Has Anyone Ever Invested Like This Before?
My broker is also my money maker. She sends out flyer to people in pre-foreclosure then when the people call her, she screens them and if it would be lucrative to me, she calls me. This is how I acquired my first houses this year. Here is how it works:
The person is in foreclosure for 115K
The house appraises at 175K
The broker tells the seller that for loan purposes that the asking price is 175k
I take out a mortgage for 175K
She has another investor invest the %down payment=26k
That makes my actual loan amount 148k
At closing the seller gets his 115k amount paid, the money investor got his down payment money back plus a fee, then I collect 26k. From that, I give the broker 5k for the finding it. Seeing how this is from the mortgage and will be paid back, the 21k is free money for my pocket. Now what do I do with the house?
Well, the sellers usually want to stay in them so they pay rent to me and in two years they buy back the property through land contract. They only pay the amount owed on the mortgage. Since, for us to do this, the house has to have a considerable amount of equity in it. Instead of waiting to collect at the end and pay taxes, I get to collect upfront and not have to pay any taxes.
The good thing is, I don't have to pay taxes but is this somehow wrong for the broker to be doing this? Or is this just another form of creative investing? Has anyone else invested this way before?
Thank Quinn
Make sure that all is disclosed to the lender on your application and the HUD-1completely outlines the transaction. Your broker may have a lender who has no problem with this transaction. I would like to know who the lender is for the first mortgage.
What your doing is called Bank / Lender Fraud and if they catch you you will do prison time. Yes it is against the law and its not unheard of for people to go to prison.
The second problem is that it is a very bad idea to sell the house back to the buyer ever. There are laws of usuary -of maximum interest allow to be paid for a loan.
If your buyer, which just happens to be your former seller, finds a lawyer and decides to sue you, after you sell the house back to them, you will expierence serious problems.
They will sue you for usaury. They will say they really didn't sell the house to you but the whole thing was a loan. Yes they will win and you will be out a large sum ( your profit ) of money and there will be penalties you will have to pay. Be Careful, Please!
Quote: Well, the sellers usually want to stay in them so they pay rent to me and in two years they buy back the property through land contract.
if they can't afford the mortgage payment, how can they afford the rent payment, and allow you to make a profit?
With the info at hand I'm leaning toward "3698"... You might want to give this a second thought.....
I haven't done anymore business with her because I wasn't sure about the whole set up. Now I only get my financing through her.
Couldn't she also get in trouble?
Quinn
Yes very much so.
Thanks guys for the input, I wish I had found this board earlier on. Like I said though, I'm no longer doing that type of business with her anymore. The property I just bidded on, feel good about because I don't feel any negative feelings about how I did it. When she got dropped in my lap by my friend who was in foreclosure, I was spanking brand new to this game and didn't know any better, I was just trying to help my friend out. The broker in no way told me that what was transpiring was wrong. I was glad I was walking away with some money. Now I know better.
Oh, By the way, The property I bidded on, the bid got accepted.
Quinn
I understand the issue of NOT "renting" to the former owner. But I don't understand where this gets into fraud.
It sounds like Quinn now has a mortgage to pay just like anyone else.
Doni49
Thats what I thought too, but I guess it's more involved than that.
quinn
Hi quinn
I here of people doing this all the time with the brokers help. I dont see why it is a problem since you are getting a loan on appraised value. It doesnt seem any more illegal than sub 2 in that you are not disclosing information to the lender. People use other peoples money to show downpayment all the time or they call it a gift. Be careful but the answer to your question is yes people invest this way all the time especially if the owner agrees. All these gurus who promote cash back at closing! Someone please tell me what they mean if they dont mean this way.
destiney homes, just listen to 3698, he is 100% right. We are a mortgage broker, so I know how things should work legally. If Quinn reports this borker to dept of banking and fianace in his states, she will definately lose her license, get fined, and get possible prison time (probably in federal prison). Just be careful, what you do. FBI is watching any fraudulant REI activities. We get calls from FBI from time to time to warn us about some indivials who are commiting loan fraud and they encourage us to contact them if we encounter anybody like that.
I don't see anything wrong with making money, as long as you do it in a legal way, and at the end of the day, you wnat to look at yourself in a mirror, and sleep well at night.
Just one of the problems for the loan broker as I see it. Please all mortgage brokers chime in here.
She has a customer come in wanting a way out of a pending foreclosure. I'll assume that the customer is trying to get a loan since they went to a mortgage broker.
Now, this customer has a $175K and only owes $115K. Borrowing only 70% LTV is about 122K, plenty to cover the old debt (and an easy loan to get even for shakey credit). However, she chooses to go with the method that you described above. What I see is a plain old fashioned scam going on here, and this is just one of the problems.
I too agree with 3698. Definitely would want some more info and disclosure going on here.
Roger
Loan fraud would be a valid complaint if the appraisal was off or something illegal was going on here. People refinance their homes all the time and get cash out. Its called a cash out loan. All the broker is doing is referring deals to you and getting a finders fee. And you are buying the property at market value. You are able to rent the property back to the original seller with the option to buy. Though I see you are doing a contract for land purchase. I would be careful about the agency disclosures and the lease purchase back to the orig. sellers. I sometimes do deals like this one. Sometimes I get a short sale from the lender, buy the property and L/P it back to the distressed sellers. Usury laws are applicable if you are a licensed lender. You would have to check your state laws as each state is different. Then again, I wouldnt do a sales contract with the old sellers right away. Give it a while, and let them RENT the property for a little while. Lots of things can go wrong. Alot of the answers could be applicable here such as a court could deem the whole thing as a loan back to the original seller. This could also become a problem if the orig sellers do a bankruptcy as the court will look at all the transactions immeditely done before the filing . Its possible the courts find the orig sellers were too distressed to make an adequate financial decision. Also with the amount of equity in the deal, the courts could deem that this equity could have been used to pay off creditors. This is the catch 22 where you have to be careful. Yes, the property was in foreclosure anyway so the white knight came in to save the day. But with everyone making a buck on this you have to be careful.
I would agree with others here. The broker in these transactions isn't acting as a neutral party. If anything, there is an obligation to the lender to disclose any gray areas, which certainly exist here.
As a loan officer/broker, your part is only to take an app, qualify the applicant, and submit the 1003 to the lender, basically. Other than advising the client on how to best obtain a loan, any other part that she/he puts together is illegal in this example.
She cannot act as an investor and a loan officer both. Investors have little regulations regarding state and federal responsiblities, while a loan officer/broker has plenty guidelines and regulations that are there for a reason. Working outside of these parameters can result in heavy fines, loss of license as well as being prosecuted to the fullest. The mortgage company that she works under (if any) also would be under scrutiny here, so don't think that if caught, the mortgage company will protect her because they won't.
Be cautious,
Beau[ Edited by bjsmooths on Date 10/20/2003 ]
So what about the deal is fraud, someone please specify? We all agree not to sell back to owner. Are you saying that you can not purchase property at 85% of appraised value? As long as the appraisal is correct why not? Isn't this what happens when you refinance, you get an appraisal which shows equity and then you pull out the equity? Or are you saying the loan officer shouldn't be helping her find property? Please specify what is illegal here?
Destiney Home, You really have to understand what they did, and believe me that was totally illegal.
First of all, they lied that purchase price was 175K to the lender. As you already know, no lender will lend you based on the appraisal value, if the appraisal value is higher than the purchase price. It is always lower of the appraisal value and the purchase price. The actual purchase price was 115K for this case. They obviously had two different purhcase contracts with two different prices on them. They gave a contract with the higher price to the lender, and gave one with the lower price to the closing attorney and the purchaser.
I hope you can already see that this is illegal.
The broker got her customer 85%LTV loan with private 2nd mortgage, but prive 2nd mortgage did not exist. They made it up. I guess 85% LTV was all her customer could qualify for, so she got 85% LTV 100% CLTV loan.
At the closing, the customer got cash back of 26K and paid the broker 5k. Destiney Home, do you still think it's legal. I hope not. You are not supposed to get any cash back at the closing, when you purhcase a property. The broker should not get paid out side of closing like that. Plus anything that the broker got paid should be listed on HUD-1, closing statement. Also, the mortgage broker is not a real estate agent, and he or she cannot collect any fee acting as a real estate agent to start with. Another thing she is doing in this case is taxabation. I bet you any amont of money that she is not reporting this under the table cash to the IRS.
So tell me you think it is illegal. If you are lending money to your brother, say who is buying school supply. He lies and says the school supply costs $50, but it is actually $40. He goes to Wal-Mart and buy it for $40, and pockets the rest. He gives his buddy $3 from $10 that he keeps. So he ends up with $7. Would you be happy about that?
Actually smileyface,
Two contracts are not submitted. At least I don't think there are. At closing the seller has the same forms in front of him as I have in front of me. I don't think the broker is telling the seller that I'm buying from him at 115k and then turn around and tell the lender the purchase price is 148k. I personally don't know what the broker tells the seller, probably something along the lines of " I have an investor who will help you out by buying your property from you so you can pay your debt off. I know for sure that she tells them that they(the sellers) can walk away with money. Thinking now, this may be the time she tells them that to do so they'll say the purchase price as such. Mind you, this is all speculation as I have no idea what she tells them but it sounds like it could be right.
The seller agrees so there is no deceit on that end. The seller knows everything.
I just wanted to add that in
Quinn
I too cannot see why this is illegal. I submitted the question to my attorney and we'll see what he says.
For this deal to work, there would have to be two contracts (at the very least one contract with a separate, undisclosed side agreement). One with the seller for the mortgage balance, and one presented to the lender for the mortgage loan.
I am sure that you can clearly see the loan fraud If the lender is mislead by the loan application that states the purchase price as $175K, when in fact the purchase price is $115K.
Actually, the loan amount is for 148k, the appraised value of the house is 175k. I know it's relevant but it was inaccurate.
Thanks everyone for pitching in on this, the more info I have the better my future tranactions can be. Most of all, the better informed I'll be.
Quinn
Here in California, you can go to jail if they find out but other states are very lenient.
Quinn, Dave T did not say anything about loan amount. He was only talking about the purchase price. We already know you only got 85% LTV loan based on your appraisal (or the made up purchase price)
I am a kind of worry that some people still don't think it is illegal. I hope they will not make the same mistake. Quinn, I am so glad you realized what was going on.
Do you have 1003 application and Good Faith Estimate that your broker gave you? Read them very closely especially GFE and page 3 of 1003. It should show the purchase price, private 2nd mortgage (made up 2nd mtg), and your loan amount.
Here is my email to and from my attorney:
Matthew:
It appears to me that you would run afoul of federal lending requirements that make it a federal crime to knowingly distort the terms of a real estate laon transaction. In other words, when using HUD and various other documents you are certifying to the lender that the purchase price of the property was $175,000.00. If in fact it was only $115,000.00 then I believe this would not be legal and could subject you to possible criminal penalties for bank fraud. I believe the relevant legislation is Title 18 U.S. Code Section 1001 and 1010.
Alex
"Matthew Youngs, Unity Homes and Rentals, Inc." wrote:
> Short question...is this legal to do? If not, why?
>
> The person is selling a house for 115K
> The house appraises at 175K
> The broker tells the seller that for loan purposes that the asking
> price is 175k I take out a mortgage for 175K
> She has another investor invest the down payment=27k
> That makes my actual loan amount 148k
>
> At closing the seller gets his 115k, the money investor got his down
> payment money back plus a fee, then I collect the rest. From that, I
> give the broker 5k for the finding it.
>
> Obviously this money is a loan and will be paid back but you get cash
> at closing that you can use for whatever.
>
> This is not a question of making sense for cash flow purposes or
> whatnot but simply a question of legality.
>
> Thanks Alex,
> Matthew
These types of dealings (and many deceptive contract for deed issues) have led to Texas's stingent and frustrating lending laws. You do not want this to happen in your state. Believe me.
Although a person may not be aware that they are doing anthing unethical with the law ignorance is no excuse for breaking the law. This is unfortunate but true.
You should have red flags go up when things seem too good to be true becuase they most likely are. Not always but most of the time.
There are so many persons just focused on the $ that they ignore the human and ethical elements.
MYfrogger,
Thank you so much for the info. Thats what I love about this site, you ask and you shall receive.
Seriously though, thanks alot all of you, I am seriously not trying to end up in prison somewhere, nor am I trying to start my business off wrong.
Thanks everyone
Quinn
Would never fly in California with all the foreclosure laws here.
[ Edited by doni49 on Date 10/25/2003 ]