How to Beat the Banks at Their Own Game – A Strategy Straight out of the Tax Shelter Playbook

Source: Neil Garfield Livinglies

If this is feasible, which it looks like it is, it could be a game changer…

“Here is a strategy straight out of the tax shelter playbook that could result in widespread relief for homeowners underwater. It comes from a high-finance tax shelter expert who shall remain unnamed. He and a group of other people with real money are thinking of establishing a clearinghouse for these transactions. The author of this strategy ranks very high in finance and law but he cautions, as do I, that you should utilize the services of only the most sophisticated property lawyers licensed to do business in appropriate jurisdictions before initiating any action under this delightful reversal of fortune, restoring equity, possession and clearing title to the millions of properties that could fall under the rubric of his plan. He even invites others to compete with his group, starting their own clearing houses (like a dating service) since he obviously could not handle all the volume.

The bottom line is that it leaves you in your home paying low rent on a long-term lease, forces the pretender lender (non-creditor) to file a judicial foreclosure, and throws a monkey wrench into the current  foreclosure scheme. I am not endorsing it, just reporting it. This is not legal advice. It is for information and entertainment purposes.”

  1. John Smith and Mary Jones each own homes that are underwater. Maybe they live near each other, maybe they don’t. To make it simple let’s assume they are in the same subdivision in the same model house and each owes $500,000 on a house that is now worth $250,000. Their payments for amortization and interest are currently $3500 per month. The likelihood that their homes will ever be worth more than the principal due on the mortgage is zero.
  2. John and Mary are both up to date on their payments but considering just walking away because they have no stake in the outcome. Rents for comparable homes in their neighborhoods are a fraction of what they are paying monthly now on a mortgage based upon a false appraisal value.
  3. In those states where mortgages are officially or unofficially “non-recourse” they can’t be sued for the loss that the bank takes on repossession, sale or foreclosure.
  4. John and Mary find out about each other and enter into the following deal:
  5. First, John and Mary enter into 15 year lease wherein Mary takes possession of John’s house and pays $1,000 per month in a net-net lease (Tenant pays all expenses — taxes, insurance, maintenance and utilities). There are some laws around (Federal and State) that state that even if the house is foreclosed, the “Buyer” must honor the terms of the lease. But even in those jurisdictions where the lease itself is subject to being foreclosed, John and Mary agree to RECORD the lease along with an option to purchase the house for $250,000 (fair market value) wherein the seller takes a note for the balance at a 3% interest rate amortized over 30 years.
  6. So now Mary can have possession of the John house under a lease like any tenant. And she has an option to purchase the house for $250,000. And it’s all recorded just like the state’s recording statutes say you should.
  7. Second, John and Mary enter into a 15 year lease wherein John takes possession of Mary’s house and pays $1,000 per month in a net-net lease (Tenant pays all expenses — taxes, insurance, maintenance and utilities). There are some laws around (Federal and State) that state that even if the house is foreclosed, the “Buyer” must honor the terms of the lease. But even in those jurisdictions where the lease itself is subject to being foreclosed, John and Mary agree to RECORD the lease along with an option to purchase the house for $250,000 (fair market value) wherein the seller takes a note for the balance at a 3% interest rate amortized over 30 years.
  8. So now John can have possession of the Mary house under a lease like any tenant. And he has an option to purchase the house for $250,000. And it’s all recorded just like the state’s recording statutes say you should.
  9. Third, John and Mary enter into a sublease (expressly permitted under the terms of the original lease) where in John (or his wife or other relative) sublet the John house from Mary for $1100 per month.
  10. So John now has rights to possession of the John house under a sublease. In other words, he doesn’t move.
  11. Fourth John and Mary enter into a sublease (expressly permitted under the terms of the original lease) where in Mary (or her husband or other relative) sublet the Mary house from John for$1100 per month.
  12. So Mary now has rights to possession of the Mary house under a sublease. In other words, she doesn’t move.
  13. Fifth, under terms expressly allowed in the lease and sublease, John and Mary SWAP options to purchase and record that instrument as well as an assignment.
  14. So now John has an option to purchase the home he started with for $250,000 and Mary has an option to purchase the home she started with for $250,000 and both of them are now tenants in their own homes.
  15. Presumably under this plan eviction or unlawful detainer is not an option for anyone claiming to be a creditor, wanting to foreclose. Obviously you would want to consult with a very knowledgeable property lawyer licensed in the appropriate jurisdiction before launching this strategy.
  16. In the event of foreclosure, even in a non-judicial state, would be subject to rules requiring a judicial foreclosure which means the pretender lender would be required to plead and prove their status as creditor and their right to collect on the note and foreclose on the mortgage.
  17. Meanwhile, after all their documents are duly recorded, John and Mary start paying rent pursuant to their sublease and stop paying anyone on the mortgages.
  18. Any would-be forecloser would probably have a claim to collect that rent, but other than that they are stuck with a house where they got title (under dubious color of authority) without any right to possession (unless they prove a case to the contrary — the burden is on them).
  19. If you want to slip in a poison pill, you could put a provision in the lease that in the event of foreclosure or any proceedings that threaten dispossession or derogation of the lease rights, the lease converts from a net-net lease to a gross lease so the party getting title still gets the rent payment but now is required to pay the taxes, insurance and maintenance. Hence the commencement of foreclosure proceedings would trigger a negative cash flow for the would-be forecloser.
  20. To further poison the well, you could provide expressly in the lease that the failure of the landlord or successor to the Landlord to properly maintain tax, insurance and maintenance payments on the property is a material breach, triggering the right of the Tenant to withhold rent payments, and triggering a reduction of the option price from $250,000 to $125,000 with the same terms — tender of a  note, unsecured, for the full purchase price payable in equal monthly installments of interest and principal.

Not much difference than the chain of securitization is it?

4closureFraud
www.4closureFraud.org

Comments
4 Responses to “How to Beat the Banks at Their Own Game – A Strategy Straight out of the Tax Shelter Playbook”
  1. rebelwithaclause says:

    I think it is so incredibly GENUIS, I love it, RUB IT IN THEIR FACE, now these are the type of people that could balance a budget.

  2. powerplay17 says:

    My only question to this process is determining if a “lis pendens” constutes a “notice of foreclosure to occupy the premises” as stated in the May 20, 2009 law, or is a lis pendens just a notice of pending foreclosure litigation?
    powerplay 17

  3. Keith says:

    “How to Beat the Banks at Their Own Game – A Strategy Straight out of the Tax Shelter Playbook”

    I HAVE DONE EXACTLY THAT, executed a 15 year lease, recorded it and I am waiting to see the results. I am in California.

    What gets me is why is there no one else talking about it if it is so effective? I have researched the law and as for as I can tell, the law is on my side, black letter law, and civil code. It is even mentioned in Obama’s “Helping Families Save Their Homes Act of 2009’’.

    I would like to hear from anyone who has had success with this defense. I am three months behind on my mortgage but no foreclosure yet so it has not been adjudicated yet.

    If you google the topic you will find countless articles by attorneys that support the defense.

    I did hire an attorney to help me with the documents but I have to say that I knew more than he did; I had to supply all the meat as he did not know squat about this. He did know how to draft a valid bonafide lease but short of that he was useless to me. Never the less, I got it done and it is as tight as a virgin as for as I can tell.

    I kind of think that one reason no one is talking this up is that it is so simple in reality. Because of that, I guess people think it won’t work and because it does not cost too much…well people think it has no value. I am just guessing as to why we have not heard more about it yet or more promotion of it. Neil did a good job of posting it but it seems no one has mentioned it any more. I may be the one of the first few guienna pigs. I long for the day to share my success with the world.

    Regards,

    Maverick

    ‘‘Helping Families Save Their Homes Act of 2009’’
    http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s896enr.txt.pdf

    read
    TITLE VII—PROTECTING TENANTS AT
    FORECLOSURE ACT page 29 through 30
    SEC. 702. EFFECT OF FORECLOSURE ON PREEXISTING TENANCY.
    (a) I
    N GENERAL.—In the case of any foreclosure on a federallyrelated
    mortgage loan or on any dwelling or residential real property
    S. 896—30
    after the date of enactment of this title, any immediate successor
    in interest in such property pursuant to the foreclosure shall assume
    such interest subject to—
    (1) the provision, by such successor in interest of a notice
    to vacate to any bona fide tenant at least 90 days before
    the effective date of such notice; and
    (2) the rights of any bona fide tenant, as of the date
    of such notice of foreclosure—
    (A) under any bona fide lease entered into before the
    notice of foreclosure to occupy the premises until the end
    of the remaining term of the lease, except that a successor
    in interest may terminate a lease effective on the date
    of sale of the unit to a purchaser who will occupy the
    unit as a primary residence, subject to the receipt by the
    tenant of the 90 day notice under paragraph (1); or
    (B) without a lease or with a lease terminable at will
    under State law, subject to the receipt by the tenant of
    the 90 day notice under subsection (1),
    except that nothing under this section shall affect the requirements
    for termination of any Federal- or State-subsidized tenancy
    or of any State or local law that provides longer time
    periods or other additional protections for tenants.
    (b) B
    ONA FIDE LEASE OR TENANCY.—For purposes of this section,
    a lease or tenancy shall be considered bona fide only if—
    (1) the mortgagor or the child, spouse, or parent of the
    mortgagor under the contract is not the tenant;
    (2) the lease or tenancy was the result of an arms-length
    transaction; and
    (3) the lease or tenancy requires the receipt of rent that
    is not substantially less than fair market rent for the property
    or the unit’s rent is reduced or subsidized due to a Federal,
    State, or local subsidy.
    (c) D
    EFINITION.—For purposes of this section, the term ‘‘federally-
    related mortgage loan’’ has the same meaning as in section
    3 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C.
    2602).

    • mike says:

      I know I’m a little late to this and I hate to resurrect an old thread, but I have to ask, how did this turn out for you? Did the strategy work?

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