Posted by Randy on March 19, 2002 at 08:00:12:
As a former mortgage officer and a mortgage servicer, I can assure you that if this loan is sold to a bank (which typically is Federally regulated) that this type of activity is considered a federal crime punishable by up to 5 years and/or a $10,000 fine… so if you are a gambler (and this is a high risk business) and don’t mind being a convicted felon and only want to see your family on visiting day… have fun…
Is this legal or ethical??? - Posted by GerryH VA
Posted by GerryH VA on March 18, 2002 at 22:16:11:
Besides doing Lonnie Deals I also…
buy used mobile home/land packages to rent. Anyone who has tried to buy one of these realizes that not all loan options are available for these deals compared to buying a single family home. Mainly, I have had trouble trying to refinance these homes even at 80% LTV. However, I do buy them for less than they appraise for so my question is…
Is it legal and/or ethical to buy something (for example) at 50,000 and tell the bank you bought it for say 62,500…if the property appraises out for 62,500 then work something out with the seller saying that you gave him 20 percent down and then get a loan for 20% LTV from the bank with no PMI. This minimizes or eliminates your cash down except maybe for closing costs.
Technically, all the seller is worried about is his $50,000 and all the bank is worried about is the 80% LTV. If this can work, how do you protect the seller so he does not have to pay for the taxes on the additional $12,500 that he really did not recieve. I hope this makes sense. If this is legal/ethical how do you do it? Maybe there is another way to essential do the same thing but structure it differently.
Any help would be appreciated.
GerryH
Its neither. There IS a better way Gerry - Posted by Dr. Craig Whisler CA
Posted by Dr. Craig Whisler CA on March 19, 2002 at 23:26:30:
Just use hard money lenders. You can be honest with them. They usually only will finance 60%-70% of value, but they don’t ask for any down payment if you are buying cheaply enough. They will often finance mobile properties that conventional lenders won’t touch, i.e. older mobiles etc. They only care about loan-to-value ratios. You should only be buying stuff you can get for 60-70% of true value anyway. If the lender won’t give you 100% financing it will be a reality check for you, meaning you are about to pay a little too much according to the lender’s opinion of the property’s value. I can normally get 100% financing from hard money lenders and still be honest with them. I can often get loans OVER 100% LTV loans when I buy right, from hard money lenders. You don’t need any money, a job, credit, or even a loan application in most cases. It is the property that qualifies not the borrower. In the case of default it is the property that pays not the borrower. Hard money loans should carry NO personal liability. Try harder to get good seller financing for all or at least for part of the purchase price. Try to buy mobile/land combos that will amortize themselves in about 2-3 years from gross rents. Nothing down is just another way of saying “no equity”. No equity is just another way of saying “negative cash flow” (not good for beginners). Don’t be afraid of a downpayment if it is otherwise a killer deal. In the begining years most investors are always short of cash to do more deals. Personally I think it is better to sell a few properties from time to time to raise cash to buy others. Hey guys… its ok to pay taxes when you are making money. Focus on killer deals with lots of free equity and positive cash flow rather than saving taxes and getting nothing down deals. Its safer to work this way than to have everything leveraged up to your eyeballs. DON’T wait until you have reached your financial goal to pay off a few properties. Get every third or fourth one free and clear from THE VERY BEGINNING (I’'m only talking about mobile and land combos with their high cash flows in relation to purchase price). Failing to follow this advice is one of the biggest mistakes I made when I was just beginning. You want good advice from the oldtimers who have already made most of their mistakes? Well here it is. If just one person follows this advice it will be worth the half hour it took me to write it. A wise man learns from the mistakes of others: A fool scarcely from his own. The cash flow from even just a few free and clear properties will let you sleep at night, help you out of many a jam, speed your progress, provide money to live on, cash for downpayments and let you ENJOY your investing. Nothing can take all the fun out of life faster than too much debt: don’t you agree? A lot of you guys have NO idea of how much stress you put your wives through with soo much debt.
Regards doc craigwhisler@webuniverse.net
Preservation of Character Attempt - Posted by GerryH VA
Posted by GerryH VA on March 19, 2002 at 11:57:12:
In an attempt to perserve my character (which I am concerned about as I am not a politician) let me offer the following:
I honestly was not sure that when a bank says 80% LTV what exactly does the value mean, street value or my investment value. Not being a lender, I originally assumed it was street value. So if it was street value, wouldn’t it make sense to truly get the street value out of it instead of just my investment value at the time of purchase and not having to wait to refinance it. I also noticed that the appraisal was always about $2,000 higher than my investment value, regardless if I payed to much or too little for the property. Since it seems to float around whatever I am buying the property for and not what its real value is, I thought, what If I can get an appraisal for street value instead of my investment value. So how do I do this?.. pay off the appraiser (no), threaten the appraiser (no), or simply have him appraise it higher to more accurately reflect the street value of property by telling him you are buying at street value. If it appraises out at that great, otherwise, oh well, get a loan for what it appraises for. I always thought an appraisal estimated street value, which I have come to the conclusion it does not always mean that at time of purchase.
Sounds like a plan if the bank was only concerned about street value and not your investment value, which I know now that they are not. The whole thing seems like a dopey little game we all have to play anyway, so I thought lets get it over with when we buy the property (assumming we truly buy it at wholesale). Being an engineer, things have to make logical sense, and originally, based on my point of view, it did not. Based on lenders point of view, it makes good sense.
Clear to me now why it is fraud, etc. based on my renewed enlightenment.
Please forgive me for I have sinned.
GerryH VA
Stop the Madness! - Posted by GerryH VA
Posted by GerryH VA on March 19, 2002 at 10:35:24:
Ok… Ok… I get the point. I guess my problem is I know I have equity in the homes, I just need to get someone to refinance them for me. Any lender suggestions?
GerryH
Re: Is this legal or ethical??? - Posted by Tony (Ga)
Posted by Tony (Ga) on March 19, 2002 at 06:55:45:
Submission of the falsified purchase price to the bank would be construed as fraud. If you have to lie to either the bank or tax officials to make the deal work…walk away.
Is it ethical? Perhaps you should ask yourself if your honor has a price tag attached to it. The purpose of deal-making, in my opinion, serves to enhance reputation of the dealmaker as a businessman that presents an opportunity to other people in fair and honest terms. Whereas profit is generated by ‘word of mouth’ marketing that attracts other buyers and generates more potential deals; a reputation of dishonesty will drive clients away.
It is called loan fraud… - Posted by Tim (Atlanta)
Posted by Tim (Atlanta) on March 19, 2002 at 06:48:44:
This is the same thing we hear of from time to time in the single family housing arena. Inflated appraisals coupled with mortgage brokers and you get an instant recipe for some time in jail. This is one of the reasons that many mortgage companies require 12 months of title seasoning before a refinance. The mortgage companies have been stuck with houses that aren’t worth what is owed on them. If you think about it, this would be a greater problem with mobile homes which tend to depreciate faster over the first few years of ownership.
This is what killed the finance companies … - Posted by Jerry Freeman
Posted by Jerry Freeman on March 19, 2002 at 06:32:21:
Hi, Gerry.
I’ve sat and listened to conventional MH dealers rant about how other dealers (not them!) have ruined the business by lying about down payments and forcing Greenpoint and CIT to shut down. (There were other factors too, but widespread cheating on down payments was a significant contributor.)
According to one of our mentors (I can’t remember whether it’s Lonnie, Ernest or David Butler), when there’s a significant down payment, the default rate on MH loans is in the 7% range. When there’s no down payment, the default rate is in the 30% range. Since that would make a significant difference in the likelihood of the loan going bad, lying about the price paid or down payment would certainly be unethical, and it would also be criminal fraud. You probably don’t want to do that.
Best wishes,
Jerry
Re: Is this legal or ethical??? - Posted by terryr
Posted by terryr on March 18, 2002 at 23:02:50:
this is ILLEGAL!!!
Re: Its neither. There IS a better way Gerry - Posted by GerryH VA
Posted by GerryH VA on March 21, 2002 at 21:54:50:
Thanks Doc
As usual, good advice. Too much debt does wake you up earlier in the a.m. than you desire!
GerryH VA
PS: May be a silly question but how does on find hard money lenders in my area? I doubt they are in the book under “Hard Loans”.
This is great Advice!! Thank You!! (nt) - Posted by John (OH)
Posted by John (OH) on March 20, 2002 at 13:43:54:
nt
No harm, no foul… - Posted by JHyre in Ohio
Posted by JHyre in Ohio on March 20, 2002 at 03:01:35:
You are learning by asking, which in this case is much safer than learning by doing. Kudos to you.
John Hyre
To be tempted but not fall is virtue, not sin (nt) - Posted by Jerry Freeman
Posted by Jerry Freeman on March 19, 2002 at 16:47:25:
nt
Re: Stop the Madness! - Posted by Tony-VA
Posted by Tony-VA on March 19, 2002 at 10:54:05:
There are small local banks out there who will refi the land/home at 80% of appraisal. They will select the appraiser and go with the numbers provided by that appraiser but if you truly have the equity in the deal, you can pull cash out.
This banking relationship may take some time to cultivate but is certainly worth pursuing.
Tony-VA
Re: This is what killed the finance companies … - Posted by LUKE FROM DEN, COLO
Posted by LUKE FROM DEN, COLO on March 19, 2002 at 14:24:48:
I DON’T THINK IT WAS ALL THE DEALERS MAKING UP DOWN PAYMENTS, I THINK A BIG PART WAS THE FACT YOU CAN GET A 30 YEAR LOAN ON A 30000.00 TO 60000.00 NOTE,WHAT YOU GUYS DONT REALIZE IS ABOUT 100.00 PER YEAR IS GOING TOWARDS THE PRINCIBAL BALANCE. BY THE END OF FIVE YEARS 1500.00 MAY HAVE GONE TO THE PRINCIBAL BALANCE.NOW,NOW A MOBILE HOME RESIDENTS WANTS TO SELL AFTER 3 TO 5 YEARS THEY WILL BE UP SIDE DOWN AND NOT ABLE TO SELL.THIS IS WHAT CAUSED REPOS AND THIS WHY GREENPOINT AND CIT WILL NOT DO MANUFACTURED HOMES.BOTH COMPANIES DID’NT GO OUT OF BUSINESS, INFACT GREENPOINT IS STILL A STRONG COMPANY. LUKE DEN COLO
Re: This is what killed the finance companies … - Posted by JHyre in Ohio
Posted by JHyre in Ohio on March 19, 2002 at 06:46:28:
Same situation here in Ohio. LOTS of dealers misrepresented the down payment or played games to “create” one. The rumor mill has it that the banks are looking for some blood…but alot of the dealers are out of business. Their form of asset protection is to squander their assets! Beware dealers, too many of them are scum. The MH business attracts a very high propertion of liars and thieves…which means we have to be extra careful, lest we get tarred by that brush. But there is also opportunity for those with good reputations…like say, us!
John Hyre
Re: Is this legal or ethical??? - Posted by chris_wa
Posted by chris_wa on March 19, 2002 at 24:10:47:
you seem to have answered your own question in the first sentence…look at it from the banks perspective to find the answer. “yes sir, it would be fine if you fudge the numbers so that you can slide your buyer in with a loan from us…we don’t mind…in fact, why don’t you keep the difference?”
smells like trouble to me…
There are hard to find. That is why they are… - Posted by Dr. Craig Whisler CA
Posted by Dr. Craig Whisler CA on March 22, 2002 at 12:44:08:
…called hard money lenders (:
Gerry, just look in any large newspaper or in the phone book in medium size or larger towns. Look under LOANS. You are about the 5th or 6th person to ask me this question. When this happens I stop and wonder what is wrong with my posts about hard money lenders that causes people to ask the same question over and over. It is clear that I am missing something. Now after a little reflection I guess I know why I haven’t been giving an adequate explaination. Hard money loans simple are not called hard money loans in ads. Gerry your questions are helping me learn to write more clearly and are greatly apprciated.
Hard money lenders can be identified by such terms in their ads as “No Qualifying” or “No Credit Needed” or We make C and D loans (means loans to people with weak or poor credit) or “We loan based on equity only” or "No job needed, or bankruptcy or past credit history no problem. Sounds like a borrowers dream right? Well read on before deciding for your self. The pros and cons are about equally divided.
You can also phone anyone who describes himself as a loan broker and ask for a referal to a few hard money lenders. Brokers use borrowed money from many different sources to loan to you and collect a commission called points and/or loan origination fees.
Most hard money loan brokers act as a channel for small private parties who want to loan money at a higher interest rate.
Since you must have 30%-40% equity in the property over and above the loan, these loans are generally quite secure, even when made to people with poor credit histories. These lenders don’t reallly care if you pay or not because if you don’t pay they can foreclose the loan and take your property. They can make more money off your equity than any other way so they don’t mind if they have to foreclose, hense no need for credit.
You can often get hard money loans for less desireable properties such as on older mobiles on private land in scroungier neighborhoods. The lenders take more risk and expect and are entitled to a higher return.
Hard money loans usually carry from 5-20 points and sometimes additional loan origination fees. They also have two other drawbacks that must be considered. They carry much higher interest rates such at 12%-15% and are usually of very short duration such as 2-5 years. For these reasons they should not be used whenever you can get a better loan based on good credit. Because of the short repayment period and the high payments necessitated by the high points and loan fees I would not be so quick to use a hard money loan for anything except either quick flip fixer uppers that have a high profit built in OR for permanent financing on properties that have a very high positive cash flow such as low priced mobile home land/mobile combinations. The reason for the latter is simply that if you buy a property that can amortize its loan fully from rents in 2-3 years, you will have more than enough cash income to support the highter payments of a hard money loan. Hard money loans are the easiest to get of all loans BUT you must be a very good buyer to be able to buy property 30%-40% below market. This is easiest to do with distress sellers of mobile home/land properties, and in other than first class neighborhoods.
Hard money loans usually have NO personal liability. If not, insist on it during negotiations. No personal liability simply means that there will be a (Santa) clause in your loan agreement that says something like “The property securing this loan shall be the sole recourse in the event of default” That way if you can’t pay, the lender takes back the property and gets your YOUR equity for HIS lunch. He can’t sue you for any other money or reason and perhaps get a default judgment against you, which could be used to levy on or attach any other unrelated property or assets you may own. I love this no personal liability clause. Don’t make loan guarantees when you can avoid doing so. I would rather pay more interest and points in most cases that to have personal liability for many loans. Just look at what happened to Donald Trump and thousands of others during recent downturns in the real estate market. I would prefer a 7%-8% interest 30 year loan to hard money any day if I have a choice. With some property you just don’t have such a choice. I can usually apply for a hard money loan with lenders who know me, by telephone, and after a five day waiting period I can go pick up my check on the 6th day. If speed is the most important factor a hard money loan can be advantageous.
Regards doc. craigwhisler@webuniverse.net
STOP SHOUTING!!! We agree … - Posted by Jerry Freeman
Posted by Jerry Freeman on March 19, 2002 at 16:42:09:
Dear Luke,
I agree with everything you’ve said. Since the question I was responding to was about whether it’s OK to lie about down payments, that’s what I focused on in my post.
A few weeks ago, I sat in the office of one of the biggest conventional MH dealers in my region and listened to him rail about how dealers lying about down payments had ruined the business. I believe I’m correct that it is an important issue (see also John Hyre’s follow-up post).
All your comments are also true, but I don’t understand why you’ve made such an issue. Have I offended you somehow? Posting in all caps is considered to be shouting, and your post gives the impression that you’re upset and shouting back at me.
Best wishes,
Jerry