CREATING Money Out Of THIN AIR!
Hi folks,
I have been pondering an interesting (and STRANGE) idea.
What would happen if an investor specializing in sub 2 deals decided they were going to sell the property to the buyer (a very risky buyer at that) right away, instead of going through the standard "lease, then qualifiy Buyer" procedure for conducting these transactions?
But Thats not the interesting part. The interesting part arises when the investor decides to hold 2 notes, and discount the 2nd to cash out the equity in the property.
So... WHEN the property goes into foreclosure, and the 2nd is dismissed... Money is actually CREATED! the investor gets his original property back, INCLUDING any increase in value it may have accrued, PLUS the remaining equity in the home! Now, granted, the cost of a foreclosure will reduce the equity about 5% (or up to double that value, depending on appreciation and time off the market). But the numbers still work! Here is a sample calculation:
Investor sales home for FMV of 100,000
50,000 owed on mtg
2nd note created for 33000 (83% LTV)
2nd discounted for 28000 (Cash out at front of deal)
Foreclosure after 2 yrs, 3% annual appreciation, new FMV of 107,000
60,000 now owed to you
get back house, sell for 107,000 (conventionally)
2nd dismissed
47,000 Cash out at end of deal
That is a total payoff of 75,000 dollars from both sides of the deal, on a house that only had 57,000 of potential on the back side of the deal after 2 yrs! that sounds like the creation of money to me! but I'm sure there are laws against it, or people would be doing it all the time. Ayone have any ideas as to the feasibility of this scenario?
-Brandon Richardson-
Brandon:
Nice scenario but IMHO the REALITY IS:
BANK FRAUD after it is construed that YOU the REI orchestrated a "FLIPPING-Scheme" to INFLATE the REAL MKT VALUE for the purposes of PROFITING on the likliehood of your new Buyer's potential foreclosure.
Not to say that this IS your original intent---ONLY How the REI HATERS out there can (AND DO) turn this around to STICK TO US FAT CATS...
So take caution in all you do so as to INSURE AGAINST DeFRAUDING a Govt INSURED Len der or ANYONE ELSE for that Matter.
Best of Success to You!
Derrick Ali
I would say play fair and ethical. Otherwise you might not like the results to the satisfaction you hope to obtain.
So high risk people do not deserve a place to stay or acquire a mortgage according to banks, lenders, etc... I do not condone illegal activity but I question to true extint of breaking the law.
Person with risky credit, credit counselling, and maybe even foreclosed in the past approaches you on a property. You say sure I'll offer you inhouse financing for X years, continue with the rest of the agreement (etc.). Tenants income came meet payment criteria and you continue with closing the deal. Later down the line things get bad, they foreclose, you sell property free and clear.
At what point is this illegal? Why even?
Hey Look you want to stay far away from the sinking ship as possible................take the best lifeboat ie the house and typically do not go with the sinking ship with holes in it and rotten to the core...........the old owner
Take that lifeboat and get away from the big ole rotten boat before it sinks and takes you with it!!!
I stay way from the distressed owner as much as I can.
Do the deal then get away ASAP.
These are usually people you do not want to be in a contract with> others think it is fine.....and sooner than later end up with problems......go and read about the poor couple here that needs help cuz the Attorney General is now after them when a disgruntled owner now reported them to get even for whatever!!!
Just like Kobe and all the silly B-Ball players should have had their flings sign a sexual intercoarse consent agreement dated and time stamped just 1 minute before they jumped into the sack.
Do the same to protect yourself!!!!
I do.
SKI
I do agree with you ski. I dont believe I would actually partake in the transaction I stated. Theres just something that doesnt seem right about it... BUT it is an interesting loophole (or PIT) neverthless.
-Brandon Richardson-
Richar18:
Quote:"Theres just something that doesnt seem right about it "
My POINT EXACTLY!!!!
Never Do ANYTHING You DON'T FEEL RIGHT ABOUT!!!
What shouldn't feel right about that situation, is the fact that the person/company that bought the discounted second, now has nothing except a negative entry in the checkbook, and a worthless piece of paper. That could be the same private lender or HML that you are courting to use on your next deal.
The Money doesn't come out of thin air, It may be taking groceries off someone elses table.
Just My Two Cents,
Jeff
youre 100% correct, Jeff. I agree in full. Not an ethical situation, Is it?
-Brandon Richardson-
If its a sub to and the first is in the sellers name how do you get a second with a messy title like that?
Who pays over 50% on any second?let alone one with no seasoning.
Do you include the fact to the loanholder that your plan is to have the bank forclose on there credit?
Sorry if this post has me confused I dont understand what is so bad about traditional CRI
If you plan on doing this more than once or twice you REI career will be quite short lived. As a seller you will get labled and no investor will deal with you. You sell one or two seconds that go bad might as well pack up you bags and take off.
Why would you work this hard to get in trouble with possible fraud when you can work just as hard to do this the right way.
My two cents and you can keep the change,
Sire
I agree. To let you guys know... I was simply pondering the scenario... was NOT thinking of actually doing it! If one doesnt conduct business in a truthful and ethical manner, all he/she can expect is failure in the end.
-Brandon Richardson-
ILLEGAL FLIPPING = FEDERAL PRISON
Excerpt by - PATRICK CROWLEY
"Neighborhoods can become victims of fraud in the mortgage industry," said Gregory G. Lockhart, United States Attorney for the Southern District of Ohio in Cincinnati, in a written statement.
"Such fraud often prevents neglected properties from being repaired and drives up the costs for honest and hardworking homeowners."
Federal prosecutors and law enforcement agencies have launched a crackdown on an alleged mortgage flipping scheme in Southwest Ohio.
On July 22 a team of law enforcement agents led by the FBI raided five mortgage-related businesses and an individual's home and vehicles.
Neighborhoods can become victims of fraud in the mortgage industry," said Gregory G. Lockhart, United States Attorney for the Southern District of Ohio in Cincinnati, in a written statement. "
Such fraud often prevents neglected properties from being repaired and drives up the costs for honest and hardworking homeowners."
Agents did say that the warrants were part of an ongoing investigation into flipping, a practice that can be legal but one that can also be at the heart of a mortgage fraud scheme.
TO READ MORE GO TO:
http://mortgagedaily.com/FraudOhioInvestigation082903.asp
I Hope This Helps...
Derrick Ali