Bailing in Vegas

It’s a morally dicey practice, for sure, but not one those with the means won’t consider. With Valley homes still losing value, those in severely underwater situations see “buy and bail” as a solution.

Now called “strategic foreclosure” by many, it works like this: While still having good credit and money for a down payment, an underwater homeowner looks for a second home, buys it and moves in under the guise that he will rent out the first or carry both payments. But here’s the catch: Our clever homeowner then lets the first home fall into foreclosure.

Taking the credit hit later is worth it, as the homeowner is trading an asset that’s priced right for a house burdened by an insurmountable debt load.

Of course, buy-and-bail practitioners should be concerned about legal ramifications. In Nevada, lenders have six months after a foreclosure to file legal action to recoup their loss. They’ll be looking for that stash of cash, other property, etc. If it’s there, they’ll want it. In the case of a short sale, lenders could have up to six years to collect.

But there’s plenty of buy-and-bail support out there. Lawyers and financial consultants can teach you how to “shield” assets from the banks.

Buy-and-bail was rampant in 2008 and 2009. Despite stern 2010 warnings from Freddie Mac and Fannie Mae that fraud charges would be filed, the practice continues. One in five foreclosures are likely buy-and-bails, according to a 2010 national report by Experian and the consulting firm Oliver Wyman.

Ironically, lenders screening new applicants for their so-called second homes also have little incentive to turn in buy-and-bailers. They have a far better likelihood of being paid back when lending on a lower-priced and accurately valued home, says real-estate attorney John Leach, the co-host of Las Vegas’ Homeowner Talk TV.

Meanwhile, the after-the-fact foreclosed home is another lender’s problem.