In real estate, there's no room for assumptions

Dear Ms. Mortgage Maven,I want to buy an investment property. I went to an investment seminar and learned a lot of different strategies on how to buy foreclosure properties without a realtor, without a lender and for no money down. Now I think I am interested in wholesaling properties or assuming someone else's mortgage. Are these good ways to make money?

Thanks!

Karyn C.

Dear Karyn,

No and no. And for all the "ifs, ands and buts" that you are about to throw in - no to all that as well.

For those who do not already know, "wholesalers" are people who get a contract to buy a property for one price and then turn around and sell it to another party for a higher price, and the wholesaler gets to pocket the difference. For example, the wholesaler finds a foreclosure property in Baltimore worth $120,000 and puts it under contract for a fraction of the value, say $80,000. The wholesaler then finds a buyer who is willing to buy the property for $90,000. The wholesaler pockets the $10,000 difference at settlement (assuming the wholesaler finds a title company willing to do the deal).

I would like to suggest another name for that type of person: real estate agent. Real estate agents make their money by bringing buyers and sellers together, and they get paid a commission by the seller, which is deducted from the purchase price. And to practice real estate, you need to take the appropriate course work and get a license from the state. "The real estate commission is going after people like this," said Nancy Gusman, managing attorney for Cosmopolitan Real Estate Settlements, Inc. in Largo, MD. And, she added, title companies that close this type of transaction are playing a game of legal jeopardy as well.

Acquiring property by assuming someone's loan or taking the property "subject to" the existing mortgage is also not a good move. When you assume someone's loan, the buyer takes over the monthly payments of the seller and obtains title to the property. However, assuming the mortgage without permission from the lender is a breach of the terms of the deed of trust and the note, which almost always has a "due on sale" clause. Very few loans are assumable these days. And even if the loan was assumable, the lender will have rules for the assumption. If you assume a loan without going through the process, or assume the loan even though it is non-assumable, the lender can institute foreclosure proceedings immediately because it is a non-monetary breach of the deed of trust.

As for making money in general by buying foreclosure properties, there are books written about that topic, but my advice to you is this: be careful because it sounds like you are being taught schemes that ultimately defraud the seller out of his or her equity, and this is illegal. There are plenty of foreclosure, pre-foreclosure and bank-owned properties that are currently listed for sale. The best way to buy one of these properties, without running afoul of the law, is to use a reputable real estate agent, reputable loan officer (unless you are paying cash) and a reputable title company. (I suggest that you find one that would refuse to settle the types of transactions you originally proposed.) A real estate agent costs you, the buyer, nothing, as that person is paid from the proceeds of the sale by the seller, whether the seller is an individual or a bank. You will not have to worry about crossing any legal lines, and you will be able to sleep with a clear conscience each night knowing that you did not intentionally or unintentionally defraud anyone out of his or her equity. And that is priceless.

Please interview at least three real estate agents, and ask them how they can help you find an investment property that meets your needs. Best of luck,

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage. Call or email her to discuss your home purchase or refinancing needs, including FHA loans and loans in "declining markets". She can be reached at 202-607-4449, Jessica@msmortgagemaven.com or jessicawhite@tenacitygroup.com. You can also apply online at www.msmortgagemaven.com.