A young investor from Atlanta was excited when he heard about a “deal” in Macon, GA. (about 90 miles south of Atlanta)
The Property – 2 Duplexes and a Single Family Home. Prices seemed like a bargain compared to Atlanta real estate: just $65,000 for each duplex and just $45,500 for the house. He didn’t know the market at all, but everyone involved assured him it was a great deal.
The mortgage broker, a local Atlanta guy with access to lots of investor loans, was very pleased to help the young investor get a low doc loan at just over 10% interest rate. The year is 2001. (Note: Low document loans may have higher interest rates because you don’t need to verify assets or income to qualify, but higher rates can still kill a deal even when there’s no credit). fraud involved. In this case, it only makes things worse.)
Everything went well and according to plan. The seller cooperated, a contract was signed for each property, a local closing attorney was chosen, an appraisal was ordered, and all the pieces fell into place. The young investor was satisfied with the entire service. He didn’t have to worry about anything. Everything was handled by him.
I had no idea that everyone from the seller to the appraiser to the closing attorney was involved in a real estate mortgage scam that was about to take our young investor to the dry cleaners and leave him with the bag on three properties for value of only a fraction of the “appraised” value.
Since the deal was in Macon, and the young investor was busy working full time in Atlanta, he had little or no time to go to the Macon area. So since things were going so well, he tended to rely on the support people who worked so hard to help him. After all, he didn’t know the Macon market very well, but he figured with these prices being half what they are in Atlanta, he couldn’t go wrong.
This was his first mistake.
Shortly after closing, the investor realized that he was having trouble renting the properties for enough to cover the mortgages. A trip to Macon to check things out revealed a disgusting situation. The properties were in the worst part of town and in terrible condition.
The confused investor reviewed his closing documents. The appraisal, dated one month before closing, 11/08/2001, indicated that each property was worth exactly the purchase price stated above. There were comparables indicating that there were many similar properties in the area that were also selling for $65,000.
As the now concerned investor soon realized, after spending some time perusing his previously unread appraisal, things were not as they should be.
For starters, the date on the appraisal cover page indicated that the appraisal took place just before the investors’ closing date. However, the signature page on the back of the appraisal indicated that it had been done eighteen months earlier. It appeared that the appraisal had actually been used for a previous transaction.
The appraiser who signed the documents was just a new or “registered” appraiser.
In Georgia, a certified appraiser should have inspected the work and signed off. But there was no such signature.
As if that wasn’t enough, the comparable properties used to establish market value were miles away and not even located near the properties in question. Zip codes had been changed to make it appear that the comparables were in the immediate area. They were more than 8 miles apart even though the appraisal data said they were less than 5 miles apart.
In short, the appraisal smelled like old fish wrapper in the hot Georgia sun.
Did I mention that the properties that were purchased were not worth the 65K as shown on the appraisal? To his horror, the investor soon discovered that his new properties were worth only $15,000 each!
Little by little he began to realize that he had been deceived. He was now $180,000 in debt from three properties that were actually worth $45,000 total.
How could such a terrible mistake occur? What about the closing attorney? Work on behalf of the lender. Didn’t he realize the lender was lending too much money for these houses? Why didn’t the mortgage broker notice this? HE was the one who worked on the loan. And, anyway, WHO hired the appraiser? What about the seller? How the hell could he expect to sell a $15,000 house for $65,000? Something was terribly wrong.
As it turned out, virtually everyone involved in the transaction was also in on the shot. No wonder this was such a convenient full-service deal for the investor. Everyone was cheating the buyer. The investor had great credit and a good income. He was a class A buyer. Just the type who is a juicy target for these predatory types who troll investment clubs like great white sharks looking for an unsuspecting meal.
Those involved in this fraud pocketed the loan money.
This investor will not have an easy or penalty-free exit from these deals. He will still face foreclosure or possibly bankruptcy, even though the seller ended up in prison and the attorney lost his license to practice law. But all of that was not enough to get our victim out of the financial obligation that had been created when he signed the closing papers. The lender who provided the funds is still waiting for the money to be paid back.
And the courts are not sympathetic to careless investors who are kidnapped.
The only way to protect yourself is to protect YOURSELF. Do not commit to financial transactions unless you have verified all essential details. As always, common sense and a cautious approach always work best. If you don’t understand the terms of your deal, get independent advice from a third party, even if you have to pay for it. And read my article on how to avoid loan fraud by verifying appraisal data.
The moral of this story is: “If you don’t check the details of your deal, no one else will. And if you’re careless enough, investor sharks will eat you faster than a swimmer in a Stephen Spielberg.” movie.”
