Question: have signed a contract to purchase a house, and settlement is scheduled in two weeks. The title attorney who is handling settlement just advised me that the seller does not own the property. Is this legal? Do I have any rights?
Answer: You may be the victim of a concept called “flipping”, and I would examine all of the facts very carefully before you go to settlement — if indeed you are able to do so.
It is not improper or illegal for someone to sign a contract for a property which is not currently owned by the seller. For example:
- The seller expects to inherit the property just as soon as some probate issues have been resolved;
- The seller was the successful purchaser at a foreclosure sale and will be getting the deed to the property before you have to settle on your contract;
- The seller is a party to a land installment sales contract, which gives him/her the right to own (and sell) the property under certain terms and conditions.
However, there is also an evil side to flipping, and it has been the subject of much debate — and litigation — in recent years. Let’s look at another kind of situation:
Buyer signs a contract to purchase property at $100,000, but does not go to closing. Buyer then signs a contract to sell to a third party (let’s call them X) for $200,000. The buyer arranges for an inflated appraisal from a friendly appraiser, and a mortgage lender — based on an appraisal of $200,000 — makes a loan to the unsuspecting Mr. and Mrs. X. To add to the fraudulent nature of this transaction, buyer usually convinced the original seller to give a deed to the property directly to Mr. and Mrs. X, thus keeping buyer’s name completely out of the land records.
In our example, the original seller gets his price — namely $100,000. The first buyer pockets $100,000 from the transaction (he paid $100,000 and sold for $200,000), but to make sure that everyone cooperates, gives the appraiser and the lender some money under the table.
This is fraud, and you should be looking at this situation very carefully — before you go to settlement.
How do you protect yourself? Here are some suggestions:
- Confront the seller directly and ask why title is not in his/her name;
- Ask your lender if they have been advised that the property is currently not in the seller’s name. Ask your lender to assist you in your investigation. All legitimate lenders are quite concerned about illegal flipping and should be more than willing to cooperate with you.
- Get a copy of the appraisal which your lender will want before they commit the mortgage loan. Make sure that the lender — and not the seller — ordered the appraisal. If there is any question about the validity of the appraisal, insist that the lender obtain a second appraisal.
- If you are working with a real estate broker, obtain comparables from the broker, showing what other houses have sold for in your same neighborhood. In order to make sure that your broker is not also involved in this scheme, you might want to talk with another real estate broker to obtain similar comparison house prices.
- Contact a local legal services program and talk with one of the attorneys in that office. Have they had any experiences with these sellers?
- Contact your local AARP office. Many such offices are monitoring flipping and predatory lending practices on a local basis, and they may have some advice and input which can assist you.
- Finally, when you go to settlement, insist that your settlement attorney is completely satisfied that your current seller in fact now owns the house you plan to purchase.
Lender or Equity Flipping
With lender or equity flipping, a homeowner is induced into refinancing his/her mortgage several times within a short period of time. Every time homeowners refinance, they are charged additional fees, such as points and closing costs. The net result is that the homeowner’s equity in their house is gradually whittled away, until they are forced into foreclosure or bankruptcy.
Predatory lending (often referred to as “loan sharking”) is an evil which must be eradicated. Merriam-Webster’s Dictionary defines “predatory” as “inclined or intended to injure or exploit others for personal gain or profit.”
Predatory lenders prey on poor and elderly homeowners, and make them loans which carry unconscionably high mortgage interest rates. For example, in a recent court case against a mortgage lender, the mortgage rate for a $75,000 loan was 18 percent, plus the borrower had to pay 15 points to get the loan. One point equates to one percent of the loan; in this case, the homeowner had to pay $11,250 — up front — to get this loan.
Government agencies are taking active steps to curtail these predatory lending problems. Law suits — both criminal and civil — have been filed against these lenders, with the view of requiring them to stop their practices and return their illegal gains back to the consumers.
Borrowers need education. But education is not enough to stop these loan sharks from taking advantage of unsuspecting homeowners. We need strong legislation and we need legitimate lenders to step in to provide realistic loans to homebuyers who have the ability to repay their mortgage loan over time.
Written by Benny L. Kass