Don't Get Caught Up in Real Estate Scams or Illegal Practices by William Bronchick

There are many ways to legitimately make money in real estate.  There are also many shortcuts that are illegal, fraudulent, or a downright scam.

Here's a few of them:

1. Lying on Your Loan Application.  Whether it be saying you will live in the property or overstating your income, these are lies that can get you caught up in legal trouble.  If you get caught, you go to Club Fed.

2. Cash Outside of Closing.  Giving the seller or buyer cash outside of closing not reported on the HUD is a violation of RESPA.  This can also land you in Club Fed,

3. Not Reporting Rental Income.  It's tempting to screw the Government by undereporting cash you receive, but why risk it?  Instead, be aggressive on your deductions.

4. Doing Work Without Proper Permits and Inspections.  Many investors will disturb lead paint, asbestos or hide hold.  All of these can get you sued, not to mention fined by the EPA.  Do the job right, and disclose it.  Also, don't do any life-threatening or health and safety repairs without a proper permit.

You can make an honest living in this business without breaking the rules.  Keep on the straight and narrow path and you will succeed. 

Mortgage Elimination Scams

You’ve seen the emails:

“Legally eliminate your mortgage!!”

Can this possibly be true? Well, I’ve read the claims and researched the law and here’s what I came up with.

The Claim

The claim is that you can legally eliminate your mortgage based on an accounting loophole that goes something like this…

“If the lender who funded your loan used borrowed money to fund your loan, then the loan is not valid. And, since the loan is not valid, the security (mortgage or deed of trust) is not valid either. All you do is simply march into court and ask a judge to void your mortgage lien, and you don’t have to pay it back.”

Now, without going into the legal issues, a common sense approach would tell you that the entire premise of this argument is patently absurd. Think about it… most lenders use borrowed money to fund loans, that’s the nature of the business.

So, if these “mortgage elimination” promoters are correct, then millions of mortgages would be void. 

The entire economy would collapse. This sounds vaguely familiar to the “tax protestor” scam where people claimed that they didn’t owe income tax because the government did not have the constitutional authority to tax them. More on that later…

The Law

The mortgage elimination promoters cite various court cases in support of their position. At first blush, it would seem there are dozens of court cases in which the judge actually did what they claimed, that is, declare a mortgage void because the lender used borrowed funds for the loan. But, since most laymen are not trained in the law, they take this stuff, hook, line and sinker.

I’ve read the decisions and they all have a common theme: they don’t support the mortgage elimination theory. In fact, most of the cases are only vaguely on point.

The “tax protestor” promoters did the same thing… take a quote from a judge’s decision out of context and cite the case as support for their position. In the end, the tax protestors all lost in court, paid large fines and went away with their tails between their legs. The government went after the promoters of the scam.

Similarly, the government is going after the promoters of the mortgage elimination scam. The Federal Reserve recently issued a warning, a copy of which can be found at the end of this article. The Office of the Comptroller of the Currency issued a similar warning last year.

The FBI recently raided the office of the Dorean Group, a big promoter of the mortgage elimination scheme. 

The Cult of Stupidity

As I write this, undoubtedly a few “followers” of the theory will email me and argue that I don’t understand or that I’m part of the “establishment mentality” that keeps the little guy down. Of course, these are likely the same people who are collecting referral fees from the scammers that are charging thousands of dollars to consumers in exchange for a false promise to eliminate their mortgages.

On a philosophical level, I appreciate discussions about how the dollar really isn’t backed by gold, the government doesn’t have the right to tax Americans and the the like. But I wouldn’t tell a client to actually rely on any of these theories in a court of law. Nor would I charge someone thousands of dollars in exchange for a promise or guarantee that their mortgage could be eliminated without paying it off.

How to Really Eliminate Your Mortgage

There are some legal ways to eliminate your mortgage:

1. Pay it off in full
2. File for chapter 7 bankruptcy (in which case you will not be liable for the mortgage note, but you will also lose the house)
3. Find a REAL legal challenge that a judge is willing to accept as a valid reason to declare the debt void, such as usury, gross violation of lending laws, fraud, incompetency or the like

How to Challenge that Bad Appraisal

In the volatile real-estate market of the past several years, prospective homebuyers and refinancers have encountered the same frustrating obstacle: a low appraisal.

Appraisal complaints have risen in recent years, particularly since home values began plummeting in 2007 and the Home Valuation Code of Conduct took effect in May 2009. But the experts say this isn't the first real-estate cycle in which contract prices don't often match an appraised value. 

More --->>> http://realestate.msn.com/how-to-challenge-that-low-appraisal

Illegal Flipping and Lender Seasoning

There has been a lot of negative press and misinformation lately about double–closings. Many people have been indicted recently under what the press has labeled “Property Flipping Scams.” Misinformed lenders, real estate agents and title companies will tell you that double–closings are now illegal. In fact, they are nothing of the sort.

A double closing is simply two back–to–back closings wherein the proceeds from the second closing is used to fund the first closing. Both closings are done in escrow so that the “middleman” can buy and resell a property for profit without using any of his own cash. The middleman profits because he buys the property below market and resells it for market price. This process has been done tens of thousands of times over the last 100 years – legally, ethically and PROFITABLY!

The so–called “illegal property–flipping schemes” work as follows: unscrupulous investors buy cheap, run–down properties in mostly low–income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured by the Federal Housing Authority (FHA), the government authorities have investigated this practice and arrested many of the parties involved.

Despite the negative press, neither flipping nor double–closings are illegal.

The activities described above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity as illegal “property flipping,” rather than simply “loan fraud.” So, whenever you hear a real estate agent or mortgage broker say, “flipping is illegal”, you know they are misinformed.

The misunderstanding of the flipping business has not been without consequence. Many title and escrow companies simply will not do a double–closing. Fortunately, there’s many that still do double closings, but they are also keeping a close eye on potential fraud (as they should).

Some lenders have placed “seasoning” requirements on the seller’s ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer’s loan. This may be a problem if you bought a property cheap and are reselling it quickly for a profit (the good, old American way!). This should not be confused with LAW – it is simply an underwriting guideline for some lenders. Of course, guidelines are just that – by going up the chain of command, you can generally get approval from loan underwriting by showing the property is being resold for a higher price because either it was purchased in a distress situation (e.g., foreclosure) or that substantial repairs were made. Keep good records of your repairs to show to the lender.

If the buyer is getting an FHA insured loan, there is no way around the “seasoning” issue. FHA regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days, NO EXCEPTIONS. This generally should not be a problem in a fix–and–flip situation, since it will likely take you 90 days by the time you acquire, rehab and sell. But, if you are planning on buying the property and reselling it in a double–closing, the end–buyer CANNOT go with an FHA loan.

BRONCHICK’S RULE:
ALWAYS REMAIN IN CONTROL OF YOUR DEALS!

A smart investor should stay on top of the process and anticipate these issues. If you are buying a property and reselling it quickly, particularly in a double closing situation, you must anticipate this problem and deal with it. Let the buyer, his real estate agent and his lender know that there may be a seasoning issue. If you stay in control of the loan process and steer your buyers to a mortgage company that doesn’t have a hang–up with double–closings, then seasoning won’t become an issue. Generally speaking, only FHA and subprime lenders have the “seasoning hang up” – FNMA underwriting guidelines do not prohibit funding a purchase money loan where the seller has not owned the property for a minimum period of time.

If you do get into a last–minute jam in a double–closing situation, there is a solution, which is called a “reverse assignment.” You simply assign your contract with the end–buyer back to the owner and step out of the deal. Your “consideration” for doing so, is the profit you would have otherwise made. This consideration can be documented in writing and secured by a lien on the owner’s property to be paid to you at closing.