“Buy and Bail” is the term commonly used when one purchases as new home and then “bails” on their existing home.
Let’s say you, unfortunately, bought your home at the peak of the Phoenix real estate market. You paid $300,000 for your lovely abode. Now you consult your trusty real estate professional about selling your home and find out that you will be lucky to get $180K for it.
“What are my options?” you ask your Realtor.
“Well, you could try a short sale (getting your lender to accept less than what is owed). Or you could bring a sack of bills totaling $120,000 to the closing table to make up the difference. You could also walk away and let the lender foreclose.”
“But I can afford my house, I just don’t want to make payments on a home worth barely half of what I paid for it. So a short sale isn’t really an option. And I don’t happen to have one hundred and twenty thousand dollars stuffed in a mattress, or in the bank for that matter. And if I walk away or short sale, I won’t be able to buy another home for several years!”
“Hey! I can qualify for a mortgage on a new home while I keep my current home. What’s stopping me from buying a new house and then just foreclosing on the old one?”
That would be Buy and Bail, Jump and Dump, Switch and Ditch.
What might be stopping you from buying and bailing is that many consider it mortgage fraud. If you lie on a mortgage application ”“ ie: claiming you are going to rent out your existing home when you know full well you are not ”“ then you are quite likely committing mortgage fraud.
Which, according to the FBI, is punishable by up to 30 years in federal prison, or a $1,000,000 fine. Or both.
I don’t know about you, but I have zero desire to spend the next 30 years in the federal pokey, and/or writing million dollar checks.
“But Jay, I know people that have done this, and nothing has happened to them!”
I don’t know O.J. Simpson, but I’m pretty sure he got away with murder. That doesn’t make murder acceptable, nor does it mean you would get away with it.
If you are pondering a Buy and Bail, the only advice I can offer is this: Seek legal counsel. In addition to legal implications, there are also potential tax implications, so you should talk to a tax professional as well. Do you want the FBI and the IRS crawling all over you?
For additional information, here is a great article on Buy and Bail from a California attorney’s perspective.
Here’s some information directly from Fannie Mae:
Buy and Bail Characteristics
The homeowner is current on the mortgage, but the value of the home has fallen below the amount owed, so he or she
applies for a purchase money mortgage on another home. After the new property has been secured, the buy and bail
borrower will allow the first home to go into foreclosure.
* The borrower defaults on the original mortgage shortly after purchasing a second property
* The borrower will be a first-time landlord (renting out the original property)
* The borrower has minimal or no equity in the original property
* Inability to validate lease terms with the purported tenant
* Purported tenant has a pre-existing relationship with the homeowner
Photo Credit: petercastleton on Flickr. CC Licensed.