CAUTION: POSSIBLE SCAM

29 Replies

Hello BP,

I wanted to share with you a possible scam I've noticed in the Houston market (could be others too).  I have multiple properties vacant and have received calls from interested parties naturally. I showed one of the listings and it turns out they were NOT looking for themselves but for clients they were doing "credit repair" for.  This person wanted to put in a renter with an option to purchase after 2 years. Even went so far as asking if possible, could they put  a lock box on my door to show other potential credit repair candidates. His selling point was that they made 3 to 4X the rent. Of course I did not pursue this any further but have since gotten more requests of the same type.... "would you be interested in renting to buy?". I might be overreacting but my gut tells me something is off. Maybe they talk you into a lockbox and then act as if it's their property and try to take deposit and 1st month from unsuspecting people? 

Maybe someone with more knowledge on the topic can share, but I wanted to bring awareness so no one gets duped. 

@Huy Thai while its possible there is a scam there my bet is that it’s likely investors trying to implement some kind of seller finance strategy. If you agreed to what they are saying it would likely go like this: you agree to a sales price based on today’s value, let’s say $100k for example. The investor then turns around and finds a tenant to rent to own or lease option the property to. This tenant usually can’t qualify for bank financing for whatever reason (not always bad reasons) so they are forced to pay a higher amount of rent and also a higher amount for the property. So the tenant will agree to pay let’s say $1500 a month for the right to buy in two or three years at a previously agreed upon price of let’s say $120k. The investor makes the spread between the fair market value of $100k to you and the higher value of $120k that the tenant agrees to pay because he/she can’t qualify for a loan. The tenant usually has to put down a big deposit or down payment as well which they may forfeit if they don’t exercise their right to purchase at the end of the lease.

I hope that sort of makes sense. There’s a lot of ways such a deal can be structured and my explanation above is just one. Wholesalers use this strategy and so do the lease option investors out there.

Lease option, rent to own...these are basically the same thing...and one of many legitimate ways to buy RE.  What you are saying makes perfect sense.  The reason they are doing this is because their credit isn't good enough to buy now, but they are working on improving it.  While that is happening, they want to find a house (yours) and will rent it until their credit is good enough to buy it.  Not a scam.

However, there are a number of potential problems you want to avoid, not the least of which is you must have two different contracts.  The Lease, and the Option to buy.  Don't credit anything in the lease payment towards the purchase price when they exercise their option to buy.  There are ways to accomplish the same end result, but works out better for you.

Also, make sure the Option Price to buy is based on future Value...not current.

In the end, you get the benefit of both profit and cash flow, and a tenant that will take care of the house better than a renter only.  Remember, as far as they're concerned, this is their house.  

Not only is this not a scam, but it's a great strategy for selling...and buying, for an investor.

On another note, I would be very careful before jumping to judgement and calling out "scam" .

Yeah I actually went to a seminar detailing this strategy just as above. Basically it’s a creative no/low money down way to make some cash flow and get a decent payday at the end. Get a property on terms with a bit of cash upfront. Put a person in who will buy the property at a later date. When this person purchases the property, pay off mortgage, pay off seller’s remaining portion and keep the rest along with the cash flow from the monthly payments.

Investor contracts a rent to buy situation with seller for say 5 years at a set price. Markets property to retail buyer as owner financing, asking 10% non refundable down and first months payment.

Seller gets portion of their selling price from the investor at the beginning and agree to receive the rest in 5 years, while also allowing the investor to make mortgage payments on the sellers behalf. (Usually the sales price is based on the equity that the seller has in the property), sometimes called your walk away price.

Investor contracts with retail buyer for say 3 years and gets the cash flow and whatever is left after fully paying seller his/her walk away price and the mortgage.

Can be quite profitable as it is so creative but seems very complicated though!

Hope that made sense.

@Huy Thai is not saying he thinks Lease Option or Rent to Own are scams, but the way this individual that approached him is going about the process is the scam. No, you should not allow this individual to put a lock box on your property because I also believe it to be a scam in which he markets this property for rent, places a renter, then disappears with first month's rent + security deposit. 

If you'd like to move forward with this individual, and if they really do work in credit repair and are simply trying to help prospective buyers, let him find the prospective renter/buyer and you do the walk-through and everything else in the process as you normally would. Regardless of whether or not his intentions are malicious, a walk-through is, in my opinion, a key part of the vetting process as you should treat it like a walking interview. Get to know as much about the tenant as possible so you can both fact-check the application and learn things not on the application.

Thank you all for the responses! That is the power of BP.... someone out there knows and can help.  That is why I mentioned "possible" scam as my spidey senses were tingling. I forgot to mention that I did a simple google search on this company/ owner and saw nothing but horrible reviews of people who got taken for thousands up front. For obvious reasons doing business with this individual was a bad idea, but when others contacted with the same requests I had my guard up. 
 

I know there are a million ways to do a deal in real estate and that is what makes it so attractive. While this does sound great if the renters pay on time and then buy my home at the future current market rate, I'm in it for the long game and will stick to my current criteria to find tenants. 

Originally posted by @Pierre Decoste :

Yeah I actually went to a seminar detailing this strategy just as above. Basically it’s a creative no/low money down way to make some cash flow and get a decent payday at the end. Get a property on terms with a bit of cash upfront. Put a person in who will buy the property at a later date. When this person purchases the property, pay off mortgage, pay off seller’s remaining portion and keep the rest along with the cash flow from the monthly payments.

Investor contracts a rent to buy situation with seller for say 5 years at a set price. Markets property to retail buyer as owner financing, asking 10% non refundable down and first months payment.

Seller gets portion of their selling price from the investor at the beginning and agree to receive the rest in 5 years, while also allowing the investor to make mortgage payments on the sellers behalf. (Usually the sales price is based on the equity that the seller has in the property), sometimes called your walk away price.

Investor contracts with retail buyer for say 3 years and gets the cash flow and whatever is left after fully paying seller his/her walk away price and the mortgage.

Can be quite profitable as it is so creative but seems very complicated though!

Hope that made sense.

 Not that complex.  Just different.

...and the loxbox part is highly questionable.  That's the part that doesn't fly at all.  Also, they don't show it...you do, or an agent of your's does.

The concept of L/O is great...but this guy's lockbox and him doing the showings is entering into the no fly zone.

just a guru tactic for those with no money to make what amounts to broker fees.

the risk to you.. if you have no clue who they put in.

if you want to sell on LO in Texas which i think in Texas is either highly regulated or its illegal but guru's would not care about legality becasue in some states its legal.

Any way just have this wholesaler middle man refer the clients direct to you and offer to pay them a finders fee.. and you take control you set the price you set the rent and you do all the credit checks etc to see if you want to put a credit challenged person in your home.. and keep in mind the success of LO with those with poor credit is VERY LOW  just a glorified renter is all it is.. LO's with highly qualified buyers that are low on cash because they have to sell a property those work all day long I have sold my personal residences twice that way.

As usual @Jay Hinrichs is correct.  It is a guru tactic.  Sometimes it is called a"free option".  It will certainly be described as "using other people's money" to get into real estate.

Normally the middle man would be the one that actually keeps the real option.  If your property goes up in value he will be the one wholesaling it to a fourth party.

Don't let them trick you into a lower price by offer a higher rent.  They will simply use the option early and you will never get the rent.

Originally posted by @Michael Biggs :

As usual @Jay Hinrichs is correct.  It is a guru tactic.  Sometimes it is called a"free option".  It will certainly be described as "using other people's money" to get into real estate.

Normally the middle man would be the one that actually keeps the real option.  If your property goes up in value he will be the one wholesaling it to a fourth party.

Don't let them trick you into a lower price by offer a higher rent.  They will simply use the option early and you will never get the rent.

 I thought i read some where that in Texas LO longer than 6 months were not allowed or something of that nature.. do you know for sure

Originally posted by @Michael Biggs :

@Jay Hinrichs  Basically there has been a crack down on them.  I would not say they are illegal.  I would not suggest them to sellers in residential real estate in Texas.  In industrial they still happen.

Here is some good information...

http://www.lonestarlandlaw.com/Lease-Options.html

 I can tell when wholesale gurus go through our market we get calls like these. Had one gal call and wanted to go into escrow on two of my lots.  300k each I shut her right down waste of time 

Originally posted by @Joe Villeneuve :

Lease option, rent to own...these are basically the same thing...and one of many legitimate ways to buy RE.  What you are saying makes perfect sense.  The reason they are doing this is because their credit isn't good enough to buy now, but they are working on improving it.  While that is happening, they want to find a house (yours) and will rent it until their credit is good enough to buy it.  Not a scam.

However, there are a number of potential problems you want to avoid, not the least of which is you must have two different contracts.  The Lease, and the Option to buy.  Don't credit anything in the lease payment towards the purchase price when they exercise their option to buy.  There are ways to accomplish the same end result, but works out better for you.

Also, make sure the Option Price to buy is based on future Value...not current.

In the end, you get the benefit of both profit and cash flow, and a tenant that will take care of the house better than a renter only.  Remember, as far as they're concerned, this is their house.  

Not only is this not a scam, but it's a great strategy for selling...and buying, for an investor.

On another note, I would be very careful before jumping to judgement and calling out "scam" .

I would not call this great.  If someone doesn't have good enough credit to buy, why would you as an investor approve them to live in your property?  I would not.  Likely, they will not be a good tenant and you may have to evict.  Even if you obtain higher rents by providing them a lease option, I think this strategy would be rarely worth the hassle.

If I’m not mistaken, The Frank Dodd Act makes rent to own situations illegal if the Buyer cannot close on the home in a years time. Tenants can’t be put in the home under the assumption that they can actually buy it when they will never be able to qualify. Landlords have been doing this for years- hence the development of the Act.

@Jon S.   No, this is a great strategy.  There are many reasons why a tenant can't  qualify that have nothing to do with being a bad tenant.

1 - Changing jobs
2 - Short funds for Down Payment
3 - Bankruptcy that is about to be cleared, and the tenant has shown a history of good credit and payments since.

@Julie N. You are mistaken.  DF focused on the  qualification process, not the end result.  You can't guarantee and applicant for any loan can close at the time of closing.  Ask any lender.  The problem was shoddy  qualification at the time of application. 

Also, look up the DF Act itself.  It was repealed:

"SECTION 1. REPEAL.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is repealed and the provisions of law amended by such Act are revived or restored as if such Act had not been enacted."

Thank you @Joe Villeneuve for responding to these questions; I do agree

For those who don't know, @Wendy Patton is the Queen of Lease Option.  If you have any questions at all, she is the one to ask.

Originally posted by @Joe Villeneuve :

@Jon S.  No, this is a great strategy.  There are many reasons why a tenant can't  qualify that have nothing to do with being a bad tenant.

1 - Changing jobs
2 - Short funds for Down Payment
3 - Bankruptcy that is about to be cleared, and the tenant has shown a history of good credit and payments since.

@Julie N. You are mistaken.  DF focused on the  qualification process, not the end result.  You can't guarantee and applicant for any loan can close at the time of closing.  Ask any lender.  The problem was shoddy  qualification at the time of application. 

Also, look up the DF Act itself.  It was repealed:

"SECTION 1. REPEAL.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is repealed and the provisions of law amended by such Act are revived or restored as if such Act had not been enacted."

Those are exceptions that are less common.  More often, it has to do with poor credit score or lack of funds.  Still, I suspect that more often than not, it is a hassle that is not worth your time or frustration.  But to each his own.  If it has worked for you then that is great.

Originally posted by @Jon S. :
Originally posted by @Joe Villeneuve:

@Jon S.  No, this is a great strategy.  There are many reasons why a tenant can't  qualify that have nothing to do with being a bad tenant.

1 - Changing jobs
2 - Short funds for Down Payment
3 - Bankruptcy that is about to be cleared, and the tenant has shown a history of good credit and payments since.

@Julie N. You are mistaken.  DF focused on the  qualification process, not the end result.  You can't guarantee and applicant for any loan can close at the time of closing.  Ask any lender.  The problem was shoddy  qualification at the time of application. 

Also, look up the DF Act itself.  It was repealed:

"SECTION 1. REPEAL.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is repealed and the provisions of law amended by such Act are revived or restored as if such Act had not been enacted."

Those are exceptions that are less common.  More often, it has to do with poor credit score or lack of funds.  Still, I suspect that more often than not, it is a hassle that is not worth your time or frustration.  But to each his own.  If it has worked for you then that is great.

Originally posted by @Jon S. :
Originally posted by @Joe Villeneuve:

@Jon S.  No, this is a great strategy.  There are many reasons why a tenant can't  qualify that have nothing to do with being a bad tenant.

1 - Changing jobs
2 - Short funds for Down Payment
3 - Bankruptcy that is about to be cleared, and the tenant has shown a history of good credit and payments since.

@Julie N. You are mistaken.  DF focused on the  qualification process, not the end result.  You can't guarantee and applicant for any loan can close at the time of closing.  Ask any lender.  The problem was shoddy  qualification at the time of application. 

Also, look up the DF Act itself.  It was repealed:

"SECTION 1. REPEAL.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is repealed and the provisions of law amended by such Act are revived or restored as if such Act had not been enacted."

Those are exceptions that are less common.  More often, it has to do with poor credit score or lack of funds.  Still, I suspect that more often than not, it is a hassle that is not worth your time or frustration.  But to each his own.  If it has worked for you then that is great.

 Have you ever tried it?  This is just a different strategy that solves a problem.  Shooting it down because "...suspect that more often than not, it is a hassle that is not worth your time or frustration", without a full understanding of what is involved, isn't a valid comment...sorry.  This is just like any other situation where you have to filter through an applicant.  Not every applicant passes muster...no different than if this potential tenant was just renting it.

Not every rectangle is a square.

Originally posted by @Joe Villeneuve :
Originally posted by @Jon S.:
Originally posted by @Joe Villeneuve:

@Jon S.  No, this is a great strategy.  There are many reasons why a tenant can't  qualify that have nothing to do with being a bad tenant.

1 - Changing jobs
2 - Short funds for Down Payment
3 - Bankruptcy that is about to be cleared, and the tenant has shown a history of good credit and payments since.

@Julie N. You are mistaken.  DF focused on the  qualification process, not the end result.  You can't guarantee and applicant for any loan can close at the time of closing.  Ask any lender.  The problem was shoddy  qualification at the time of application. 

Also, look up the DF Act itself.  It was repealed:

"SECTION 1. REPEAL.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is repealed and the provisions of law amended by such Act are revived or restored as if such Act had not been enacted."

Those are exceptions that are less common.  More often, it has to do with poor credit score or lack of funds.  Still, I suspect that more often than not, it is a hassle that is not worth your time or frustration.  But to each his own.  If it has worked for you then that is great.

 Have you ever tried it?  This is just a different strategy that solves a problem.  Shooting it down because "...suspect that more often than not, it is a hassle that is not worth your time or frustration", without a full understanding of what is involved, isn't a valid comment...sorry.  This is just like any other situation where you have to filter through an applicant.  Not every applicant passes muster...no different than if this potential tenant was just renting it.

Not every rectangle is a square.

You are correct.  It's a different strategy that solves a problem... but it is not a problem that I would like to solve.  The beauty of real estate investment is there are millions of strategies that can work.  This strategy though, in my experience, has not worked.  My properties are in quickly appreciating areas and the times I have offered a lease-option... In order for the numbers to work for me, the rents had to be several hundred dollars higher than market.  The people that would be interested in the lease option would be very unlikely to be able to afford a high enough rental rate for me to offer this (because I would be receiving the $ from my equity I would have received through a sale... through rents).

It's true...it is likely that any tenant requesting a lease option may not be able to close it anyway, so you're getting higher rents and still keep the property.  But I do not believe abusing my tenants by taking advantage of them in this way.  They are my customer and I run my business in an ethical way.  I got into this business because I found that I could have a triple win impact (my investors and I make money, the customer/tenant get a clean/quality home for their family and good service, and we improve housing which benefits the community) and I would encourage you to do so as well.

Also....Whatever your investment strategy is WILL have an impact on your lifestyle (whether you get sleep, whether you have to worry about your tenants getting shot, etc. etc.).  My personal preference is to create and provide high quality properties in high quality neighborhoods to well-qualified tenants.  This has enabled me to build a business where I've experienced just one eviction in 17 years, while owning properties across three states in 5 cities.  Choose your focus wisely.  Focus turns into habit.  Habit turns into your life.

Are you a real estate investor to just make money OR to also have a positive impact on your customers, partners/contractors, and the communities in which you operate?

I believe that if it's solely the former, you'll eventually find yourself unhappy.  You know that gaining financial success is important, but it is far from everything. 

@Huy Thai I agree with what others are saying. Of course it's smart to keep your radar up but it looks more like they're doing some type of lease option/rent to own deal. They may not have a particular renter for your property and are more interested in getting inventory in to their program. 

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