Investors Working on Foreclosure Deals: Avoid Fraud Suspicion – Disclose!

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The Attorney General for the State of Texas has issued numerous public warnings to homeowners facing foreclosure. The warning is simple really… “Do not sign the title to your house away to anyone claiming they can help.”

Those warnings hit me pretty good since a large portion of my business involves homeowners in pre-foreclosure. It is a common thing for an owner to deed me their house using a Warranty Deed. Furthermore, I make sure there is no possibility of fraud being involved. But the Attorney General has made it clear to NOT give up your title! Who is right? I say the Attorney General is right BUT, . . . I am not wrong.

Real Estate and Mortgage fraud are so rampant in Texas that issuing warnings to homeowners is just one step the state is taking to lessen fraud. I am not going to give the details of fraud cases that have prompted the warnings because I don’t like telling people how others committed fraud.

It is very bothersome to have to contend with homeowners when they bring the warnings up. A few less than honorable people out there make it difficult on the rest of us who go out of our way to comply with the law.

Stopping Foreclosure by Reinstating the Loan

In Texas, I teach investors how they can take over mortgages of owners in foreclosure by reinstating the loan. This is done by having the owner sign a Warranty Deed (giving me or an investor legal title to the house). The mortgage is left in place for the time being in the homeowners’ name. This stops the foreclosure for the owners, brings their loan current and once a new mortgage is obtained in my or an investors name, . . . it gives the homeowner a “paid mortgage” on their credit reports. That’s a great deal for someone who is days away from losing their house.

This plan actually leaves the owners in the house and does not increase their payments nor does it require any money from them.
This usually gets a lot of curiosity interest from investors wanting to know how it’s possible. However the purpose of this article is not to lay out the blueprint for the plan. The purpose is to show how to do legitimate business while staying away from fraud.

One major concern that surfaces when doing one of these deals where the mortgage is re-instated, left in the owners’ name and title is transferred, is the possibility of the Due on Sale clause coming up. Some investors say to put the title in a Land Trust but good luck getting a mortgage with the owners’ identity concealed.

How can you do such a deal while not raising any suspicion?

First off, I tell everyone (and I do it myself) to urge the owners to have all documents reviewed by a real estate attorney of their choice.

THEN… I contact the lender that is foreclosing and explain the entire situation to them. Tell them EVERYTHING!
I contact the Loss Mitigation department and ask to speak to a Vice President or the highest ranking person in the department. I explain to them that I would like to reinstate the mortgage and plan to have the homeowner sign a Warranty Deed as my security. Once the loan is brought current, I intend to get a new mortgage within the next 120 days (which will then pay that lender off entirely). I tell them that I am aware such action could warrant them invoking the Due on Sale clause (and they are quick to agree). I then ask them if my plan is acceptable to them and ask for their assurance that they will not exercise the Due on Sale if I proceed. To date, only one lender has told me they would call the loan if I did that.

To summarize the scenario:
The homeowners get to stay in their house, they are not required to come up with extra money to do this and the past due balance is wiped clean. They are able to start fresh with their payments. The reassuring part for the homeowner is they feel safe and secure with the deal because they know their own lender has given their blessing and in the end, there is no reason for them or the lender to suspect any fraud or wrongdoing.

The lender has no reason to question any part of the deal because they were informed up front and allowed to say yes or no. Most lenders are all for such a scenario because they go from nearly adding a house to their REO pile to being paid in full within a few months.

So the Attorney General is right to issue warnings of potential fraud. While at the same time, I am right to disclose everything to all parties involved in the transaction because if everyone is on the same page . . . there is no fraud and everyone benefits!

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  1. I agree, disclosure is always the safe way of conducting business, however I think it is also good business to know what you are bound to legally disclose for multiple reasons. Thanks for the informative article!

  2. I guess it just isn’t Texas that is giving warnings, because I heard a similar news story here in Atlanta this morning. People are wary now as fraud has happened with mortgages during the boom. Now people have their guard up during the downturn.

  3. “The homeowners get to stay in their house, they are not required to come up with extra money to do this and the past due balance is wiped clean. They are able to start fresh with their payments.”

    You mentioned getting the mortgage re-financed within 120 days. But the homeowners stay in their house, and start fresh with their payments. Have you or the investor carried the note, as owner financing, or are the homeowners no longer homeowners, and now renters? Explain please.

  4. I have seen a few reports about people taking advantage of homeowners through deed transfers. I hate to see more regulation. But I wonder if there would be a way to transfer deeds from a homeowner to an investor where it was regulated by the state or through a title company. That way we could get rid of the shisters but at the same time allow legitimate investors help homeowners in trouble.

  5. Rick,
    I didn’t mean to imply that they don’t ask questions. I was referring more to the homeowners who fall victim to fraud. You know the, “Sounds too good to be true” thing. Lease Options are so restricted in Texas now because of fraud. One case I heard about had a guy selling houses to people with a Lease Option. Collected the down payment & the works. Problem was…. He didn’t own the houses! How many people would check title doing a rent-to-own?

    Investor Girl:
    It’s not a re-finance. Its a new mortgage since the investor was never on the original mortgage. The homeowners would then become renters at their previous mortgage payment amount. Once the new mortgage is in place, the monthly cost to the investor drops and that creates instant cash flow. For the full scoop on structuring one of these deals… I invite you & the other readers to attend my 4-hour class in Dallas .

  6. I’m a little confused as to why people would sign their home over without asking some questions to verify whether or not somone can actually help them. This is similar to when I was looking for a renter, and a guy from out of the country was coming in for a year to work on a visa, and his company was going to pay for the rent. He sent a cashiers check and asked if I could send the ramining balance back. I constantly asked this guy questions to find out as much as I could but didn’t get enough to be satisfied, so I thought it best to keep looking for another renter.

  7. Thanks for explaining. What gets sticky is when the tenants are over their troubles in a year or two, and forget how they were rescued by you, and were able to stay in their house. It leaves too much room for them to say they didn’t understand the transaction. They will think they should still have ownership rights. Even with great contracts, and full disclosure, a sympathetic judge could rule in their favor. Things like that happen. Even though I try to help the homeowner in every way I can, I don’t structure a deal like that, with the previous homeowners becoming renters in their home, because of the way it opens you up for being accused of fraud.

    Just my opinion, I am sure you are just trying to make it a win/win for all.

  8. The problem with this article, as it is very informative in explaining how to do good business, is it fails to address the underlying problem of why the homeowners are in foreclosure status in the first place.

    Typically homeowners are in foreclosure because for whatever reason, they simply can not make the payments anymore. In such a case, a shortsale is probably the best solution to get the homeowner freed from the mortgage, the loan of the books for the bank, and (hopefully) a hugely discounted property for the exit strategy of your choosing.

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