Slick Real Estate Operators Peddling Crappy Houses Using 'Contract For Deed' Conveyances Lead To Continuing Horror Stories For Unwitting Homebuyers

In Minneapolis/St. Paul, Minnesota, the Star Tribune reports:

• A year after moving into her white brick house in suburban Robbinsdale, Jennifer Gaines got a letter that turned her life upside down.
  
  She was facing foreclosure -- even though she was current on her monthly payments. She was also about to lose the $25,000 she paid on the home because the seller, who was responsible for paying the mortgage, had gone bankrupt.
  
  Gaines bought the property through an unusual, but increasingly common, option known as "contract for deed." Unlike a traditional home sale, the transactions typically take place with no bank, no Realtor, no appraisal -- and little government oversight.
  
  Instead, the seller finances the sale and then collects monthly payments, much like a landlord.
  
  Across the Twin Cities, many homes sold through contract for deed have been beset by inflated prices, high interest rates and other terms that almost guarantee the buyer will default, according to a Star Tribune investigation of 1,330 such deals dating back to 2007.
  
  In hundreds of cases, records show, sellers failed to provide mandated home inspections that would have revealed code violations and safety hazards. Some buyers said they were misled about outstanding debts attached to the properties. Others thought they were signing a lease.(1)
  
  "This is the first place that ever felt like home to me, and now I have to move," Gaines said. "I was so naive."
  
  In the aftermath of the housing market crash, contract-for-deed sales in the metro area have soared more than 50 percent in the past five years, as families with low income or bad credit are lured by the promise of homeownership.
  
  "There is a lot of abuse out there," said Connie Sandberg, who oversees St. Paul's housing sale inspections. "People are being victimized."
  
  Regulators in several cities said they are alarmed by the Star Tribune's findings and frustrated by their inability to do more to protect buyers. Local officials are vowing to push state legislators this year to require greater disclosure from sellers.
  
  "They are clearly taking advantage of a certain segment of the population that needs housing," said Kellie Jones, manager of Minneapolis' problem properties unit.
  
  The purchase price can be twice what the property is worth, records show. On average, contract-for-deed sales were about 10 percent above the estimated market value as set by county assessors.
  
  To get a handle on the growing business, Minneapolis officials recently began their own examination of contract sales. They believe many rental property owners are using contracts for deed as a way to avoid maintenance rules, shifting the cost of expensive repairs onto their buyers. Indeed, hundreds of contract sales in the Twin Cities involve former rental properties, many with a history of problems.
  
  "People are signing a contract for deed and thinking it is a synonym for a lease, and they don't recognize the seriousness of what they are agreeing to," said Henry Reimer, assistant director of regulatory services for Minneapolis.
  
  Many properties were sold again after buyers defaulted, allowing sellers to pocket down payments ranging from $1,000 to $25,000, plus any monthly payments already collected.

***

• For rent or for sale?
  
  In the past five years, nobody sold more former rental properties on contracts for deed in the Twin Cities than Brooklyn Park homebuilder Leslie Reynolds.
  
  But Reynolds' online advertisements continue to promote the properties as rentals, not homes for sale. Reynolds acknowledged the bait-and-switch tactic during a recent interview.
  
  "We put them in 'houses for sale' and we never got a call," Reynolds said.
  
  Several people who responded to the ads said they didn't find out Reynolds wanted to sell them a home until they walked into his office to sign what they thought was a lease. By then, the buyers said, they had already toured the properties and agreed on the size of the monthly payment, not realizing other financial obligations would follow.
  
  Natasha Osborn said she didn't know how much she agreed to pay for her property until she moved in and the contract arrived in the mail. She thought she was renting a house for $900 a month with an option to buy. Instead, she must pay $145,000 by 2014.
  
  "I kind of lost my mind," Osborne said. "My house is not worth $145,000."

***

• So far, not one of Reynolds' 160 buyers has been able to refinance their deals, which typically require six-figure balloon payments in three years. Many walked away, allowing Reynolds to retain ownership. In the past three years, 40 of Reynolds' former rental properties have sold more than once through contract for deed.

***

• Many of Reynolds' buyers went to Brooklyn Park officials for help, said Curt Raymond, who handles enforcement for the city's building department. City officials believed Reynolds may have violated laws against deceptive marketing, so they contacted state, local and federal prosecutors, Raymond said.
  
  "We've run this past everybody we can -- including the FBI -- to see if there is something predatory here, but we couldn't find anything criminal to go after him on," Raymond said. "There is nothing much we can do."(2)

For more, see Contract for deed can be house of horror for buyers (High-risk housing often is sold on such contracts, with little or no oversight).

(1) See Detroit Feds Pinch Notorious Area R/E Operator Suspected Of Screwing Over Naive Homebuyers With Land Contracts On Homes In Some Stage Of Foreclosure for a post on a Detroit-area real estate operator who got bagged in June, 2012 on federal wire fraud charges for allegedly engaging in a similar pattern of unloading crappy houses to naive homebuyers using 'land contracts', a form of deferred title transfer used in Michigan that is essentially the same as the 'contract for deed' form of deferred title transfer used in Minnesota (and not unlike two other forms of transfer often favored by ripoff artists, the 'rent-to-own racket' and the 'lease/option' deal).

See also Co-Owner Of Racket That Ran 'Contract For Deed' Scam Cops Guilty Pleas To Multiple Charges Of Securities Fraud, Unlawful Merchandising Practices for a post on a Missouri case where the ripoff artists failed to advise their gullible homebuyers when their homes were in danger of foreclosure.

Go here for other posts on:

• contract for deed ripoffs,
• land contract scams, and
• rent-to-own/lease option rackets.

(2) Make no mistake - if prosecutors (either the feds, or state prosecutors) were motivated enough to bring criminal charges against these real estate operators, they can find something to slam them with, even if they bring charges for something basic, like theft by deception/ false pretenses, obtaining property by deception/false pretenses, securing writings/execution of documents by deception, engaging in a pattern of corrupt activity, organized scheme to defraud, theft/exploitation of the elderly/vulnerable adults, unlawful merchandising, etc., etc. depending on the specific facts of each scam and the laws of the jurisdiction in which the ripoffs are taking place (to the extent the scammers use the U.S. mail, UPS, Federal Express, etc. or telephone when pulling off any of these scams, federal jurisdiction may be triggered through the mail fraud & wire fraud statutes).

As a reminder to those who mistakenly assume that these apparent ripoff deals are nothing more than civil cases, it is clear that all the sophisticated paperwork in the world (ie. business/purchase contracts, leases, closing statements, etc.) isn't enough to permit scammers to insulate themselves from criminal prosecution when they target their victims with legitimate-looking business propositions when screwing their victims over. Criminal prosecutors have the authority to "pierce through" such attempts to disguise a blatant criminal real estate ripoff as a common, legitimate business deal.

Clear precedent exists for such a "pierce through" approach to overcome any objections that will certainly arise when the scammers make the argument that the arrangement was just a civil transaction that, if challenged, should be done with a civil lawsuit, not a criminal prosecution. See, for example:

• People v. Frankfort, (1952) 114 Cal.App.2d 680, 700; 251 P.2d 401:
  
  The simple answer to this argument is that "The People prosecuting for a crime committed in relation to a contract are not parties to the contract and are not bound by it. They are at liberty in such a prosecution to show the true nature of the transaction." (People v. Chait, 69 Cal.App.2d 503, 519 [159 P.2d 445]; People v. McEntyre, 32 Cal.App.2d Supp. 752, 760 [84 P.2d 560]; People v. Jones, 61 Cal.App.2d 608, 620 [143 P.2d 726]; People v. Pierce, supra, p. 605.)


• People v. Jones, (1943) 61 Cal.App.2d 608, 620 [143 P.2d 726]:
  
  Defendant argues that the deal with each "seller" was a civil transaction; [...] Cloaked in the draperies of his corporation and pretending to act in its behalf, he boldly approached his unsuspecting victims.
  
  [***]
  
  Although each deal in its incipiency bore the color and trappings of a normal, civil contract, yet when subjected to a postmortem it exhaled the stench and disclosed the carcass of a fraud. (People v. Epstein, 118 Cal.App. 7, 10 [4 P.2d 555].) There appears no sign of good faith at any turn. Each taking and appropriation was a grand theft.
  
  The use of the corporate name and the promises made in accomplishing his purpose were a camouflage of such common variety that no excess of genius was required to discern the fraud. Parol evidence of all that occurred was admissible to show the intention of defendant. (People v. Robinson, 107 Cal.App. 211, 221 [290 P. 470].)