The Mortgage Assignment Investing Strategy Is Dangerous And Deceptive - Use At Own Risk!

What is a "Typical" Mortgage Assignment?

Suppose Sam Seller borrowed a hundred thousand dollars five years ago to buy a house, and today he needs to sell. But he's having a hard time in thia market to sell as the house is worth less than the $100,000 he borrowed. How much less? It's only worth $90,000 today, making it "upside down" by $10,000. But wait! Ivan Investor comes along and says he'll buy the house for the full $100,000! The only catch? Sam must agree to sell "subject to" his existing mortgage.

Who'd pay $100,000 for a $90,000 house? Ivan Investor would, and you'll see why in a moment. Smart sellers know it's a bad idea to sell your house "subject to the mortgage." And that's why "sub to" sellers are nearly always sellers in some form of distress and desperate to sell.

Sam Seller knows "sub to" deals are high risk and should be avoided, but he also knows he needs to get the house sold and get out from under those payments so it's a risk he's willing to take. So, he contracts with Ivan Investor to sell the house for the full mortgage balance and knows that from here on out, whomever Ivan sells the property to gets to make the payments.

Ivan, it turns out, never actually buys Sam's house and has no intention of buying it. Instead, he markets it on Craigslist by advertising "No Qualifying - Take Over Payments" where Barry Buyer sees it and makes a call. Barry can't get a loan because he's got terrible credit. But what he does have is $10,000 in cash and that's all it takes to qualify in Ivan Investor's eyes. They quickly put together a deal that has Ivan agreeing to sell the house for $110,000 with Barry agreeing to buy it at that price, paying $10,000 down and taking over payments on the $100,000 loan. That price is $10,000 more than what's owed to Bank of America and $20,000 more than the house is worth, but it's the only way Barry can get into a house with his poor credit.

So, "no credit" Barry Buyer purchases "desperation" Sam Seller's "over-encumbered" home and pays Ivan Investor a cool $10,000 down for the privilege. Everyone involved is happy with their win-win-win deal!

* Sam Seller is finally free of that upside down house. * Barry Buyer is the proud new owner of his very own home. * And best of all, Ivan Investor just banked $10k!

What could possibly go wrong now?

In reality, Sam Seller remains on the hook for the loan because nothing Ivan Investor does changes the fact that there is a signed note in the lender's vault with Sam's signature on it. Unless his loan is paid off or formally assumed by a new, qualified borrower, Sam will remain liable for the life of that loan because in this mortgage, the mortgage was never actually touched, much less assigned.

Are Mortgage Assignments legal?

The gurus like to point to that misunderstood "subject to" section on the standard form settlement statement and say, "if it's illegal, why is there a spot for it on the HUD-1?" The HUD-1 settlement statement is an accounting statement showing the debits and credits in the transaction and nothing more. A place on the statement to list existing loans is there merely for the sake of convenience and in no way sanctions "sub to" deals.

Some loans, particularly existing owner-financed loans, may not have a due-on- sale clause and having a place to list them on the settlement statement is appropriate.

There's nothing illegal about buying or selling a house "subject to" in most states (though not all), so why wouldn't you have a spot to list them? In reality, violation of the due-on-sale clause is a default of a non-monetary covenant, whether there's a spot on the HUD-1 settlement statement to list it, or not.

Who's to Blame when the deal goes bad ( which 80% of them do)? When foreclosure does happen, you can be sure there will be lots of people looking for someone to blame.

Who? People like Sam Seller. You remember Sam. He only did this Mortgage Assignment deal because he was desperate, and Ivan Investor convinced him everything would turn out okay. Except it didn't, and now Sam's credit shows a foreclosure and is ruined for years to come. Worse, the lender didn't just take back the house, he also received a judgment against Sam Seller for everything they lost and can now garnish his wages, levy his bank accounts and seize whatever else Sam happens to own.

And you can be sure Barry Buyer isn't happy either. He put up $10,000, made all the payments as agreed, and the lender took the home from him anyway. Do you suppose he wants his $10,000 back, not to mention every last nickel he's put into the property since? Yes, he does, and so today he's out filing complaints with the Attorney General and the Better Business Bureau and every other agency he can think of, asking them to help get his house or money back.

Once those agencies take on Barry Buyer's case and get copies of files and see the problems these Mortgage Assignment deals created for buyers and sellers and lenders and everyone else, who do you think they're going to blame? Sam Seller? Nope, he was desperate, unsophisticated, and convinced it would all turn out okay. He did whatever he was told, signed whatever papers put in front of him, and he thought that was the end of it. Besides, he didn't get a nickel from the sale. He can be called dumb, but that's about it. He's not to be blamed.

Then how about Barry Buyer? Nope, he thought he was doing a deal that made sense, considering his credit situation, and he was willing to pay a premium price to get into a home of his own without having to qualify. That's all he knew about buying a house. Besides, he paid $10,000 in cash to make it happen. He's not to blame for this mess, either.

No Defense In a three-party deal transaction that goes horribly bad, where two of the parties are unsophisticated and lose everything, the odds are pretty good that third party is the one who screwed it up or got all the money... or both.

And if that third party happens to be an investor who had no interest in the property he sold, who acted as an unlicensed agent in the process, and who walked away with all of the money on the table, odds are pretty good he gets fingered as the one to blame.

His defense?

"But I did these Mortgage Assignment deals just like they told me to do them!

Let's just hope our friend Ivan Investor hasn't been really good at them- because if he's done a bunch, he'll have a lot of explaining to do... the kind of explaining that happens under (1) oath, (2) the penalty of perjury, and (3) a very bright light.

The Mortgage Assignment strategy has a fundamental problem that cannot be easily fixed... there's an investor in the middle of things where no investor should be. He's an opportunist, providing little real value and extracting whatever profit he can from the unsophisticated sellers and buyers involved. Providing little or no value is the real problem. To make $10k in any transaction, be it real estate or anything else, you first need to deliver at least $10k in value. You won't find that value anywhere in this type of deal.

What you will find is the tired old "sub to" strategy that brings together all the usual suspects found in the kinds of real deals experienced investors won't touch.

Doing Deals That "Bite Back"

We recognize that deals involving desperate sellers, bad credit buyers, and upside down properties almost always end badly. Add to it an investor with a total disregard for the outcome of the people he's supposedly helping and you have disaster waiting to happen. Right, wrong or somewhere in the middle, these deals are indefensible. Worse, when one goes bad... they all tend to go bad. The Mortgage Assignments strategy is risky for sellers and buyers, but most of all it's risky for investors. I would never do one of these deals no matter how much money I thought I could make.

I wouldn't do one because I know that any money I make won't be mine to keep, at least not in the long run. These are deals that bite back nearly every time. Maybe it doesn't happen tomorrow, or next month, or maybe not even next year, but bite back it will.

About the Author

Duncan Wierman is an Ex Software company CEO turned Real Estate Investor and Internet Marketer. Duncan teaches how real estate agents and investors can take their business to new levels using creating marketing methods to promote their business and get more leads. Get your free 14 day internet marketing e-course at : http://www.duncanwierman.com/blog

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