A Really Ugly Turn in the Foreclosure Market

by : Dave Dinkel

Recently there has been an ugly turn in the foreclosure market.Most people are familiar with the foreclosure victim who is a homeowner that fell on hard times and is forced into foreclosure, or when a homeowner has re-financed his home and "cashed out" his equity, and stops making his mortgage payments.In effect, he has sold his home to his lender.Lately there is a third entry in the foreclosure arena.

The new foreclosures are investors who are unable to make payments on speculative real estate purchases but decide to rent or lease option the property to help offset the financial loss.This group of investors is actively renting or leasing their properties knowing they are going into foreclosure and are keeping the rent payments as a profit source.

The strategy of renting a property, even if the income doesn't cover the mortgage, is used to offset carrying costs on a property until it can be sold.In the recently declining real estate markets, price declines have more than offset hope for a swift turnaround.Investors are faced with continuing financial losses, or selling and taking a loss.But if no sales are taking place, going into foreclosure is the only option.

The problem is that some investors are renting their properties and are not paying their mortgages.In even worse situations, some investors are lease-optioning the homes to tenants who are paying substantial "option considerations" for the privilege of purchasing the home in the future at a preset price.When the lenders foreclose, the tenants will be evicted with no chance of recovering their deposit, last month's rent, or option considerations except by legal action.

The investor who rented the home has legal liability to the homeowner, to the state's attorney, and to the lender for fraudulently carrying on a practice called "equity stripping".The investor may feel he has no liability because he may have purposely put the property's title in an LLC, corporation, or even a land trust.However, his fraud nullifies any attempts to cover his tracks.Even the new bankruptcy laws preclude the inclusion of fraudulent items such as when equity stripping is involved.

Renters must take legal action to recover any lost funds and get compensation for their moving expenses.Renters should contact an attorney who is familiar with tenant/landlord law as soon as they have any indication of a foreclosure. This notification usually comes in the form of a summons from the county court.

When lease optioning a property, make the mortgage payment directly to the lender, and make a second check to the property owner for any amount over the mortgage.If the rent is less than the mortgage payment, a foreclosure could be a real possibility.To determine how much risk a property has, ask the landlord to see his mortgage coupon book or monthly statement.Next, check with the county clerk to see if any other mortgages exist against the property.Finally, proceed with the lease option only if you are certain that all the liens against the property have been disclosed and your rent covers them.