We are amazed at all the schemes that have popped up in this devastating real estate market. So many homeowners are left wondering who they can trust now days. One of our clients who we are currently helping avoid foreclosure received a letter from a husband and wife investor team explaining to our clients that they were cash investors who wanted to purchase the house directly from them, mind you their property was already listed and on the market. Our client presented us with this letter; clearly we knew this was a scam. We are aware of some individuals/companies who say they are investors or will negotiate your short sale for you. It is along the same lines as described in the Foreclosure Rescue Scheme here is how this one has been seen:
•The company has a limited liability corporation that offers to buy the property for a very low price.
•They ask distressed homeowners to sign over their deeds of trust so they can negotiate their short sale on their behalf. What they are essentially asking people to do by signing away the deed is giving their home to this individual(s) while the homeowner is still on the hook for the defaulting mortgage.
•Meanwhile, other interested buyers also submit bids for the home, offering considerably more than the LLC's bid.
•But the dishonest company tells the seller (which in this case is the bank) only about the low bid from the LLC. It illegally keeps the other bids secret.
•Figuring that the LLC's offer is the best deal available, the bank agrees to sell for the low price just to get the home off its books.
•Then the company/agent immediately resells the house on behalf of the LLC to one of the other bidders for the house.
•Say the home's fair market value is $450,000. The agent and LLC persuade the bank to sell it for $400,000. Then the legitimate home buyer pays the agent and LLC $450,000, netting the agent and LLC a quick $50,000 at the bank's expense.
•A double escrow is happening here. These listing agents are not disclosing this fact to the seller, which is the bank, and the distressed homeowner who will receive a larger 1099(c).
Foreclosure Rescue Scheme
If you have fallen behind on your mortgage payments, this may seem like an attractive solution - but beware. A foreclosure rescue scheme often begins with a scam artist offering a promise to pay off your delinquent mortgage, allowing you to stay in the home as a renter with the option to purchase the home back when your financial situation improves.
But what really happens is a series of steps designed to cash out the equity in the home and disappear:
•As part of the "rescue," the homeowner will be required to deed the property to a new borrower who is often "investing" in a rental property, but who is really part of the scam.
•The proceeds of the sale pay off the delinquent loan and the new borrower removes all the equity in the house, never to be seen again.
•The distressed homeowner is now merely a renter in a home they no longer own, unaware that the new borrower is not making payments.
•When the new borrower defaults on the loan, the homeowner is evicted from the home.
Scam artists are very crafty and will often vary the scheme depending on the homeowner they are talking to, so be cautious. Some warning signs that a scam artist may be trying to set you up as a victim of a foreclosure rescue scheme include:
•Being approached by a stranger with an unsolicited "rescue" offer.
•Receiving an unsolicited call, mail or flyer about "foreclosure rescue" or saving your home.
•Participating in a complicated deal that you don't fully understand.
•Signing documents that have blanks or false statements. Regardless of what you are told, this is never okay.
Protect yourself from fraud. Scam artists are often very charming but beware of unsolicited offers of help. The best solution when you face financial difficulties that may endanger your home is always to talk to your lender or a reputable Realtor.
These 2 types of scams happen when a seller has equity, they are still good to be aware of:
Illegal Flipping
Flipping is a legitimate practice where an investor purchases a property in need of repairs or upgrades, makes the necessary changes to the property in a very short amount of time and sells the home for a profit.
We've all seen the TV shows about flipping and they're fun to watch. But there are scam artists who use flipping to make money illegally.
Often times, the scam artist will offer much more than the asking price of a home with a stipulation that the "surplus" amount over the asking price is given back to the borrower at closing.
At closing, the inflated value of the home will be attributed to home improvements that were never made. The scam artist will pocket that surplus money and default on the loan.
As a homeowner, especially one whose house has been on the market a long time, this may seem like an attractive deal but remember - falsifying documents is fraud.
Illegal property flipping with cash-out purchases
How can a cash-out purchase be used for illegal flipping?
One of the latest developments in illegal flipping is the cash-out purchase. In these instances:
•The buyer/borrower approaches the seller of the property and makes an offer considerably higher than the current list price.
•The offer will include a stipulation that the additional amount over the asking price will be given to the buyer/borrower at closing.
•The stipulation for cash back to the buyer/borrower will often be documented in an addendum to the purchase contract.
•An inflated value charged to non-existent home improvements will be used to support the inflated sales price.
For example, the seller lists the property for $150,000. The buyer/borrower offers $199,000. At closing, the seller will receive net proceeds on the $150,000 asking price and the surplus of $49,000 from the loan amount is disbursed to the buyer/borrower at or through closing.
Often, these types of loans end up as first payment or early payment defaults and most likely in foreclosure.
Where is cash-out purchase fraud most common?
There are two real estate market environments where cash-out purchase fraud is most prevalent:
•Markets where the housing values have experienced rapid appreciation. Those who perpetrate the fraud are relying on the actual value of the property to rise to the inflated origination value before the lender has foreclosed and detects the inflated value.
•Stagnant, even slowing markets, where the property is on the market for an extended period of time. The longer the property is on the market, the more nervous sellers become and are more likely to agree to a cash out purchase arrangement.
What are the 'red flags' of cash-out purchase fraud?
Although challenging to detect, there are a few red flags to look for when reviewing mortgage files:
•The home may have been on the market for an extended period of time
•The sales contract may have been modified or may include an addendum regarding the payment to the borrower
•The appraisal may include red flags symptomatic of inflated value
•Many of the same red flags that accompany a traditional flip also apply to cash-out purchase fraud - straw buyer, false source of funds and false occupancy
•The preliminary HUD-1 Form may already indicate a portion of the net proceeds going back to the borrower
When any of these red flags surface, it is important to review the file more closely.
•Ensure that the borrower truly has the represented funds to contribute at closing; borrowers involved in flipping typically do not
•Take advantage of on-line real estate listing tools or contact the listing agent directly to verify the listing history on the property. Instances where the sales price is markedly higher than the list price are cause to ask more questions and to look harder at the appraisal itself.
Distressed homeowners, you are getting phone calls, email blasts or mailers promising that these companies or expert agents can get you out of your situation beware. We even encourage homeowners who reach out to us for assistance to fact check everything its about full disclosure, being transparent. Do not just go with the first agent or company immediately who you just sat down with if they pressure you into signing a contract of any sort. There are so many issues that need a thorough investigation ie; do you have a verifiable hardship, what type of loan did you take out on your property, is your loan acquisition indebtedness, is this your primary residence, is there PMI, lender MI or MI, is this a private investor who now holds your note? This is just the beginning of the extensive check list Gary and I go over at our consultations. You cannot afford to gamble with your financial future, now is the time to get on the road of recovery. Always ask for references from past clients call them, and speak to your CPA for any potential tax ramifications.
My husband Gary and I are Santa Clarita's Certified Pre Foreclosure Specialists, PSC with a Certified Distressed Property Experts designation, CDPE. By dealing with Realtors who have earned the PSC and CDPE designations, you are working with experienced pre foreclosure specialists that are equipped to handle your specific needs.
With both Gary and I coming from a law enforcement background we have the skills necessary to deal with your banks loss mitigation/home retention departments. We have a system and team in place to access a your situation and give you an honest confidential evaluation to see what can be done for you. Our goal is to keep you in your home, but if this cannot be achieved then you know all avenues have been exhausted.
Just remember the old adage 'if it sounds to good to be true it is'.
