In the heyday of the 100% financing investment real estate market, fraud was really running rampant. One of the more common tricks was getting owner-occupant financing on a building, which the buyer had no intention of ever occupying. Nobody was getting called out on it, so more and more people started doing it.
Today is a different story. With all the checks and balances in the system, you’d be hard pressed to get away with that now. Some of these cash-strapped lenders are even getting so picky that they are looking back at old loans to figure out if any fraud was taking place.
I actually got a heads up on this issue from one of the tenants in a building I have ownership-interest in. The owner of the neighboring property did a rehab a couple of years ago and somehow got away with a non-historical porch and windows in the front of the project. We’ve been none too happy with his work and even less happy with the tenants he put in the building. I must confess that I wasn’t all that upset when I heard from our tenant that this guy was in trouble.
Apparently he financed his substandard rehab project with an owner-occupied loan despite the fact that this was a pure investment. I’m sketchy on the exact implications of this, but he now has this property for sale on the MLS. It’s way overpriced, so I’ll be curious to track what happens when he can’t sell this thing. Will they go so far as to foreclose on him or will they just renegotiate his loan?
The main question this situation raises is whether this is an isolated incident or if this is a sign of things to come? I suppose only time will tell. If you’re among those who financed this way, I would suggest you don’t wait to find out which way the wind is blowing.
Refinancing rates and terms are starting to open up again so it might be a good time to start thinking about making your loan legit. Under situations such as these, a lender has a right to call in a loan in full at any time. If that happens, the lendee (hopefully not you) might find themselves among the ranks of the recently foreclosed. Be careful out there.