There is no question that it is very, very difficult to see people moving into your neighborhood buying your same house with better upgrades for half the price. It can make your blood boil. And then you find out that they bought this new home at half the price while they still owned the first house that was completely underwater and now they are letting the first house go into foreclosure. This is crazy. This is Buy and Bail.
Buy and Bail is really just strategic default planning. The current home no longer makes financial sense and I need a roof of my head. And, oh by the way, it looks like a good time to buy. This is absolutely fine.
Buy and Bail is a problem if you commit loan fraud in the process. In 2008, the government tried to crack down on Buy and Bail by banning the use of rental income from an existing home to qualify for a new mortgage loan unless the first property had at least 30 percent equity. Unfortunately, recently, we are seeing many new instances where rental income is being allowed with no equity in the existing home.
If you tell the new lender or agent of the new lender i.e. mortgage agent that you are going to rent out the old house, but really don’t intend to rent it out, you have a problem. If you say that rent on the old place will conveniently be the same as the mortgage payment, but you know that rents in the area are only one half of the mortgage, you have a problem.
Buy and Bail is a problem if you have junior lien(s) on the old house that are recourse loans i.e. they were not the original loan or loans used to purchase your primary residence. If you have recourse debt and don’t qualify for bankruptcy, you will be stuck with the debt. If you qualify for bankruptcy, the new home loan payment may be so low that you do not qualify for a Chapter 7 and will be stuck in a Chapter 13 for 3-5 years paying back some or all of your creditors.
Buy and Bail is a problem if the foreclosure or short sale of the old home leaves you with tax liability. Every transfer of real property is a taxable event. There is no free lunch with the IRS and State Franchise Board. If there was cash out or accrued interest on the old home, you will need to know whether you will have any tax liability if the property is later foreclosed or short sold.
Buy and Bail is a problem. It is very tempting, but it can end up very bad. Remember, if something sounds too good to be true, it is! A Buy and Bail may put you in the middle of the ocean without a paddle. Don’t do it. If you are considering a Buy and Bail, seek legal counsel prior to proceeding. Buy and Bail has serious consequences which should be analyzed by a bankruptcy or real estate attorney prior to commencing the purchase of a new home. This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make an analysis of your particular situation fairly quickly. I see people for a free 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.
WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.