Lessons in Real Estate Fraud

With all the real estate messes around some tales of woe are starting to filter in.  The most recent one is where some heartless bas*&*^ sold a home in Florida as an investment property to a retired nurse in California. What's wrong?

First, in my humble opinion, people should not by rental property further than a half-hour drive from where they live unless you have someone you know and trust, like a relative, manage it for you. So she unwittingly violated this rule.

Second, she got 100% financing so just had to come up with closing costs. That might be viewed as good but that loan came at a horrible price, like 9% plus PMI. Her payment is gagging. Total mortgage payment and taxes and insurance is more than $3,500 per month.

Third, she can only get $950 per month rent, which probably always was the market rent. That means that she has a negative cash flow of $2,500 per month, $30,000 per year. Rule of thumb is that you want to try to breakeven cash-flow wise, at least a couple of years out. On this property rents may not get to $3,500 per month until the 22nd century.

Fourth, a modest negative is OK if the property is going up in value. But in this case the property has to go up in value at least $30,000 per year for her to break even. Do you think that is happening in Florida, one of the most over-built markets in the country?

Bottom line, she was a victim of fraud, perhaps not legal fraud because I do not know what representations were made to her, but I think that she might have been a straw buyer for some crooks who were trying to unload excess property.  I never thought I would tell someone to walk away from a property but this is an exception to that rule. Sure, it'll mess up her credit but she is a 69 year old lady and really doesn't need credit at this stage in her life.

In another case I am aware of a foolish buyer entered into a lease option agreement with a guy. She gave him $25,000 as an option fee and that and a goodly portion of each monthly payment was to apply toward her down payment when she exercised her option. There is nothing wrong with that kind of a deal and when entered into between two honest people, it can work well for both.

But in this case, the seller did a lot of these transactions, over 100 it is said. What he also did was to refinance each property, probably with fraudulent appraisals, to pull cash out of the property, thus stripping the equity.  This home now has over $575,000 in loans against it. Her option price is $470,000, probably what the home is worth today but the lender who is holding the $575,000 loan isn't going to permit a sale to her unless the entire loan is paid off.

She may get lucky and the seller might approve a "short sale" but I think it is unlikely because the creditors are all lining up against the seller hoping to get whole in Court.

She called me but, frankly, I do not want to be drawn into Court on a deal with this gal who made some dumb decisions in hte past and will probably make more.  Sorry, not with me around.

Bottom line, I wonder about scams. Buying foreclosed property, for example, is a job for professional investors, not the average guy. So I would be really wary about "get rich quick with foreclosed property" seminars. People are going to get burned.