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Why I Told My Client Not to Carry Paper for This Buyer – Seller Financing Scam Alert

Scam AlertThis is exactly the kind of thing I hate to see… someone preying on older people who have a lot of equity, and not a lot of sophistication. In Virtual Coffee Q&A this month, I talk about a recent consulting client (an elderly lady with a husband with Alzheimer’s) who contacted me just hours before she was to sign a contract with a buyer.

He was offering her full price just 48 hours after her property hit the MLS, and the ‘nice title lady’ explained how everything would work, and she felt good about it, but just to make sure, she wanted to talk to me. After she did, she canceled the deal.

He was offering her full price, $820,000, but he would be making NO down payment. He would be putting a $420,000 first HML (hard money loan) on the property, and asked her to carry the remainder of her equity in a 2nd for $400,000. He said he would pay it off within 120 days.

All of the risk was on my client, the seller.

If he was so inclined, he could collect vacation (VRBO) rental dollars for 4 months while stiffing the 1st HML (private lender – who was probably a friend of his), and just before turning over the pre-signed Deed-in-Lieu, he could strip all of the furniture out of the property. To get possession of the property and keep it, my sellers would have to bring the HML guy current to the tune of $15,000+, re-key the property, and repair any damage.

When we suggested we switch to a lease-option, the guy who was so keen on getting her property suddenly couldn’t put it together when he needed to come out of pocket, even with a paltry 5%, to control this $820,000+ asset.

I told her she could proceed with the offer originally submitted if she asked for 3 important modifications to the agreement: 

  1. Ask for additional security. I wanted her 2nd position note secured not only by her own property, but by other property that the buyer owned… property with substantial equity.
  2. I wanted him to sign a personal guaranty for the note that was to be signed by his LLC. It is all too easy to strip an entity of assets. If he defaulted, I wanted it to affect him personally.
  3. Approve the rate and terms of the hard money loan, as she could potentially inherit it. I also suggested that the first loan be pre-paid for 4 months at close of escrow, so that there wouldn’t be back interest, late fees and other penalties acruing while she was waiting for the balloon to mature on her second.

I will discuss this in detail in Transaction Review & Calculator Practice on September 3, 2013. Owner financing is a great tool and I believe in it 100%, but there are things you definitely have to watch out for.

October 11, 2013 – email from my client:

Dear Dawn,

We have leased our home with an option to buy to a wonderful family that was dumped by an owner they thought was going to let them buy house and then changed their minds.  No it’s not a true lease option because there is no down payment. But I know them well, have gone to church with them for four years and know how they will care for the house. When he finishes growing his business, he will pay full price.
 
Our other ” friend ” never did come up with money.  I really believe that he was doing the “money buddy” scheme and when we didn’t go for that one (thanks to you and your advice) he wasn’t interested.
 
My husband has been admitted in to ActivCare in Carlsbad and I have an apartment very nearby.  I can do all this without selling house. The lease payment will cover all pertinent obligations. He will cover all maintenance obligations and I can just concentrate on husband.  
Plus down the road I have the house money when I need it more.  I think everyone wins on this one. Thank you for your interest and advice.
 
Best wishes,
Betty

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