HUD Purchasing Fraud and Skirting L/O's in TX

As my profile says, I love to spread knowledge to whoever will listen. I've gotten email from several people recently inquiring about HUD foreclosures, the owner-occupied only (OOO) period, and investors. To clear up a lot of confusion, I thought I post what I know about some of the legal issues when dealing with HUD foreclosures. In the second part, I'll give some tips I received from http://LeaseOptionLoopholes.com on how to navigate around the recent legislation that was passed into law in Texas (ONLY!) that makes L/O's downright next to impossible to implement anymore.

HUD Foreclosures
First, when HUD lists a property for sale, the first 10 days are what is known as the owner-occupied only period (OOO). If the property does not sale within those 10 days, it then goes into a "GEneral, All Purchasers" stage whereby anyone can submit a bid on it. During the OOO period, HUD puts stipulations on the buyer. One stipulation is that the purchaser must declare (in writing) that they have NOT purchased a HUD home in the last 24 months. The second stipulation is that the purchaser must state they fully intend to occupy the property as their primary residence for the next 12 months. The key word is primary, which means no investment property (i.e., rental or L/O). According to this article (pdf), if a person misrepresents this information (IOW, buys the property and sells it within 12 months), they can be fined up to $250,000 and/or spend two years in jail. Even with these stiff penalties, some investors still feel the need to commit fraud so they can one-up the competition. Sounds pretty risky to me. One other thing to note is since you must go through a qualified broker/agent to submit an offer on HUD foreclosures, the broker/agent can also be in deep trouble for submitting offers for people who plan to flip the property within 12 months (like losing their license, paying a fine, and/or spending time in jail). I hope anyone that knows of a person (or persons) who commits this fraudulent act will do the right thing and report the incident to HUD immediately. Investors are already getting a bad rap from the media and lobby groups - we don't need unscrupulous investors feuling the flames anymore.

Lease Option Loopholes
Due to the recent bill signed into law by Gov. Rick Perry of Texas, lease/options are now considerd an executory contract, and, as such, have pretty much outlawed doing L/O's in the state unless the property has no liens/encumberences (IOW, you own it free and clear). But with any piece of legislation, there are ways of working around the issue. A couple of people decided to take a hard look at the law and decided there were ways of doing likeable strategies while still staying within the boundaries of the law. They put up a website called LeaseOptionLoopholes.com to spread their information. When I subscribed, I received six emails over the span of 7-8 days with a technique to use to get around the new legslation - LEGALLY. The emails suggested spreading the word out to other investors, so I don't see my paraphrasing their content as infringing on their copyrighted material. If so, and they find out, I will gladly remove this portion of the post.

Part #1: Doesn't discuss any technique, but just says how the new law has rallied investors in the state to lobby future bills that could harm investors.

Part #2: Do Lease/Options out-of-state.

Part #3: The new law states a L/O involves and optoin to purchase real property. Using a Land Trust, however, the beneficial interest is personal property (not real property). Therefore, give you TB an option to buy the beneficial interest in the land trust that holds title to the property instead of giving them the option to buy the property itself. This sounds logical to me, but I wonder what a judge would think?

Part #4: Use owner-financing with a wrap around mortgage.

Part #5: Since the law allows 180 days to deliver the deed to the property before the agreement is considered an "executory contract", you can structure the deal in such a way that your option agreement is not effective until your tenant is ready to buy. Just allow them to simply lease the property until that time and you will be in compliance.

Part #6: Since TB's usually don't exercise their option to buy at the end of a L/O, investors are really quasi-landlords. Adding a few clauses to your rental agreement and making it a rental will help out. Such as making the tenant more responsible for maintenance, giving your tenant the right of first refusal, and making the security deposit non-refundable.

The actual techniques are discussed in more detail. I would advise anyone who is curious about these techniques to subscribe to the mailing list on their web site. To date, I have received ONLY these six techniques and no other spam/offerings from them.

Disclaimer: I don't condone nor advise these techniques. I am posting for educational purposes only. I give no warranty - express or implied - to the effectiveness or legality of these techniques. Please consult a RE attorney before engaging in any transaction involving these (or other) techniques.