Surrogate mortgage holding/credit borrowing scheme?

[lendaddy]

A buddy of mine is getting involved in the following and to me it sounds like a scam. You tell me.

Person A is about to be foreclosed on (their home). Their credit sucks and they cannot refi or pull the substantial equity in their home as they do not cash flow for a loan of any type in their own name.

Person B takes out a loan for Person B's home plus ten grand out of equity (up front gift to person B for their service), plus two years payments (put in escrow to cover the payments).

Person A must pay 10-20% of the payments (say $200 a month on a $1200 payment) on time every month for those two years or they default and Person B assumes their home.

Person A (after successfull completion of two years payments on time) must pay off Person B in full (via cash or another loan) or Person B assumes their home.


In this case it is worth $240k and he is taking out a loan for the $115k Person B owes. So in the end he may assume ownership of a $240k asset for $115k, and worst case he gets $10k for his trouble when they pay him off.

Is this for real or a scam? (I realize it's not a good deal for person B)

[Tishabet]

Sent you a PM.

[Paul T]

sounds fishy to me...what is changing in person A's financial situation that they will be able to pay person B off in 2 years? The can handle that but they can't handle the loan themselves today? Is this just a deferment till they come into some money?

[lendaddy]

Originally posted by Paul T
sounds fishy to me...what is changing in person A's financial situation that they will be able to pay person B off in 2 years? The can handle that but they can't handle the loan themselves today? Is this just a deferment till they come into some money?

Exactly, Person A assumes things will get better but according to my friend something like 80% of the time Person B takes over the asset.

[GDSOB]

B needs to have some ownership interest in the house in order to get a mortgage on it. So A must have already deeded the home over to B with an agreement to transfer it back after the two years.

This is a big gamble with their equity. They should just price it to sell quick and cash out.

[lendaddy]

Originally posted by GDSOB
B needs to have some ownership interest in the house in order to get a mortgage on it. So A must have already deeded the home over to B with an agreement to transfer it back after the two years.

This is a big gamble with their equity. They should just price it to sell quick and cash out.

Again, I agree entirely and it is a BAD deal for person A. I assume the only reason they don't just sellto cash out equity would be either stupidity, ignorance, or an extreme emotional attachment to a property.

And yes Person B takes legal ownership with an agreement to return ownership upon successful completion.

[RANDY P]

Straw purchase scheme - person B is in a lot of trouble if it fails or the lender finds out. You can't just deed it back to person A after closing- the lender will find out and promptly demand repayment in full.

rjp

[lendaddy]

Originally posted by RANDY P
Straw purchase scheme - person B is in a lot of trouble if it fails or the lender finds out. You can't just deed it back to person A after closing- the lender will find out and promptly demand repayment in full.

rjp

Randy,

They don't deed it back per se, Person A must legally purchase it back from person B via cash or financing.

Person B legally purchases the home from Person A initially as well. The only hitch is a legal contrct where B must sell to A at a predetermined price after two years of successfull payments and subsequent buyout.

[Dantilla]

Time to hire a good attorney.

[RANDY P]

Originally posted by lendaddy
Randy,

They don't deed it back per se, Person A must legally purchase it back from person B via cash or financing.

Person B legally purchases the home from Person A initially as well. The only hitch is a legal contrct where B must sell to A at a predetermined price after two years of successfull payments and subsequent buyout.

Gotcha.

In this case, it turns 'em into renters.

In reality, if there's at least 30% equity in the house and there's benefit there - if you have a pulse and a job you can typically get a loan. If these "investors" are doing this and leaving themselves less than 20% equity after it's all said and done - there's a lot of things that can turn your lights out -

1- value drops from corrections in the market will eat your margin for safety - it'll take you 10% just to get rid of the house if you need to dump. Also if the value goes down then your renter has to qualify for a higher loan to value mortgage - making credit much more an issue vs. lower equity

2-Doing this turns 'em into renters and gives them renters rights - including the right to BK if they want. That's a big mess too.

I would only consider doing this if I was reasonably sure after everything is paid out there was at least 25% equity left in the house - you could lose 10% value in a year and still have enough there to pay a realtor, pay yourself and get the hell out. You try this any higher and you could wind up owing money to get out.

Just my $.02

rjp

[RANDY P]

Hmm? as person "a" - If I was trashed out -

take your offer, unload the house, file BK (assuming that you can get past the BK court accusing you of "dumping" assets-make sure that the investor has used up all my equity) kill all my debt, pay for a year or two at discounted rent, take the cash savings on housing expense and save it,

BUY A NEW PLACE WITH THE DOWNPAYMENT I'VE SAVED AT A MORE REASONABLE DEAL - NOT PAY BACK ANYONE.

Investor dies since no one will buy home at the orginal agreed upon purchase price.

rjp

[lendaddy]

Originally posted by RANDY P
Hmm? as person "a" - If I was trashed out -

take your offer, unload the house

You can't do both, if you take the offer you can't sell it anymore as person B legally owns it.

[RANDY P]

Originally posted by lendaddy
You can't do both, if you take the offer you can't sell it anymore as person B legally owns it.

what I mean is - sell it to you - take your offer. I lose the asset on paper, which allows me to BK easier.

rjp

[lendaddy]

Ok, I get ya. But equity in your home is generally protected to a decent amount anyway.