Homeowners facing foreclosure have enough trouble, but often the mailman brings more, in the form of ads for rescue schemes and scams.
“The worst case I heard about was an elderly couple in northwest Denver,” says real estate agent Dave O’Brien, who does business in that part of town.
The couple received a flier offering to “buy homes for cash.” They met with an investor who persuaded them to sell their home for $60,000, which was approximately the balance due on the mortgage.
The new owner did repairs worth $40,000 and then resold the property for more than $300,000.
Ending such “equity-stripping” abuses was one aim of Senate Bill 71, also known as the Colorado Foreclosure Protection Act as it made its way through the General Assembly in 2006. It became law in January. The practice of equity stripping is now illegal, under the act.
The Foreclosure Protection Act was crafted with input from Denver attorney William Bronchick. Its effectiveness is hard to estimate at this point, as many conscientious investors “don’t know about it yet and may be walking all over the rules,” he said.
The poor, the elderly and the financially unsophisticated are deemed most in need of protection. Beyond that, the law governs how investors interact with homeowners in several specific ways.
It differentiates between “equity investors,” whose intent may be to purchase the property, and mere consultants who provide help and advice, typically for a fee. Specific standards govern the behavior of each group, with the threat of fines and prison time for violations.
The two-class distinction “ends the bait and switch,” said Bronchick. In the past, investors could falsely paint themselves as advisers but have the ulterior motive of purchasing the property.
The law says a purchase contract must give the seller three business days to cancel it. It also lays out requirements for a “leaseback,” in which a homeowner sells the property to an investor and stays on as a resident and renter; and for a “buyback,” which gives the seller an option to repurchase the property at a later date.
Such dealings are not inherently abusive, but unscrupulous investors have long used them to exploit unsophisticated homeowners. The terms may include a below-market purchase price and exorbitant monthly rent. The optional buyback may be excessively priced in the investor’s favor.
The law says a leaseback must give the renter “a reasonable ability to make the lease payments.” The payments may not exceed 60 percent of the renter’s gross income. An investor selling a home back to its original owner may not profit by more than 25 percent of the original sale price.
To honest investors operating above the board, the new lease and purchase restrictions can either be a headache or a welcome source of support for sound business decisions.
Verneeda White of Aurora often encounters homeowners in foreclosure. “Maybe seven or eight out of 10 of them say, ‘Could you buy my property and make the payments for a year, until I get back on my feet again?”‘
People who have lost employment, for example, may believe their troubles are temporary.
A lease or a buyback option is usually impractical. “In so many cases they’re kidding themselves,” White says.
Colorado Springs real estate broker Derek Wagner is no fan of foreclosure investors, having criticized them as “vultures” in an Internet blog. But the new law is too onerous even for the most well-meaning individuals, he said.
A client of Wagner’s was in foreclosure and wanted to sell his home to his father, who would have leased it back to the son, said Wagner. “The rules scared them off.”
That foreclosure need not have happened, he admits. A leaseback would have been legal, but his conservative clients were unduly concerned about prosecution for inadvertently breaking the rules.
Bronchick, the attorney who drafted the law’s leaseback language, acknowledges the possibility of a “chilling effect” on potential deals. “That’s not necessarily a bad thing,” he said.
Many abuses may be curtailed as well.
In April, investor Doug Till was dealing with a homeowner in Northglenn. His hope was to persuade the foreclosing lender to accept a payoff amount lower than what was owed on the mortgage, in a common transaction known as a short sale.
He got a late-night call from the homeowner, who said another investor had arrived at her door that evening. The unannounced visitor was a real estate agent who claimed to be working directly with the lender on a plan to pay off the defaulting mortgage in full.
“It was much better than my offer,” said Till. “I told her she should take it.”
The homeowner and her husband signed over the deed to their home. But the offer was a scam. The investor lied about representing the lender and violated numerous provisions of Colorado’s foreclosure statute. The requirement of a three-day cancellation period was ignored, according to Till.
“I don’t think the law stops the bad apples in the business from doing whatever they want,” he said.
So far, between 20 and 25 complaints have been filed for alleged violations of the statute, according to Nate Strauch, communications director for Colorado Attorney General John Suthers. Six of the cases have been settled with fines or restitution, all with out-of-state companies.
“The statute has definitely made a difference in certain cases that would not have been pursued because those specific activities would not have been illegal,” Strauch said.
