Pre-Foreclosures Ilegal? - Posted by Brian Rhodes

Posted by Kawika_CA on February 08, 2005 at 10:27:58:

You’re right to be concerned. In many states, and mine California, they place restrictions on dealing with owner’s in foreclosure. In regards to loans the legislator has made it nearly impossible to get a loan for someone in foreclosure.

The way the California Business and Professions Code is written you have to be a broker or working for a broker to do anything other than buy the property and never let the owner stay in or option back the property. The courts will look at that as a loan rather than a purchase and if you’re not a broker that followed the restrictive procedure to get them the “loan” you’d have a problem dealing with usury which could result in civil and criminal prosecution. All this is predicated of course by the previous owner filing suit.

I’m not sure what the laws are in your state but you should check it out.

Pre-Foreclosures Ilegal? - Posted by Brian Rhodes

Posted by Brian Rhodes on February 08, 2005 at 09:33:52:

I have been doing rehabs and wholesaling for a while now and recently got interested in pre-foreclosures. A local investor friend has been getting his leads from a bankruptcy clinic. He agreed to give me some of these leads in exchange for a fee. He told me that there is a big market of homeowners in foreclosure that want to stay in their house. He said you can take the deed and reinstate the mortgage and have the previous owner (now the tenant) rent back from you, or do a lease option. I knew I had heard from numerous people that you always wanted to get the previous owner out before you did anything. This new concept sounded like a good answer to be able to profit and help the previous owner even more by letting them stay in the property. I have now done several deals like this and recently came across another investor who told me what I was doing was illegal. In fact there could be jail time involved. Obviously this was scary news. He faxed me a copy of what he was talking about. It had to do with Usury Laws and the courts can view what I am doing as “Loan Sharking” and “Racketeering”. It said there could be civil and then potential criminal implications. Overall it said it said the court would look at the intent of the transaction and not the paperwork. If there is a history of these types of transactions the court usually took the previous homeowner’s side. Additionally, all the loans that were paid by me were forgiven. This is all real bad news for me. I know there are a few other investors doing this locally. I know that doesn’t make it legal, but now I am nervous. I don’t want to build a real estate empire to have it all come crashing down from ignorance. On top of all that I really don’t want to go to jail when I really want to help people just like I am sure that most of you do as well. What is the truth? Should I stop doing business this way immediately? Thanks in advance for anyone’s help.

Re: Pre-Foreclosures Ilegal? - Posted by DaveD (WI)

Posted by DaveD (WI) on February 08, 2005 at 10:56:53:

The problem occurs sometime down the road when you have to throw out your “tenant” for non-payment of rent. They cry to the public defender you have defrauded them (you haven’t), they didn’t mean to sell their house (they did), how dare you make so much money off their suffering. While you might be factually right, the big lie has a way of unwinding your position. Plus, expect to get a lot of bad press. Just a sign of the times, I guess. Best to cleanly unhook them from their house. You might want to change your business plan.