I’ve never been one to really shy away from controversy and I guess this subject proves this to be so. I feel strongly that there are many dubious practices in investing that should be carefully investigated before one jumps in with both feet. I respectfully make the case for two practices that should not be commonplace for an investor. I look forward to your comments and opinions!
There are two practices that I see that have taken root in our industry that I think should be addressed and paid close attention to. Although neither are necessarily new, they seem to be growing in practice and commonality.
1. Mortgage assignments: “Sell an un-sellable house to an un-loanable buyer”
Shouldn’t that tag line alone make one question the strategy? The premise of this niche reeks of the Clinton era (and continued on by Bush) National Home-ownership Strategy of ’94 and the belief that every American has the “right” to home-ownership.
The idea of this strategy is simple: Take a home that has issues selling, usually because the homeowner is upside down, and find a buyer who can’t qualify for a loan to purchase.
Bringing the two together should be the perfect union and everyone lives happily ever after right? The motivated seller has gotten out from under his mortgage, the unqualified buyer has a home, and the agent/investor walks away with a nice pop and no money out of his or her pocket.
All things that glitter are not gold! Sorry, but this sounds like a recipe for disaster and one of the reasons for the housing market bubble burst. Taking an unqualified buyer and putting them into a home where they are already upside down seems to be at best unethical. Furthermore, you’ve now created a false market value for the property as in these situations the initial home-owner was already underwater, yet the home has “sold” for what the home-owner owes, not at a fair market value.
I know, I know, I hear the comments coming already, “But we’ve saved the homeowner from foreclosure!” We’ve made home-ownership possible for the one who wouldn’t otherwise have been able to purchase!” Yes, but at what cost? What happens when the unqualified buyer (possibly) defaults on the loan? What if that family needs to move in a couple of years? Isn’t it irresponsible to put someone in a home that they will be instantly underwater in? Having said all of that, I do realize this system can work and I am not calling it a scam. I personally know of individuals who have benefited from this system. I also know of people who have been burned. Is it worth the risk? Could you as the investor/agent walk away with the cash in your pocket from the transaction and feel that it was a good deal for everyone? If the answer is yes, then good for you and job well done. As investors, we have a great responsibility and must never become so desensitized that we forget those around us who are also affected, for better or worse, by our choices and methods.
2. Wholesaling With No Access to Funding: Putting the Motivated Seller at Risk
Let me start off by saying our investment company loves wholesale deals. Reduced risk, quick turn-around for a profit, and no money required makes for a happy day! However, there are some very common wholesaling practices that are borderline criminal. Inking a contract with a home-owner without a definite exit strategy and WITHOUT clear explanation (disclosure) to the home-owner… well, that is a very fine ethical line that an investor should be careful to walk.
Let me give you a real life story as an example: Our investment company received a lead from a homeowner who was behind on their mortgage but had good equity. When my husband had finally connected with the seller, he was too late. Another investor had already made an offer that they accepted. My husband had that weird gut feeling and told the homeowner, “Ok, but if for some reason they back out, keep my number.” Sure enough, a couple of weeks later we get a call back from them saying the investor had insisted on an “inspection” period, to enable him to find an assignee, unbeknownst to the home-owner. The investor couldn’t make it happen and backed out.
Here’s the problem: That investor did not communicate to them his plan. He wasted their valuable time, and the home-owners were now facing foreclosure in 3 weeks. This added fuel to a fiery trial for these people. It took their situation from bad to worse, and put an immense amount of pressure on them as their foreclosure date loomed. Fortunately, we were able to come in and purchase the home before it reached the court house steps.
You can say anything you want about a home-owner needing to do their homework before signing a contract, but let’s get honest. Most of the home-owners we deal with are not experts on contracts or how a real estate transaction works. Often they are in desperate situations where time is of the essence. I am advocating a real and honest conversation between the investor and the home-owner so that they understand the risks involved and how the process works. Using your real estate knowledge to mislead a homeowner is not only unethical but can also be considered illegal depending on your business structure. Disclosure is always your best choice.
Realtors, inspectors, and mortgage brokers are bound by a code of ethics. Real estate investing isn’t necessarily bound by a governing body regarding ethics but it should be just as important. All are required to use practices that are legal. But I would like to stress there is a difference between legal and ethical. One is required by the authorities, the other comes from moral principles.
Doing what is right is more important than doing what is right to make money.
Interestingly enough, one of the most popular key words/phrases we’ve seen come up in our internet marketing and research is, “we buy houses scam“. There have been those that have gone before us that have given real estate investors a bad name because of practices that were questionable. There are plenty of deals to be had out there by doing things the right way. Don’t let fear dominate you or your business. In handling every deal with honesty and the desire to do what is right, you will never go wrong.
Photo: Matthew WilkinsonTwo Real Estate Investing Practices To Avoid by Katherine Grote