The Mark Is Selected…The Fix Is In…Sting Underway
By Dale Rogers
Mary peeking out the window witnesses a sharply dressed middle aged man probably in his late 30s she surmised driving a brand new Mercedes. Upon entering, Trevor was dripping in bling with a huge Rolex watch, a heavy gold chain on his wrist and tailored suit that looked very expensive dressed out with a fine silk tie and a gold ring with an onyx setting bordered with small diamonds. Mary noted that he was somewhat handsome man over six feet tall with a slight northeaster accent. He almost looked out of place but had an electric smile and a warm manner. Betty Jane listening to the discussion appeared to be in deep thought. Finally, Betty Jane, a recent divorcee, asked Trevor if it was a good time to invest. Trevor turned his sharp focus in Betty Jane's direction. Betty Jane was a friend of the new homebuyer and had used the same Realtor and Title closer on her loan and purchase twelve months ago. She had a comfort level with the professionals in the room. Betty Jane finally indicated to Trevor that she had recently became interested in finding property that would give good cash flow over something other than she was getting in CDs at the bank. Trevor engaged her further. A lengthy discussion followed. Numbers and information was exchanged. The game was on.
Betty Jane had excellent credit and was a professional marketing manager in her own right and had assets in the bank as well as a full investment portfolio which was just barely going sideways with the recent market climate. She wasn't losing any money, but she wasn't making much either. While at work Trevor called to make small talk and inquire as to the depth of Betty Jane's commitment to find a good investment property.
A week passed and Trevor called Betty Jane to indicate that he might have something on the radar in the way of a stellar investment but would check it out fully before bothering her with anything that would not be in her best interest.
A few days later, Trevor called to say he had found a property but after doing a careful due diligence found the property had a termite problem. Likewise the owner wasn't forthcoming about a settling problem of unstable soil in the neighbors house which could effect the for sale property so he rejected that possibility but was still looking for other opportunities. Trevor explained that he ran in different investment circles and was able to locate properties with extremely motivated seller's who would listen to offers. Trevor's stock began to rise.
A week later, Trevor called Betty Jane regarding an incredible deal that he had found and wanted to show the property to her with the listing Realtor. Since this was an exclusive property other Realtors were not being invited to sell it. The property was vacant and needed some improvements to bring it up to the neighborhood standards but had great square footage and otherwise in good structural condition. Betty Jane saw the potential and many of the homes in the area were selling in excess of $400,000.
Incredibly, Trevor called Betty Jane and indicated that he was in contact with a national writer who was looking for a large home in the area while he studied research material in the historical archives at the University in the area of Indian culture. This was to be the first in a series of three books, which would take some ten years to complete. It was a fiction based but needed to be factual in the background information. He wanted to lease with an option to buy a home similar to what Trevor was touting to Betty Jane but wanted some specific remodeling completed before moving in. The author wanted to remain below the radar and wanted to use a third party intermediary to negotiate and protect his identity. In this case, it was the author's business manager. Trevor met with Betty Jane and showed her the agreement. Remarkably the terms included paying $5,000 per month including all utilities and deposits, and Trevor showed Betty Jane a cashiers check for $12,000 representing the first and last month's rent and $2,000 option money. The option price was set at $600,000 or appraised value in three years. The improvements would certainly make the property worth a lot more, Betty Jane reasoned. The stipulation of the lease-option was that the property had to be remodeled to meet the specifications of the anonymous author who demanded secrecy, security, and floor plan modifications with a new kitchen as the author professed to be a gourmet cook. Trevor showed Betty Jane a virtual plan of the remodeled property that the author had agreed to in the lease option agreement. Trevor went on to explain the author was demanding autonomy and did not want any publicity while he worked on his next series of books. For that reason a high security fence was to be built in the back to shield him from prying eyes. Trevor's contractor connection had already bid the property construction work out at $85,000. However, to take care of this opportunity, Betty Jane would need to move quickly to lock up this rare deal. The sales price was set at the appraised price of $425,000.00. This was about $40,000 more than the closest comparable but there was this great lease option and there were improvements to be made. Betty Jane decided to go ahead. With Betty Jane's excellent credit she was able to get a 90% Combined Loan To Value with an 80% first of $340,000 at 6.5% and 10% LTV second mortgage of $42,500 at 8%. The total payment was $2,149.03/month on the first mortgage and $311.85 on the second for a total principal and interest payment of $2,149.03 + $311.85 = $2,460.88/month plus $390/month in taxes and $280/month insurance for a total payment of $3,130.88/month. And even with paying the utilities budgeted at $800/month including lawn care and maintenance that would still leave approximately $3,130.88 + $800 = $3,930.88 outgo with $5,000 in rent would give $1,069.12/month in estimated cash flow each month. With a 10% down payment of $42,500 and $8,000 in closing cost Betty Jane's total investment was now $50,500 for which she figured she would get $12,829.44/$50,500 = 25.40% Return On Equity. Trevor showed her with the depreciation with land value backed out at $100,000 the improvement remainder of $325,000/27.5 years = $11,818.18/year in depreciation. The interest deduction would amount to $22,100 on the first mortgage and $3,400.00 on the second mortgage for a total deduction of $25,500. This would make for depreciation deduction of $11,818.18/year plus $25,500 the first years interest for a grand total of $37,318 to offset the rental income. The future appreciation and option exercise price Trevor demonstrated to Betty Jane was a situation investors dreamed about.
With the improvements the Return on Equity was now at 9.94%. The only thing Betty Jane needed to do was to arrange for the $85,000 construction funds to make the improvements on the purchase. For this Betty Jane took out a Home Equity Line Of Credit on her personal residence. All the mortgages and the closing were completed in three weeks from start to finish. The appraiser had to supply some additional comparables with notes of the impending improvements the lender signed off. The closing was held at a Title company of the seller's and Trevor's choosing. Betty Jane received the signed Lease Option Agreement with the $12,000 check from the author's business manager and she wrote a check out to the construction company which promised to complete all the work in two weeks and thus needed the entire $85,000 up front. This she gave to Trevor. On the closing statement was a $40,000 amount paid from the seller's side payable to Trevor for contract assignment and consulting. Trevor indicated to Betty Jane that this was normal and customary in his investment practice and at any rate he reinforced to her that since she was getting such a great deal she shouldn't mind sharing some of the profits. Besides, the seller was paying for it. Closing went on and Betty Jane was the proud owner of the property to be leased to a famous author.
The contractors failed to show up on Monday as planned. Betty Jane called Trevor. The phone was disconnected. She called again. Disconnected. In a panic, Betty Jane called the original Title person, Patricia, who closed on her home loan and had made the introduction at the open house to find out if she had heard from Trevor. She stated that the last time she had seen Trevor was at the Open House but she asked why she was trying to find Trevor. Betty Jane told the story. There was dead silence on the other end of the line. Patricia took a deep breath and shared with Betty Jane that she may be a victim of fraud. Betty Jane broke down and cried. Patricia insisted that Betty Jane call the FBI and tell her story. Agent Ryan showed up at Betty Jane's home and they went through all the details. Agent Ryan had been chasing this con man for over a year now. As the facts were revealed, the appraiser in conjunction with the Title Company by using two closing statements, one for the bank and one for the seller had all participated in perpetrating this fraud on Betty Jane. Agent Ryan shared that "Trevor" had closed three other deals on the same day and left town. The house was actually worth about $375,000 and needed work. "Trevor" had received $85,000 from Betty Jane and another $40,000 from the Title company for a total score of $125,000. The $12,000 check Betty Jane received bounced and was worthless. Betty Jane was left with a property worth less than $50,000 from what she paid for it. The market rents were only $2,000 per month if that. Now Betty Jane had a $3,130.88 plus a Home Equity Line Of Credit payment on her personal resident of $653.58/month with a massive shortfall to look at each month.
To cut the bleeding Betty Jane with her Realtor friend spiffed the property up as much as possible with paint and cosmetics and was able to sell the property for a little less than the mortgage. Betty Jane made up the difference out of the pocket. Betty Jane's attorney sued the Title Company and the appraiser along with the participating Realtor and they have yet to go to court. This transaction had the potential to destroy Betty Jane's excellent credit. It was a strain.
Agent Ryan, using a group picture from the open house party put out fresh photos of "Trevor" and two weeks later he was captured and charged with mortgage fraud among a litany of other charges. He still had some of the remainder cash but there were lots of people after their money and Betty Jane had little hope of getting all her money back. She was now, a lot wiser however.
Eventually, she did back in the real estate game with a team of good people and is slowly winning her way back.
Like any investment there are things to look for. If it sounds too good to be true, it probably is.
It's always advisable to have an attorney at your side during negotiations and at closing. Get all the facts. Deal with established companies and brokers well known and long experienced in the community. Someone new in town just showing up is a red flag. Anyone can independently verify values. Start with the local assessor and work it from there. One can look very closely at the title history with one's attorney to see if it's a flip property or anything else that may not look right. One needs to take their time and not be rushed into these "great deals". If you happen to miss one, there will be another coming along soon. Keeping the powder dry allows one to do something another day.
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About the Author
Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.
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