stripping. Equity stripping is a fraudulent scheme used by lenders to purchase homes that are in foreclosure, where there is a significant difference between the home’s market price and the mortgage. For example, a homeowner has a mortgage of $80,000 on a home worth $200,000.00. In an equity stripping sale and leaseback, the purchaser would buy the home for $80,000 and attempt to resell it to the homeowner or someone else for $200,000.
2) They May Not Accomplish The Chief Goal of Sale and Leaseback
Sale and leasebacks may not accomplish the homeowner’s main goal of staying in the home. First, if the former homeowner could not pay the mortgage, the homeowner may not be able to pay rent either unless rent is significantly less expensive. Second, even if the rent is low at first, the new owner can raise it, perhaps to levels that are unaffordable. Third, the new owner can sell the home to someone else, eventually forcing the homeowner to move.
While a homeowner might seek to prevent these events from happening by carefully negotiating the lease terms, that is not realistic. Many homeowners may not understand fully the terms and conditions of the lease being offered them. Even if the homeowner understands the terms, a homeowner in foreclosure has a lot less leverage to negotiate lease terms than the purchaser.
3) Homeowners Facing Foreclosure Have Other Better Options
A homeowner in foreclosure should consider the following options: a) Offer to renegotiate the terms of the mortgage with the bank; b)Offer to the bank to put the home on the market, and c) consider filing for bankruptcy.
a) The homeowner on a defaulting mortgage should contact their bank and attempt to try to obtain better terms that will allow them to avoid foreclosure. Homeowners re-negotiating their mortgages have significant leverage with banks because in foreclosure the bank will incur significant costs to foreclose the home and bank may be faced with selling the foreclosed home at a loss in the current real estate climate. These conditions make it favorable for the homeowner and the banker to work out a scenario that reduces the mortgage payment to allow the homeowner to stay in the home and the bank to lose less money.
b) The homeowner should contact the bank and offer to list and sell the home. A bank is likely to accept as this allows the bank to avoid the costs of foreclosure. The homeowner stays in the home and has an opportunity to take any equity that they have in the home at the sale.
c) The homeowner should consider bankruptcy as a last resort if the homeowner has large debts in addition to the mortgage. While bankruptcy will only temporarily stop the foreclosure of the home, it does give the homeowner time to work out things out with their lenders. Homeowners burdened with high credit card debt, or other debts may benefit from bankruptcy because after discharging those debts, they may be able to make their mortgage payments. Bankruptcy is not be taken lightly, and the homeowner should seek counsel from a bankruptcy lawyer before deciding to file.