If you aren’t familiar with a seller leaseback, let me explain. Investor Bob approaches Homeowner Holly after finding out she’s in foreclosure. Being the caring and sensitive guy he is, Investor Bob proposes to Homeowner Holly to sign over the deed to her home, and he’ll ‘lease it back’ to her for a year until she can get back on her feet. In doing so, he’ll bring her mortgage current, and she’ll act as a tenant/renter of the property during that time. Once she’s back on her feet, she can ‘purchase’ her home back from Investor Bob and they both go their merry ways. Homeowner Holly is ecstatic at this option as she gets to stay in her home, repair her credit, avoid the embarrassment of having to move, and retain ownership once she’s back on her feet again. Homeowner Holly owes $160k, with an additional $10k in arrears on her mortgages. Investor Bob knows her home is worth $250k, and sees potential to make some serious profits.

Homeowner Holly signs over the deed to the property, as well as a rental lease agreement to Investor Bob. Investor Bob brings her mortgage current, and starts making her monthly payments on the mortgages. Homeowner Holly is happy that all this mess has gone away. Three months go by, and Homeowner Holly loses her job. She can’t make her ‘rent’ payment to Investor Bob. Investor Bob, a wise opportunist, quickly files an eviction notice and kicks her out of the home. He quickly wholesales the property out to Landlord Larry for $200k. Landlord Larry fixes up the home, throws a new tenant in there and chalks it up to another great portfolio purchase.

Investor Bob takes his $30k profit he made on the transaction and heads off to the Caribbean for a week. After all the hard work, he’s earned a great vacation. Upon arriving back home, he is welcomed by a court order to appear in front of Judge Jerry. Homeowner Holly is suing him for stealing her home and equity. Investor Bob takes some of the money he made from another Seller Leaseback and hires a fancy $400/hr attorney to represent him. He gathers all his paperwork, throws on his nicest suit and heads down to the courthouse for victory.

Upon arriving, he sees Homeowner Holly and her attorney, as well as Landlord Larry. Apparently Landlord Larry was ordered to appear as well! Homeowner Holly proceeds to tell Judge Jerry that Investor Bob was offering her a ‘bailout loan’, and that she had no idea she was signing over ownership of her house. “How dare she!” thought Investor Bob. “She knew damned well she was signing over ownership, and that she would buy it back from me in a year! She was soo desperate for my help, and thankful for the opportunity I gave her to keep her home before! Now that she doesn’t need my help anymore, and she wants her house back!” Investor Bob was very angry, and couldn’t believe how Homeowner Holly could turn on him like this. Good thing he had it all very well documented, even had her sign the ‘Best Damned Document’ and everything! Judge Jerry will surely see what’s going on here and rule in his favor.

Judge Jerry, being sympathetic to this poor homeowner, victimized by this slick, fast talking vulture investor, thinks otherwise. He reviews the documents, hears both sides of the story, and makes his decision. “If it walks like a duck, sounds like a duck, looks like a duck, it must be a duck.” Puzzled, Investor Bob’s attorney asks for clarification. Judge Jerry then explains that setting the paperwork aside, this entire transaction looks and feels like a loan. Investor Bob loaned her money to bring her mortgages current. He allowed her to remain in the home (which, typical purchases has the seller moving out of the home, while a loan allows the seller to remain in place). He then called his loan due when he evicted her for being 1 day late on payment. Judge Jerry sees it as an ‘Equitable Mortgage‘ and not a sale of Real Estate.

Additionally, because Investor Bob sold the property to Landlord Larry, he essentially STOLE Homeowner Holly’s equity, and rules it as ‘Equity Stripping‘. The judge figures Investor Bob’s $30k in profits into the equation, stating that he LOANED Homeowner Holly a total of $10k, but charged her $30k in interest. And since this was LOANED for a period of only 3 months, he amortizes it out to be 1,200% APR charged on the loan. Judge Jerry calls this ‘Predatory Lending‘. He rules in the favor of Homeowner Holly, demanding that the property is to be given back to her immediately. Landlord Larry can’t believe what he’s hearing, as he’s watching his new asset disappear. He had nothing to do with the initial transaction between Homeowner Holly and Investor Bob, yet he’s losing out. He’s going to lose any costs he put into the home, his tenant, etc. Landlord Larry immediately calls his attorney to file suit against Investor Bob.

Judge Jerry orders the bailiff to handcuff Investor Bob and book him for Equity Stripping and Predatory Lending. He sets no bail and is currently awaiting sentencing. Investor Bob could be facing upwards of 10+ years in prison for his crimes, and the District Attorney is now researching every real estate transaction he has done to see if he can add in more counts of the same.

There have been numerous accounts of this scenario across the country. I warn every investor I meet who is currently involved with leasebacks. Sadly, they all blow it off as ‘not possible’ or ‘it won’t happen to them, [they] have great documentation’. This is exactly why I will never purchase, or be involved with a seller leaseback. I’ll never do business with someone who is involved with leasebacks. One swipe of the gavel and the judge can change your destiny forever. Every foreclosure investor knows how quickly a homeowner can change their hearts as soon as the pressure of the sale is off their backs. Do homeowners lie? You bet they do, especially when it comes to saving their homes. Can the judge overrule your ‘perfect contract’? It happens every day across the country.

There’s nothing wrong with investing in foreclosures or helping homeowners out of their situation. Most of the time a home owner’s best option is to get a fresh start in their lives, with a new home. The old home has bad memories, habits, and harbors a sense of failure. A new home means a clean start- a chance to do it better this time. The rule of thumb is to always place new financing on the property, and move them out of the home BEFORE paying them or a bank a dime. Always close your transactions at a reputable title company. As always, document every thing you do.

For those of you out there still investing in seller leasebacks- do yourselves a favor google and start reading.