We Loaned on a Stolen House

63 Replies

Local wholesaler gets a response from some bandit signs. A homeowner is willing to sell his vacant hoarder house and adjacent lot in a nice area in Los Angeles. Sale price for both properties is something over $500k (I'm not exactly sure). He pays cash, which is unusual for a wholesaler but completely legit, and he closes appropriately thru title and escrow and also obtains an owner's title policy.

Some weeks later, the wholesaler contacts our borrower, a local and very experienced house flipper, who agrees to buy both properties for $610k. House will take about $75k to fix and end up with an $875k ARV. Not a barn-burner, but the lot next door will be sold quickly for $100k to make this a great deal.

Our borrower's transaction is handled through the same independent escrow and title company that handled the wholesaler's purchase. Our borrower gets an owner's title policy and we obtain lenders title insurance in the amount of $685k. We fund and close like any other normal boring loan.

Two days later, our borrower is standing in the property planning the rehab. A gentleman walks in and asks who he is. He says he’s the new owner. The gentleman says he’s the owner and never sold the property. Uh, oh.

The escrow company calls the notary who witnessed signing the grant deed for the original sale to the wholesaler. At first, she doesn't return the call but calls back a few days later claiming she lost her notary book or it was stolen. More uh, oh.

Everyone files a title claim and a police report, including us. Title opens an investigation.

I understand the wholesaler, who we never met, sent all his profits to the title company. He’s even. As a result of the great long-term relationship we have with our borrower, we loaned him 100%, so he’s out almost nothing as well, but has been paying for fire and hazard insurance since he closed. We’re out over $600k but with either a legit 1st position lien or a credible title claim. I'm not worried.

I called our lawyer asking if we need to hire him. With almost no info from me, he virtually repeats what happened and what will come. He advises us to sit tight and let title “do their thing.” No need to hire him unless someone files a lawsuit or title denies our claim. He tells me this could take two months or two years to resolve. Aren’t I thrilled.

Title does a four-month investigation, interviewing everyone and their brother. It appears the police (I think?) were able to search bank records and determined the “real” owner never received any money and was telling the truth -- he never sold the property. The grant deed was indeed forged, though we don’t know by whom and I don’t know the involvement of the notary.

It also appears the escrow company, which is an independent escrow (not associated with a title co.), did not require the seller to present himself with proper ID to sign a notarized grant deed. They accepted everything by mail – and obviously from a scammer. You’d think this would violate a title company rule???

We just received a check from title for our principal and interest. We were also owed points but title claimed they were not part of the "indebtedness." Our lawyer said we could argue but it would take a while and the outcome wasn't certain. Per his recommendation, we require the value of our lenders title policy must be at least 125% of the loan value. Frankly, we would have been happy just getting our principal back so we're happier than a pig in you know what. The system worked for us.

This problem it seems occurred because escrow either didn’t follow proper processes or because they didn’t have any. Bottom line is don’t even think about buying or lending on a property without proper title insurance. Make sure your policy will cover all your potential losses.

There are a few heart stopping moments for everyone involved in that story, thanks for sharing and glad it worked out for everyone who did things the right way.

"but the lot next door will be sold quickly for $100k to make this a great deal."

Is this a mistake? There are no buildable lots in the Los Angeles area that are worth so little...

Not a mistake, @Rachel S.   I suppose I should have written “… or more.” That’s how we did our underwriting. Adjacent lot is very buildable, but truly a postage stamp.

As a former claims person for various title underwriters I worked on many claims in CA and other states based forged deeds. It's an endemic problem based on everyone's desire to close quickly. Many of the the claims were on transactions where the title closer relied on emails for the sole contact with the seller with the docs being emailed to the "Seller" and returned by overnight delivery. In my opinion not a particularly safe way to do it but the underwriters make enough money that losses are considered a cost of doing business.

fortunate to get your interest.. we had a big title claim on forged loan docs back in the late 80s.. and title company would only pay principal.. the guy who did it though got 9 years in San Quentin.

I do a lot of mail always..  and title companies ( many of them ) are requiring you use their mobile notary service.

Or i get them to send docs to my title company and they courtesy sign me.. 

but some still just send the docs to us and my bank notarizes them.. 

My wife and I put a title insurance claim in the very first time we purchased a house. I've never done a transaction wherein the buyer did not get title insurance, excluding scenarios such as the following paragraph.

I also strongly encourage title insurance for quitclaim scenarios. Not long ago, we had a refinance wherein the free/clear property was QC'd to our borrower from several family members years and years prior. To get lender's title insurance and close the $600k cash out refi (this ALSO would have been required to SELL the property, but as a loan originator I do not work with sellers -- only buyers, and owners who are refinancing), the borrower had to chase down every single person on that QC and get them to sign additional paperwork. If one of those various persons had a falling out with our borrower in the meantime, they could have stopped the refinance from going through (or attempted to extort money, etc). This is a new thing in California, in response to things like what happened in OP.

Yes, some will object that title insurance is like mafia protection money. They point out that health insurance plans pay out $95 or $97 in claims for every $100 in insurance premiums collected, but title insurance only pays out less than $20 by that same metric, leading to an unusually large profit margin. I do not disagree. Great, we're all in agreement, it's the mafia. Conclusion remains unchanged: pay the mafia or your legs will get broken. It's a simple as that. 

Originally posted by @Eric James :

I'm surprised this kind of thing doesn't happen more frequently. Here in TX, pretty much all someone would need is an identification in the name of the seller.

we try not to really talk about it..  gives the bad folks ideas..  :(

 

Originally posted by @Chris Mason :

My wife and I put a title insurance claim in the very first time we purchased a house. I've never done a transaction wherein the buyer did not get title insurance, excluding scenarios such as the following paragraph.

I also strongly encourage title insurance for quitclaim scenarios. Not long ago, we had a refinance wherein the free/clear property was QC'd to our borrower from several family members years and years prior. To get lender's title insurance and close the $600k cash out refi (this ALSO would have been required to SELL the property, but as a loan originator I do not work with sellers -- only buyers, and owners who are refinancing), the borrower had to chase down every single person on that QC and get them to sign additional paperwork. If one of those various persons had a falling out with our borrower in the meantime, they could have stopped the refinance from going through. This is a new thing in California, in response to things like what happened in OP.

Yes, some will object that title insurance is like mafia protection money. They point out that health insurance plans pay out $95 or $97 in claims for every $100 in insurance premiums collected, but title insurance only pays out less than $20 by that same metric, leading to an unusually large profit margin. I do not disagree. Great, we're all in agreement, it's the mafia. Conclusion remains unchanged: pay the mafia or your legs will get broken. It's a simple as that. 

Title insurance is based on risk elimination not risk assumption hence the much lower claims expense.  However if you look at the loss expense together with the cost of producing the product and marketing expense I think you'll find the profit margin in line with other insurance companies.

Originally posted by @Jay Hinrichs :
Originally posted by @Eric James:

I'm surprised this kind of thing doesn't happen more frequently. Here in TX, pretty much all someone would need is an identification in the name of the seller.

we try not to really talk about it..  gives the bad folks ideas..  :( 

Or have a relative with the same name as the owner try to sell the house. I remember your story on that.

 

Absolute heart-wrencher of a story. I'd be as pale as a ghost when the actual owner walked in and told me the news.

I hope you're able to wipe the slate clean and keep hunting for more opportunities soon! 

@Jeff S. Glad this all worked out for you. And thanks for sharing. It’s the kind of story we can learn from.

I've had a recent experience that didn't turn out quite as well. In fact, it remains unclear who owns what— all because the supply chain of "professionals" in the buying/selling processes of residential real estate aren't really professionals. Many are just punching a clock and doing a half-assed job at their "J-O-B." There is some kind of transformation needed to elevate the level of professionalism so this kind of error doesn't happen in the first place (or is not possible). Regardless, I'm glad the system—in the end— worked out for you.

This is one of the fastest growing fraud/scams going on today and is very common. I ran into one last year here in North Los Angeles (San Fernando Valley) where a wholesaler was selling a deal with a lot of meat on the bone. Found out before it was too late that the deal was a scam and the owner was not selling the home.

I made a post about it last year, wish we could have caught the SOB who I found out was doing this multiple times.

Bring back public hangings I say!

@Jeff S. Difficult to dream-up a more compelling argument for title insurance. A topic most don't adequately understand in coverage or cost. Hopefully this'll push everyone who reads and needs to become more conversant! Thank you for sharing and relaying so succinctly!

Originally posted by @Will Barnard :

This is one of the fastest growing fraud/scams going on today and is very common. I ran into one last year here in North Los Angeles (San Fernando Valley) where a wholesaler was selling a deal with a lot of meat on the bone. Found out before it was too late that the deal was a scam and the owner was not selling the home.

I made a post about it last year, wish we could have caught the SOB who I found out was doing this multiple times.

Bring back public hangings I say!

Pretty scary for foreign buyers who are not familiar with US law.

I know this is very basic, but I will ask anyway.. what's the normal procedure for purchasing property in the US? Which are the steps?

I mean, in my country it can be as simple as buyer and seller (without real estate agents or any representation) go to the notary public and sign a sale and purchase deed. Buyer pays sellers with a bank cheque (this is money guaranteed by the bank, so there are always funds). Notary public identifies the parties (ID), signs on the sale and purchase deed (notarised), send a fax to the Land Registry. Buyer goes to IRS office to file for taxes (this is also prepared for or advised at the notary public, it's possible to DIY). Seller mainly deals with taxes on the next tax assessment. Pretty simple.

For what I am reading, in the US, in a normal closing, even if it is a cash purchase, do you need (i) a real estate agent, (ii) a title company, (iii) a escrow company, (iv) a notary public, (v) land registry (??)...?

Why a notary public cannot advise on title, escrow etc? Why is it split up that way?

@Juan Pardo

There are just more "stuff" to protect yourself in a transaction here. The Notary just somebody who is supposed to sign off saying that the signing party didn't sign under duress and knew what they were signing for. That's why its an add-on function to everybody else. After the Dodd-Frank Act, Title Companies have been doing the Closing Agent function which is basically getting all the documents prepped, signed, and getting them filed. It used to be the attorneys, but now I'm to understand with all the regulations its actually cheaper and easier to have the Title Companies be the Closing Agent. Sometimes, a separate Closing Agent company is used, but its the same but different. I'm not used to having a separate escrow company. Usually the Closing Agent performs the escrow function. The Closing Agent handles filing the paperwork with the various municipalities, disbursing the funds out of escrow at closing (with bank checks), etc --- its all the administrative functions.

The real estate agent is just brokering the deal. You hear about this a lot about what is their use. Well, in a very, smooth transaction is there isn't much to do. But, in a more complicated transaction where issues arises, they serve as another line of communication, less formal than going through the attorneys. Also, one big job, albeit not very glamorous, is just to open the door (e.g. for inspections, estimates, etc.). Also, buyers who have a busy"9-5" job could/should rely on their agent to handle a bunch of arrangements, e.g. scheduling inspections, etc. Yeah, basically we are gloried (or not) secretaries. But, that's part of brokering the deal.

I think maybe you need to think of it as functions vs. people/company. It varies some by locality and/or State in the United States. For example, northern NJ typically uses attorneys and sourthern NJ doesn't. For a cash purchase in NJ, you basically need a buyer, a seller, and a Title Company at a minimum. The buyer comes with the cash (normally in the form of a bank check). The seller leaves with cash (normally in the form of a bank check). The Title Company does the Title search, issues the Title Insurance, and can perform the closing agent function handling the transaction in escrow, receiving and disbursing the funds out of escrow, the Notary function of identifying the two parties and attesting they are NOT under duress and understand the transaction, and filing the Deed with the municipality (I think that is your land registry).

Now, before closing.... There generally is an attorney review period. The attorneys take a crack at the contract before you legally go under contract. Also, I generally have the more nitty-gritty terms hammered out here, if any. Although real estate agents in NJ are provided more "training" and thus "write" the first contract, I want to leave the real legal work with the attorneys. Then, we have the inspection period, e.g. home inspection, septic inspection, underground tank sweep, well water inspection, etc. The buyer should do their due diligence to make sure you aren't buying a money pit. Depending on the circumstances of your transaction, sometime after going under contract the Title search is ordered. In my area, we tend to wait to the end to do that because if the deal falls apart after inspection, why bother having paid for the Title search. Lenders hate that about us because that leaves little time to make corrections should a problem be found during the search. In the case of a loan, the appraisal is preferred to be ordered after inspections for the same reason. When you deal with National banks (e.g. Chase, Wells Fargo, ...) they order the appraisal immediately. I've had a few unhappy clients who wonder why they paid $500 for an appraisal when they killed the deal during inspections...

All that being said, I suppose the Notary can advise on "everything."  I just see it the other way around.  Since anybody and everybody can be a Notary just about, I'm not worried about finding a Notary.  I'm more worried about getting clean Title, having the escrow to protect me, and having somebody prepare and file the documents (e.g. Deed, the closing statement numbers which includes getting final utility readings, etc.).

I know this was kinda long.  Make any sense? 

Wow. Crazy.

I'm a notary (in CA) myself so I hate to be suspicious of anyone in my own field, but seems sketchy to me because it took so long to call back and then the journal was lost/stolen???

If a notary's journal is lost/stolen, we are supposed to report it IMMEDIATELY to the secretary of state, so I would check that that happened before you contacted them. This is why I'm so careful to keep my journal meticulously and follow the rules of keeping it and my stamp in my possession or under lock and key.

Clearly it would have been a lot easier to prove if someone's ID info and thumbprint (required for all real estate related notarizations) was present on the journal.

I had a similar case where I did a cash-out refi to an investor who owned a rent house.  Turns out he forged the deed.  Luckily, I had a lender's title policy.  Never make a loan without that!