Avoid foreclosure rescue schemes at all costs - here is what to look for

Buying & Selling Real Estate
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Avoid foreclosure rescue schemes at all costs - here is what to look for

Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes


What is a foreclosure rescue scheme?

A foreclosure rescue scheme is a type of fraud that takes advantage of homeowners who have fallen behind on their mortgage payments. The fraud perpetrator approaches the homeowner with promises of paying off the delinquent mortgage and helping the homeowner stay in the property.

How does a foreclosure rescue scheme work?

The most common foreclosure rescue scheme unfolds when a homeowner receives a solicitation in the mail that promises short-term financing from a 'private investor' offering to pay off a delinquent loan:

  • The homeowner is told they can stay in their home and rent back from the 'investor'
  • The homeowner is convinced to transfer the title of the home to the 'investor' as collateral. The 'investor' promises that the homeowner can continue to live in the home and repurchase it later or promises them new financing. If the homeowner is promised new financing, a straw borrower will then be involved.

What happens to the homeowner?

At closing:

  • The homeowner deeds the property to the straw borrower, relying on the false promises made by the ‘investor’
  • All proceeds are used to pay off the defaulted loan
  • The homeowner walks away with nothing
  • The 'investor' pockets the equity and runs
  • The straw borrower defaults on the loan
  • The homeowner is evicted, loses the house and all equity

There are many variations of a foreclosure rescue scheme. Some schemes require the homeowner to unknowingly transfer the property title to a third party. 

** Other schemes will promise homeowners that if they transfer the title, they can continue to rent the home and repurchase it at a future date. 

The purchaser of the property, sometimes the foreclosure rescue artist, is now free to refinance the property or to sell the property to another party. Sometimes the foreclosure “rescuer” charges the borrower high 'service fees' up front and then disappears with the money without providing the promised service.

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  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    1y

    I am not able to determine your purpose in posting this, since you did not also offer solutions for the seller or for the investor.

    The situation does not unfold when the homeowner receives a solicitation, as the article mentions...it begins when they are late paying their obligation to their lender.

    There is a timeline to a bank beginning foreclosure. Typically when the homeowner is 90 days late on a mortgage payment the bank may issue a notice of default. Depending on the State in which the property is located, foreclosure starts through a judicial process or a non-judicial process. 

    It may be possible for the homeowner to talk with their lender's workout department and negotiate terms to pay off the arrears, penalties and late fees on a new schedule.  Perhaps the homeowner can turn back the deed to the mortgage holder, in lieu of foreclosure.  This prevents the foreclosure from damaging their credit for years, but also does not return equity.

    The homeowner may consider selling the house on the MLS or FSBO. And they may consider selling the house quickly to an investor, who picked up on the process at the NOD stage, mailed a marketing piece, to which the homeowner responded.

    There are opportunities at several stages here, for the homeowner.  Also, people who are motivated to sell quickly may find there are buyers who want to buy quickly, and at a discount.  

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  • Ken M.
    OP
    Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
    1y
    Quote from @Kerry Baird:

    I am not able to determine your purpose in posting this, since you did not also offer solutions for the seller or for the investor.

    The situation does not unfold when the homeowner receives a solicitation, as the article mentions...it begins when they are late paying their obligation to their lender.

    There is a timeline to a bank beginning foreclosure. Typically when the homeowner is 90 days late on a mortgage payment the bank may issue a notice of default. Depending on the State in which the property is located, foreclosure starts through a judicial process or a non-judicial process. 

    It may be possible for the homeowner to talk with their lender's workout department and negotiate terms to pay off the arrears, penalties and late fees on a new schedule.  Perhaps the homeowner can turn back the deed to the mortgage holder, in lieu of foreclosure.  This prevents the foreclosure from damaging their credit for years, but also does not return equity.

    The homeowner may consider selling the house on the MLS or FSBO. And they may consider selling the house quickly to an investor, who picked up on the process at the NOD stage, mailed a marketing piece, to which the homeowner responded.

    There are opportunities at several stages here, for the homeowner.  Also, people who are motivated to sell quickly may find there are buyers who want to buy quickly, and at a discount.  

    I didn't write the article. That comes directly from the Freddie Mac website, unedited. ;-) By the way, that is not the whole of the article. There are additional things to avoid.

    My purpose for bringing this to the attention of investors is because there are misguided gurus out there teaching these very techniques. How do you think that will end up? ;-)
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  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    1y

    I think it is best for me in my situation to use an all cash offer, and I don't rent back to distressed sellers.  

    2Reply
  • Ken M.
    OP
    Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
    1y
    Quote from @Ken M.:


    What is a foreclosure rescue scheme?

    A foreclosure rescue scheme is a type of fraud that takes advantage of homeowners who have fallen behind on their mortgage payments. The fraud perpetrator approaches the homeowner with promises of paying off the delinquent mortgage and helping the homeowner stay in the property.

    How does a foreclosure rescue scheme work?

    The most common foreclosure rescue scheme unfolds when a homeowner receives a solicitation in the mail that promises short-term financing from a 'private investor' offering to pay off a delinquent loan:

    • The homeowner is told they can stay in their home and rent back from the 'investor'
    • The homeowner is convinced to transfer the title of the home to the 'investor' as collateral. The 'investor' promises that the homeowner can continue to live in the home and repurchase it later or promises them new financing. If the homeowner is promised new financing, a straw borrower will then be involved.

    What happens to the homeowner?

    At closing:

    • The homeowner deeds the property to the straw borrower, relying on the false promises made by the ‘investor’
    • All proceeds are used to pay off the defaulted loan
    • The homeowner walks away with nothing
    • The 'investor' pockets the equity and runs
    • The straw borrower defaults on the loan
    • The homeowner is evicted, loses the house and all equity

    There are many variations of a foreclosure rescue scheme. Some schemes require the homeowner to unknowingly transfer the property title to a third party. 

    ** Other schemes will promise homeowners that if they transfer the title, they can continue to rent the home and repurchase it at a future date. 

    The purchaser of the property, sometimes the foreclosure rescue artist, is now free to refinance the property or to sell the property to another party. Sometimes the foreclosure “rescuer” charges the borrower high 'service fees' up front and then disappears with the money without providing the promised service.

    .

    Each state has it's own foreclosure rescue/avoidance/solicitation laws. Some are far more strict than others. It's a good idea to spend a couple of hundred dollars to meet with a real estate attorney or foreclosure attorney and go over what you can and what you can't do in the state you want to buy foreclosures in.

    For clarity, there are stages to foreclosure. And each stage has it's set of rules. Here is how some steps are categorized.

    Performing Loan
    30 day lates
    90 day lates
    Assignment
    Notice of Default VA loan
    Notice of Default FHA loan
    Notice of Default Conventional loan
    Notice of Trustee's Sale/Notice of Foreclosure
    Lis Pendens
    Continuation/Postponement
    Loan Modification
    Reinstatement
    Bankruptcy
    Auction
    Real Estate Owned

    There other possible steps, but these are what you will typically see.
    The key is to know what you can do in each of the steps in the state the property is in.
    Then you need to know what to avoid and what the options are for the owner and options available to the lender.

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