As a prospective homeowner, it’s important to be well informed about common real estate practices and scenarios where individuals get taken advantage of. A predatory practice is any method which coerces a buyer or seller to accept otherwise unfavorable terms in order to achieve a better result or higher profit margin for the offender. Predatory practices can occur in lending or real estate sales.
While not all of these practices are inherently predatory, they are commonly used in unsavory ways within the real estate industry, so it is important to be familiar with them.
Predatory lending is when a loan originator uses otherwise dubious tactics to entice, incentivized, or otherwise coerce a borrower into obtaining a loan they do not otherwise have the reasonable ability to pay back. Remember, a mortgage loan is the borrowing of money against an asset. The asset being the home you purchase. Therefore, if you fall through on payments, the financial institution gets the property.
Common forms of predatory lending that we see most often in real estate are unjustified risk-based lending and failure to clearly and accurately disclose all loan terms. Unjustified risk-based lending is a legitimate practice, however, if exorbitant fees are charged, it’s predatory. When lenders fail to disclose all loan terms, they are misleading the borrower. In mortgage products, it is required by TILA-RESPA that lenders disclose all loan terms. If any form given to you by your lender lacks all of the charges or does not match the initial loan estimate, this is a red flag.
Here is a list of other red flags to keep an eye out for when working with your lender:
Predatory Practices in Real Estate Sales
In addition to financial institutions participating in predatory lending, there are a few different situations during real estate sales where people get taken advantage of. Some of the most common are low ball/all-cash purchases, schedule stretching and wholesaling.
Low Ball/ All-Cash Purchases
When someone offers significantly below market value on a property and preys on those who have recently had a divorce, are experiencing financial hardship, or are behind on their mortgage payments. These offenders often say things like “you have no other option” when in fact, there are many programs available to help people who are behind on their mortgage payments. These homes would sell for more money on an open market, specifically in today’s market, even if they require some work. If you or someone you know is experiencing financial hardship or a major life event and is struggling to pay their mortgage, there are counseling and forbearance programs available. Selling for cash at a low price is not the only option.
This is when a buyer continues to move the closing date further and further out. They will try to keep the property off-market for as long as possible, then lower the price and claim the market has cooled. Offenders that use schedule stretching often will claim that the market changed since the purchase began and now their bank lowered the amount they are willing to lend, which would not be the case. Their goal is to wear the seller down to the point where they will make many concessions to get the deal to close. They may demand an exorbitant escrow and lower the purchase price over a small repair. If you are experiencing a buyer that is attempting to schedule stretch, stand your ground, and work closely with your listing agent to exercise your options and remain in control of your sale.
When a person (or company) contacts someone who is trying to sell their property, submits an offer, gets under contract, then resells the property to another investor and has the two closings on the same day. The first purchase agreement is written to be assignable so that they can assign the contract to the investor after it is accepted. The wholesaler collects an “assignment fee” for the transaction. While not inherently predatory, this becomes predatory when it preys on distressed sellers and offers a very low price while reselling for substantial profits to an investor without disclosing their intent to the seller.
Below is a list of other predatory practices in real estate transactions:
Your Best Interest
Whether you are a buyer or a seller, your agent and your lenders should operate in your best interest. The best way to avoid being taken advantage of in a real estate transaction is to do your research, maintain your understanding, and know your boundaries. There may come times when you don’t fully understand what decisions are being made whether you’re meeting with your agent, a buyer, a lender, or any other real estate professional. If you aren’t sure, speak up! Ask questions. This is your transaction, you are the one with assets and finances, sometimes your life’s savings at risk. You should understand every decision you make and before you make that decision, you should know what your best interests are and how/wherein the process to protect them.
At Novum Realty, this is why we focus so heavily on educating our clients. It is easy to fall back on the opinion of the professionals. For the most part, the people you work with are working in your best interest, but that’s something you should understand fully and be able to see in their practices, not something to be assumed.