Pitfalls and Scams related to foreclosure.

Some of the people you contact or who contact you may not be completely honest. Try to be aware of who you’re dealing with. Notice if they seem honest to you. If what they propose doesn’t make sense or “smells bad” to you, ask more questions and take extra time before going ahead.

The list below gives you a look at the main things to look for. Always use common sense when considering an offer. Think about the long-term effects that might happen, in addition to the immediate situation. Someone who’s treating you fairly should be willing to explain the pro’s and cons of their offer.

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Some of the things to watch out for are:

Scam: Equity Skimming. What it is: You make a deal and move out. The Buyer rents the house out to a 3rd party, pockets the rents, and doesn’t make any payments on the mortgage. Ultimately, the house is lost to foreclosure.

To make this work, a Buyer must spend little or no cash. Otherwise he won’t make a profit.

How you can prevent Equity Skimming:

1. Don’t move out unless you receive a substantial amount of money, say, at least equivalent to 3 months’ rent.

2. Don’t move out until the mortgage is paid off or brought current, or the money to bring the mortgage current is in the hands of a reliable 3rd party, such as an escrow company or lawyer.

Other Factors: In the real world, most buyers won’t give you any money, nor bring the mortgage current, nor pay off the loan until you’ve moved out. Therefore, if you have little or no equity, you might have no choice but to take a chance.

Try to find out if the buyer is reputable:

- Ask how long they’ve been in business.
- Ask them to show you some “proof” or records, like a business license, previous records of purchase, etc.

Scam: Predatory Lending. What it is: Someone gives you a loan at a very high interest rate or very short time to pay it back, such as one year or so. In many cases, it’ll be very hard to pay the loan back in time, so the lender later forecloses and takes the house. 

How you can avoid Predatory Lending: If anyone offers you a loan, read every line of every page, and all the “fine print”. If you don’t understand anything, go to someone you trust --- maybe your local bank or credit union, an accountant, a lawyer --- and ask for their opinion. Know what you’ll be getting into and how you’ll be getting out. Know what your payments will be, how soon you have to pay the total back, if there are any prepayment penalties, and what happens if you miss a payment. 

Pitfall: Sell Your House with the Option to Buy it Back. This may be a legitimate offer, but review your financial outlook carefully before you sign. Do you realistically expect to be able to repurchase the house at the option price within the time allowed? Read carefully to see what reasons you could lose your option. For example, if you could lose your option by being 10 days late on a payment, will that be OK in your situation? 

How to Protect Yourself: Read the agreement carefully. If you have any doubts, ask someone you trust to review the offer and give you their opinion.

Pitfall: Sell your House. Selling your house may be your best choice. If you agree to sell your house, try to ensure the buyer will keep their promises. This is very important if your loan will stay on the house and you care about your credit. Remember, your loan and credit stay on the house until the loan is paid in full, even if you sell the house. (An exception is “no-qualifying” mortgages, which could be the case for VA and FHA loans issued before 1990 and never refinanced. These are rare, nowadays.)

How to Protect Yourself: 

1. One way to get the buyer to keep their promises is to use a reliable 3rd-party to handle the closing, such as an escrow company, a title company, or a lawyer. This “3rd party” should be in the business of handling closings. It will usually cost about 3% of the house’s value, which is about 3 monthly payments. This will cover such things as title insurance, transfer taxes, and other fees. In some cases, you may not have enough equity to make this a reasonable expense. You must use your judgement, or contact us to get our opinion.

2. If you will be leaving the loan in your name, strongly consider putting a lien on the property, payable to you. This can give you the right to step back in if the buyer doesn’t keep their end of the deal. An escrow company, title company, or lawyer can assist you with this. Contact us if you have questions.

Scam: Paying money. Unfortunately, there’s no easy way to pay someone to fix your situation, except for just paying the back payments and fees due on your mortgage. Any money you spend looking for a cheaper way out is probably a waste. 

How to Protect Yourself: Before you pay anyone money, know what you’re getting and know how you can be sure you’ll get it. If it sounds too easy, it probably won’t work. In particular, we recommend you avoid anyone who proposes to get your mortgage cancelled by finding errors in the paperwork. 

Pitfall: Trying to Sell for “Top Dollar”: It’s easy to think that your problems are solved as soon as you list the house with a Realtor or start trying to sell it. But don’t count your chickens until the money is in your hand. 

How to Avoid getting tied up: First, if you need to sell fast, don’t expect “Top Dollar”. You will almost certainly have to sell below market. As a guideline, lower your price by about twice what you estimate all repairs will cost. Why? Because when most people look at a house, they’re looking for their “dream house”, not a 2nd job. Unless the house is in “almost new” condition, any person who will buy it is looking for a bargain --- a chance to make “sweat equity”. And be ready to lower the price further if you don’t have a legitimate sales contract within 2 or 3 weeks. 

Pitfall: Declare a Bankruptcy. Declaring a Bankruptcy will delay foreclosure, not cancel it. All mortgages and liens secured by the property will remain and the back payments and fees will continue to build up if you aren’t making payments. So you need to keep making the mortgage payments. If you don’t, when the mortgage company gets permission from the Bankruptcy court to proceed with the foreclosure, you will have a much larger debt than before. And in the end, you will also have added a Bankruptcy to your credit report, in addition to the foreclosure. With a Bankruptcy on your credit record, you may have trouble getting insurance, renting an apartment, or getting a job, in addition to having bad credit for up to ten (10) years.

It’s not a “clean slate to start over”, as some people think.

How to Avoid a Bankruptcy and a Foreclosure: If you owe more money than you think you can ever pay back, or if your creditors are suing you and may ruin your life, or a lump-sum of money is on it’s way to you but it’ll be too late to save your house, declaring bankruptcy may be the answer. In most cases, declaring bankruptcy only delays foreclosure, leaving you Bankrupt and Foreclosed out. 

Summary: Be aware of what you’re doing or agreeing to. 

A. Read everything completely before signing. If you’re not sure, get a 2nd opinion or take a day to think about it. 
B. If something doesn’t feel right, take a day to think about it, or get a 2nd opinion. 
C. Get all agreements and promises in writing. 
D. Be cautious if your name will stay on the loan. Consider your “worst case” scenario. 
E. Go through an escrow company, title company, or lawyer, if possible. (This costs money, so it may not be workable in all cases.) 
F. Usually, you shouldn’t pay for anything up front. If you’re not sure, wait until the service is done before paying.
G. Check to see if there are any complaints against your buyer or lender or Realtor or lawyer. You can contact your local Better Business Bureau, your state’s attorney general, your local district attorney, or your state’s real estate commission to check things out. 
H. It’s not over until it’s over. Don’t count your chickens until you’re out of foreclosure. Try to get things done quickly, but carefully. Know when the foreclosure or sheriff’s sale date is. 

Remember, it’s up to you to do your best to protect yourself and your credit. With appropriate action, you can probably avoid a foreclosure. Good Luck! 

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