First up, the standard disclaimer: I am in no way, shape or form an attorney or tax professional. And you should seek the advice of both if you are even remotely considering buying and bailing.
“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!”
All true.
“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!”
Yet:
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.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Great blog subject Jay, it's definitely going on out there and once again these home owners need to be informed BEFORE rather than after the fact.
Thanks TJ! I fear many just dive into a Buy and Bail without considering all the consequences…
Jay, Stan Graham in his cont ed classes said he has spoke with the primary mortgage fraud investigator in the Phoenix area, and unless this is a repeat offender or the amount is substantial , like over $600,000, the FBI just doesn't have time to look into it. Right now they are reviewing cases from 2005, so they are quite backlogged as it is.
I'm sure they are backlogged. But I sure wouldn't take a chance on not getting caught just because there is a backlog. Fraud is fraud and is illegal, whether you get caught or not. I also have no idea what the statute of limitations on fraud is. There's no question many will get away with it. But some won't….
I wonder how many of these people lamenting that their house isn't worth what they paid for it- have they ever purchased a car? What happens when their car isn't worth what they owe on it (which happens about 100% of the time on cars)? If you're not trying to sell your home right now, and are planning on living in the house for the next 5-10 years, what have you really 'lost'?
An excellent point Dan…
If enough people start buying and bailing the FBI will start coming down hard as a warning to the rest. A few newspaper headline and late-night monologues later anyone thinking of buying and bailing are kowtowed enough to not even consider it. Similar to what happens with high profile tax evaders.
This was a great post Jay. I just had this conversation with another Realtor in my area and it seems that the FBI is starting to take action on this. Most people dont think they will get cought because the FBI doesnt have enough time to go check up on everyone, but it sounds like they are starting.
Hi Jay,
This is a big topic. I am not aware of any cases that have been prosecuted but that would be very interesting to follow. I think defense attorneys will start raising the question of the legitimacy of the original loan agreements. How many homeowners were induced to purchase and borrow relying on the integrity of the real estate and mortgage markets only to find themselves victims of massive abuse and potentially fraud?
I used to be a ‘pay your debts’…guy. No Excuses. But these are big circumstances with a large number of Americans that will never recover financially.
What should they do? What would you do?
A very fair question Bill. I too used to be a pay your debts guy. But sometimes it boils down to a financial decision. I understand the need sometimes for “strategic default”, but that’s different from “buy and bail”. It’s not fraud if I walk away from my mortgage. My mortgage was a contract to pay and the consequences of breaking that contract is the bank gets my home. If however I deceive another lender and purchase a new home, knowing full well I plan to walk from the first, then I’ve just defrauded that new lender. Now if my original lender happened to mislead/defraud me, then maybe that’s a different story… Its a complicated mixed up world we’re living in…
I’ve had a client tell me that is what they were planning to do and had to politely tell them to find another realtor.
I am so glad to see a post that highlights the unethical practices of mortgage fraud for those considering purchasing a new property and essentially leaving their old property to foreclosure. Although I understand the unhappy homeowners who are paying more than they feel their property is worth, a contract is a contract and it is essential (especially in this economy) to uphold that contract. The market WILL recover..it’s just a matter of time.
Shockingly, I am aware of several people who have done this when they relocate out of State for a new job. I am not so sure it’s not the best financial decision. I really could be.
Grant – it may well indeed make financial sense. It may well indeed also be committing a crime. Robbing a bank or selling cocaine may make financial sense too. I guess it all depends on the risk/reward the person is willing to tolerate, as well as their sense of morals/ethics.
It seems to be an individual’s prerogative to indulge in whatever variety of tomfoolery he or she wants to be involved with. Common sense says if you feel like you’re getting away with something, you probably are. It might be better not to.
“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.”
Am I overlooking something, or couldn’t you, well, just go ahead rent out the existing home?
Sure, the house could actually be rented out. But many don’t want to bother with the hassles of being a landlord or the expense of a property manager. And in the Phoenix market at least it’s unlikely that you’d get enough in rent to come close to covering the existing mortgage. So rather then face years and years of negative monthly cash flow, people consider buying and bailing…
My earlier comments were really more on the ‘Bail’ component of the topic (strategic default). I’m sympathetic to the millions of homeowners that find themselves victims of these circumstances. And while the market will recover eventually, for many it will take at least 10 to 15 (or more) years just to return to their original purchase values. That’s a lot of years paying well over the market rate for housing. I believe a good many people have a very bleak financial future as a result. Preparing for long term financial goals like a child’s education and retirement, while shackled to an underwater home will be very difficult. In my opinion, severely underwater homeowners should look hard at their financial circumstances and be prepared to make some tough choices with harsh consequences.
However, I fully agree that misleading a new lender to buy a home is mortgage fraud.
So while ‘buy and bail’ is bad news, I don’t feel as judgmental about ‘bail, rent, rent, rent and buy’.
“I don’t feel as judgmental about ”˜bail, rent, rent, rent and buy'”
Ditto.
True, and personal, story.
We bought our home in 1998 for $195K. During Phoenix’s ridiculous run up, could have sold it at the peak for about $400K. Now? We’d be lucky to get $160K for it. That’s less than the original owners paid for it in 1995.
We did *not* treat the home like an ATM machine with cash out refi after refi. We did refi once for lower rates and took a small cash out second to pay down some debt when we started our business.
My guess is it’ll be 15 years, at least, before we are back to even.
“Shackled” is a good word.
As badly as I’m sure your circumstances sting…the real tragedy is the poor family who bought your neighbors house for $400k only to now find it worth $160k. They are making monthly payments of $2700 on a house that can be purchased today for under $1000 per month(estimates only).
So…if this family pays $1700 per month over the fair market of the home for the next 15 years, they should be able to sell it without having to write a check.
That’s about $300,000 more than ‘bail, rent, rent, rent and buy’.
Integrity ain’t cheap.
I agree with you Jay, backlog or not, 30 years isn’t worth it. If you can’t stomach the loss in equity, take a credit hit for 7…FREEDOM
I look at buying a home like buying a stock. Sometimes the value goes up, sometimes it goes down. It is a risk you take. I get really pissed when I hear about the ones that bought at the height of the market but have cash on hand now so they go and purchase the same model or similar home in the neighborhood with cash at 1/2 the price they paid for their current home then just walk away. Where are these peoples morals/ethics? Buy and bail makes my blood boil.
They have no morals.
I finally understood what is “Buy and Bail”. I also agree with Jay but only in some points. Credit is not the exit, jayson.
Jay, i didn’t really know what that terminology really meant until you said ‘buy and bail’…i saw a segment on 60 minutes a couple of months ago that addressed it but didn’t go into the mortgage fraud aspect of it enough. That is what it is too…thanks for sharing.
Hey, Jay, I suppose we’ve been pretty fortunate here in central Texas. While our values are down somewhat, we have not experienced HUGE losses in value. Probably what we see more here in the Ft Hood area are active duty military that purchase homes and come up on orders to relocate. If purchased properly (which is not difficult in this market) the owner can fairly easily rent the home and at least cover the mortgage, if not be in a positive cash flow situation. I cannot imagine what many agents around the country are going through and being faced with a client that you know is planning to “buy and bail”. I am happy to see that many of the agents here are above board a nd would do the right thing. Sadly, there are all too many in our industry that will do whatever is necessary to make a buck. Sorry if I went a bit off topic, just a pet peeve.
Surprisingly the first time I have heard this term. Sounds like a really risky thing to do. On a side note here in the D.C area a lot of people hold some type of security clearance for their job, foreclosing or even short selling will put that clearance in jeopardy. Sometimes you just need to wait out the market and eat your losses. Follow through with the commitment you made to your mortgage company. I know it sucks but it is what it is.
This is the first time i have heard of this term also. Thanks for sharing!
It is fraud and the rest of us indirectly get stuck with the bill.
What about the guy that buys the second home based on rental income, rents the first home out for a year and then lets it go back. Has he committed fraud or found a way to out smart the system?
From what I have been hearing from buyers that are purchasing a second home, they are getting asked questions about why they are buying a second home. It seems that the underwriters have been made aware of people taking advantage of the system.
What about the guy who gets his mother-in-law or his wife(who isn’t on the 1st house) to qualify for the loan to buy the second house?
Good information!! I’ve seen the process take place to soldiers that are required to relocate. The home they own get’s rented, they move and buy a new house; renters leave, sometimes unexpectedly, months go with no new renters; foreclosure. Outcome the same but no intent to defraud. Intent has to be proven.
Jus sayin 🙂
Jay, this is a great article. I have a question though that I could use some help on. I am in a similar situation but am FULLY planning on finding a renter for my first home before moving into the 2nd home. I would like to keep a renter for as long as possible, and break even. What happens though if a a year down the road I can’t find a renter for 4,5,6 months and have to let the house go because I can’t afford to make payments on a house I can’t get a renter for? Will that be considered fraud? I want to try and get a 2nd home, and rent the 1st, but what happens if at some point I can’t continue to rent the first and have to foreclose on it?
No response on David’s question, above, Jay? That’s because, like most everything in life it is not black and white, it falls into a ‘gray area’. From what I’ve heard, if you’ve rented the home for a period of time, that shows your intention, and letting it go after losing a tenant isn’t something you’ll be prosecuted for. (Well, 99.something% chance, anyway)
But don’t ask Jay about that. Based on his July 7 response he thinks it would be the same as robbing a bank or selling cocaine.
I’m not sure where you’re getting that I’m equating buying and bailing with bank robbery or drug dealing David. Loan fraud can be a felony, but I’m not here to judge which felony is worse than another. I’m just trying to give people some things to think about.
As for the first David’s question, sorry, I didn’t see it. I miss comments every now and then. My response to him would, unfortunately, have to be, “I don’t know”. I’m not a lawyer, and I’m not intimately versed with all the nuances of the law. I would think intent would play a very large factor in all of this. What it takes specifically to demonstrate “intent” is what I can’t answer. You’re right, it’s not all black and white. Which makes it extremely difficult to answer specific questions like David’s.
Morals are only so important, and I spoke with an investor it's 100% legal if you don't lie! Just don't lie and you wont get in to trouble!
Hello. Thank you for this article. Buy and bail is not only being practiced by those who were unfortunate enough to purchase at the height of the market. May of these folks purchased well before the housing bubble and enjoyed cash out refinances, sometimes for over $100K at a time. They did not merely commit an unwise investment choice. By bailing they are effectively stealing as the cash they extracted to fund various lifestyle extravagances will never be recovered. Their neighbors (like me) are left to pay the price in declining neighborhoods. I’m curious, if you are aware of a case of such abuse (as some are keen to brag on it) is there any place to report this fraud? I am extremely weary of bearing the brunt of greed and entitlement and would frankly like to see some of these people at least suffer hefty fines to pause those who might follow in their footsteps.
I don’t think this article is helpful at all, I was wanting to find out how to rent my home and buy a new one.
Not the ‘premise’ of a buy and bail scheme, but the actual renting out of an existing home, so you can buy a new one.
The thing is, many of us wanted to sell our home and buy a new one, nothing sinister about it. I don’t really want to be a landlord – but I’m willing to consider it, if I have to. In normal times, we’d just sell our old home and move into a new one, but nowadays, you can’t sell your home for anything close to what you owe and without a stack of $120K, as you mentioned you are stuck. I’ve been living in a home 8 years now, that my wife wanted to sell 6 years ago, and still waiting.
What’s wrong with writing an article that is actually about addressing this problem?
Personally I’m sick of the moralizing, there is absolutely nothing wrong with trying to solve a problem that you have, and asking someone who might be an expert at the law, to not look for roadblocks, but to look for legal solutions.
You really took a pass on the problem, and got stuck on your high horse instead – useless.
YOU ARE PROBABLY ONE OF THE MANY REALTORS WHO TOOK ADVANTAGE OF PEOPLE TRYING TO BUY THEIR FIRST HOUSE KNOWINGLY THAT THE MARKET IS GOING TO TANK AND YOU HAVE THE AUDACITY TO MAKE A RIGHTEOUS BLOG ON BUY AND BAIL. GIVE ME A BREAK DUDE, YOU GUYS JUMPED ON EASY MONEY AT THE EXPENSE OF PEOPLE WITH REAL JOBS. YOU GUYS ME SICK