As discussed in this month’s Nationwide News column, here’s another scam being pushed to seminar attendees and homeowners in default alike. This one is a bit different than the usual “steal it from the homeowner” method. These Gurus suggest that you approach a homeowner in foreclosure with the following “plan”:
- Tell the homeowner you will make up his back payments and give him some cash.
- Take title to the property.
- Lease it back to the former owner with an option to buy it back for one year.
The Guru suggested that after one year, the house would be yours if the former owner didn’t exercise his option. Sounds great doesn’t it? You could beat out all your competition that is trying to “steal” the same house.
Well, here’s the catch. The poor homeowner in foreclosure will be your best friend when you make up his back payments. However, when the year is up and he can’t get his house back, the trouble will begin. (Read “Using Lease/Option” past Legal Corner article.)
In a number of cases, these homeowners will go to court and claim that the “sale/leaseback” was really just a disguised loan. He or his attorney will ask the court to “re-characterize” the transaction as a loan and place title to the property back in his name. (Read this month’s “Lease Options the Right Way“ Money Matters article).
If the court agrees, the loan is illegal, since it is usurious.
Here’s how it works: Let’s say that you find a house in foreclosure worth $100k. The balance of the loan $50k, and the homeowner is behind $5k. You agree to make up the back payments of $5k and take title. You then lease it back to the homeowner with an option to buy it back for $100k, its fair market value. What’s the problem?
The problem is that if the court re-characterizes the transaction from a sale/leaseback to a loan, you have loaned the homeowner $5k at 1000% interest! Think about it . . . you give him $5k, and he has to pay $50k ($100k option price minus the $50k loan balance) to get his equity back. 1000% interest is usury, and the court will set aside the loan. You will lose the house AND your $5k.
If you’re not familiar with the word “usury,” it means charging more interest than permitted by law. The consequences of a usurious loan are usually civil; the court will declare the loan void and the borrower won’t have to pay it back. If you get caught making usurious loans on a regular basis, you’ll be hearing the words “loan-sharking” and “racketeering.” These are CRIMINAL acts that will get you in jail.
Many foreclosure real estate investors have been indicted onracketeering charges for doing exactly what I described above.
The Better Way to Do It
The safer way to deal with someone in foreclosure is to buy him out and get him to leave. If a person is in serious financial trouble, chances are he will get into trouble again. Thus, you will end up with a messy eviction and a court battle with the tenant/former owner. If a homeowner insists on staying in the property, then simply lease it to him without an option to re-purchase.
Make sure you read this month’s Marketing Mania, Nationwide News and Money Matters for more details on these important issues.
