Another Tenant Falls Victim To Equity Skimming, Foreclosure

In Tennessee, a Seymour couple who had paid nearly $30,000 under a lease with an option-to-buy contract for a small commercial building from which they started and operated a fitness center business, and who claim that they personally increased the value of the property by running a successful and prominent business and by making capital improvements, reportedly investing well over $200,000 into the property, expect to be evicted from the premises tomorrow by the bank who recently foreclosed on the premises, according to a story in The Daily Times.

The total purchase price on the arrangement was to be for $212,000. Four months after signing the lease, and unbeknownst to the couple, however, the then-property owner took out a mortgage for $560,000 on the property and, shortly thereafter, defaulted on his mortgage payments. The couple unwittingly continued making the lease payments to the owner, and the owner continued skimming the equity in the property by pocketing the rent without paying on the recently-obtained mortgage. Reportedly, the lease-option contract stated that the agreement was “subordinate to any existing or future liens against the property”, thereby allowing the property owner to get a new mortgage on the property, with the mortgage having legal priority over any rights the couple may have had in their leasehold interest (and thereby allowing for them to legally "have the rug pulled out from under them").

For more, see 'Forced out of business'.

For posts on other stories of tenants unwittingly renting homes in foreclosure, go here and go here, and go here. alpha

Postcript

While this story involved a lease of commercial property, it nevertheless serves as a cautionary tale to residential tenants renting homes and condos. With all the residential property currently in foreclosure, I expect to see more and more "lease-option" scams, where a real estate investor facing foreclosure (or a "professional equity skimmer", for that matter) (1) purports to lease-option a home to an unwitting tenant, (2) pockets a significant amount of upfront cash for the option, (3) "squeezes out" as much monthly rent as possible without paying the mortgage until the mortgage lender finally forecloses, and (4) leaves the tenant "holding the bag."