I have been asked many times "why are there so many foreclosure and for lease signs in my subdivision". I have also had clients refuse to view homes in subdivisions where they see too many of these signs. What is going on just might surprise you. The most obvious reason for the foreclosures is overextended homeowners with ARM's and rising property taxes. This situation is very common in Collin County, where foreclosure rates have often led the nation. What might just surprise you is another major contributor to unoccupied homes and foreclosure signs; the new home builder....and here is how it happens.
Builders construct the homes, but can't sell them to real home buyers. This usually happens with builder using antiquated elevations and floor plans. Sluggish sales also can induce builders with interim construction loans to turn to non-occupant owner fraud or to post transactions with buyback agreements. In order not to lose money, the builder sells the homes (usually at a discount) to investors or maybe a straw buyer. Investors buy homes to make money, not to live in them, even though they may represent that the property is owner-occupied. Thus, here is where the trouble begins.
Most investors obtain their own financing and use their own appraisers. The investor receives an appraisal that is more than the value of the home, say $50,000 over the sales price. The investor secures the loan needed for the purchase, plus the $50,000. The loan closes and the investor receives a check at closing for the $50,000 in extra "value" for the home. Here is an example: the home cost is $150,000, the appraiser values the home at $200,000 real or not. The investor receives a loan for $200,000. At closing, the home is paid for and the investor gets cash back in the amount of $50,000. If the appraisal is fake, that is fraud, if everything is on the up and up, it is still bad business on behalf of the builder. One of the best ways to detect fraud in this type of situation is to compare the properties and a few comps values with County Tax Assessors files/database. If appraisal is 15-20% above county value this should be red flag.
Builder bailouts occur when the builder or developer is motivated to move property quickly in a depressed or slow real estate market. Some of the following red flags may occur in builder bailouts:
• The builder is willing to "do anything" to sell property.
• The borrower is barely qualified or unqualified.
• The sales price and appraisal are inflated.
• No-money-down sales are included.
• "Silent" second mortgages are involved.
• The source of funds is questionable.
• There is a reference to secondary financing on the HUD-1 or purchase contract.
• Parties to the transaction are affiliated.
If you see this happening in your neighborhood, don't be afraid to address the issue with your homeowners association. You can even call the builder's regional corporate office to complain.
If you suspect fraud or suspect you have been the victims of fraud, contact:
The Texas Department of Savings and Mortgage Lending
Main Phone Number: (512) 475-1350
Main Fax Number: (512) 475-1360
Address: 2601 North Lamar Blvd., Ste. 201
Austin, Texas 78705
Email: www.smlinfo@sml.state.tx.us
Toll Free Consumer Hotline: (877) 276-5550
Main Website: www.sml.state.tx.us(great tips, warnings information available)
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