The Right to Rent Plan---Similar to Sale-Leaseback Technique?
Posted by: Carleton Sheets in Tenant, right to rent, Renter, Real Estate Market, Real Estate, Market Value, landlord, Foreclosure, fair market value, borrower on Aug 14, 2009.
In an effort to deal with the growing number of foreclosures on the market, yet another program has been proposed. The Right to Rent Plan would actually allow distressed homeowners to stay in their homes after the foreclosure sale ... by paying a fair-market monthly rent to the "landlord" (the lender who foreclosed on the former homeowner). (Don't get this program confused with an earlier one that offers qualified tenants a lease that allows them to remain in a foreclosed rental property.)
However, The Right to Rent Plan isn't without its critics! I was reading some comments in a related article, and it seems like the general public is outraged by the idea. The consensus is that, "If they [the distressed homeowners] couldn't afford to pay their mortgage, how can they afford to pay their rent?"
But as many investors know (especially the ones who have been doing a purchase leaseback for some time with qualifying tenants), this could actually work in certain situations. It could be a win-win situation for everyone involved.
If you haven't been using this creative technique, let me explain ... if a first mortgage-holder forecloses on a property, all junior liens are terminated. For instance, if a property has a $100,000 first mortgage, a $30,000 second mortgage, and a few credit card liens, the second mortgage and other junior liens would be wiped out.
Now, assume the property's fair market rent would be approximately $1,000 to $1,200 per month. As long as the property taxes and insurance were halfway reasonable, the lender (or an investor who bought the property at auction) could rent this property to the former homeowners at fair market value. Of course, since the distressed homeowners couldn't afford their previous mortgage payments, the rental amount would have to be quite a bit less than that amount.
On a positive note, while renting the property, the former owners may feel like they have a vested interest in the property and may be more apt to take care of it ... especially if they know there's an opportunity to repurchase the property in the future. (Note: Each state has a different set of sale-leaseback rules).
So The Right to Rent Plan could very well be a win-win situation in certain circumstances. Do you know of an investor or homeowner who has tried this? Did it work?
