Monday, April 23, 2007

Making Fortunes* in Foreclosures

*Once you've discarded your ethical compass

The Sale/Leaseback Technique

Image Still from _Toy Story_, 1995Find a distressed homeowner in a house with a decent amount of equity (I’ll admit that this particular scheme is a bit passé in today’s foreclosure market, given how little equity is out there right now). If at all possible, your homeowner should be a non-native English speaker and/or have the education level of a 6th grader.

Tell the homeowner(s) that you’re there to help them stay in the home. This’ll win you big points, as the prospect of losing their house has undoubtedly been weighing heavily on their minds. It's a sure bet that you’re not the only shark to have come along—except that all the others have probably been artlessly insulting them with lowball offers to buy the place.

Tell them that you’re going to bring their loan payments current—use a big word like “reinstate”—they’ll be impressed and appreciative. Explain that you’re going to “execute a Warranty Deed” for them. They won’t have a clue what that means, so be sure to gloss over the fact that this will transfer all beneficial, legal and equitable title interest in the “subject property” to you. Stress, instead, that you know in your heart that they are good and responsible people who’ve just hit a rough patch in their lives. You can just tell that in a couple years, when they’re back on their feet financially, they’ll be buying their home back and all will be as it was. To think otherwise is to be ruled by fear, paranoia, cynicism, and negativity. You’re not that way, and they shouldn’t be, either! The more you can pile on convincingly about things like “The Law of Attraction” and how your being there is proof that “someone upstairs must be looking out for them,” the better.

Meanwhile, you’ll have them sign a 2-year lease agreement with the following salient features (some of which you’ll want to downplay as much as possible):

  • The Buyer (that’s you) will take over paying the current mortgage, as well as bringing the payments current.

  • The Seller’s (that’s them) rental payment will be the original mortgage amount plus a monthly “service” fee, usually around 18-20% of their mortgage payment. More than likely, you’ll be able to stress to your homeowner(s) that even with this fee you’re going to be saving them money, since they’ll still be paying below market rent.

  • Rent is due on the 1st, subject to a 5% late fee on the 4th, and, if not received by the 15th, puts the agreement into “default.”

  • The Buyer agrees to sell the house back to Seller at the end of 2 years, as long as Seller is not in default, for the sum of a) the original cost of reinstatement of the loan; b) any and all escrow fees not already paid by Seller; and c) a “funding” fee of roughly 4% of the loan balance.

  • At the Seller’s discretion, as long as they are not in default, the rental agreement and option to repurchase can be extended on a month-to-month basis beyond the 2-year mark.

  • Any breach of the agreement by the Seller will constitute “default,” which immediately terminates all rights Seller has with regard to their option to repurchase. Once default has occurred, no remedies are available. “Seller understands and agrees that Buyer may seek recovery of subject property and all damages incurred, including but not limited to, court costs, legal fees, and any other remedy at law or equity from Seller resulting from Seller’s default.”
Now, given that your homeowner has already demonstrated an inclination towards financial irresponsibility and an inability to handle the original mortgage amount, how likely do you think it is that they’re going to make it the full 2 years plus, paying 20% more per month? Even if, by some slim chance, they do, how likely is it that they’ll also have saved up the several thousand dollars they’ll need to buy the house back from you?

In other words, done correctly, this technique allows you to purchase the equity of a home for 10 to 20 cents on the dollar!

The Risks

Since Arizona Courts have ruled in the past that sale/leasback schemes can be considered equitable mortgages, the above may be actionable under various Federal and State statutes, including but not limited to the Truth in Lending Act, the Fed's Regulation Z (esp. 226.2(a)(11) and the Homeownership and Equity Protection Act of 1994), the Real Estate Settlement Procedures Act, and (if you’re in Arizona) the Arizona Consumer Fraud Act.

The Virtual Realty Funding Company (on whom this summary of the scam is based) is currently being sued by the Arizona Attorney General's Office for fraud.

1 comment:

Dikkii said...

Man, that is utterly amazing. I can't even begin to think that someone would have the balls to try to pull this one off.