Episode Transcript
[00:00:05] Speaker A: Welcome to the Short Term Show. The show about short term rentals and long term wealth with real property owners hosting real properties who are crushing it.
[00:00:16] Speaker B: In the vacation and short term rental space.
[00:00:19] Speaker A: And here's your host, Avery Carle.
[00:00:29] Speaker C: Hey, y'all. Welcome back to another episode of the Short Term show. I'm your host, Avery Carle. Got a really exciting guest today, but first, a few housekeeping items. We are hiring in a number of markets for real estate agents. So if you are in the Orlando area or really any area that you think would be a good addition to the short term shop team, or if you think you yourself would be a good addition to the short term shop team, shoot us an email at careers the shorttermshop.com. you can also follow us on Instagram at the Short Term shop or me specifically at the Avery Carl on Instagram. So if you guys are looking for a new job, definitely reach out to us. So we have a really exciting guest today. And I have been selling vacation rental real estate for almost 10 years now. I have dealt with thousands and thousands of investors and, and everybody wants to get a good deal. Everybody, myself included, you know, wants a hack. And in finding those hacks, sometimes you can cross some legal lines and maybe get into some territory that's a little bit of a gray area that maybe isn't something that you should be doing. Now, how do we know what those things are? Well, I have decided to bring on a commercial real estate attorney to answer some questions for us. So, Carrie Rosati, very nice to meet you. Thank you so much for coming on. Do you want to just introduce yourself, tell us a little bit about you and your practice?
[00:01:57] Speaker B: Sure.
Thank you, Avery, for having me on the show. My name is Carrie Rosati. I am a commercial real estate attorney. I handle all aspects of commercial real estate, from soup to nuts, really. Raw land to development to financing to hospitality, multifamily commercial. I'm currently doing a lot of refinances right now, as I'm sure a lot of your listeners are going through that process. And I've been doing this since I graduated law School in 1999, which is a very long time. But as you know, real estate is fun. And I work with a firm called Greensteel and Albrecht in Irvine, California. But my practice is national. So, yeah, that's a little bit about me.
[00:02:45] Speaker C: Awesome. So lot of experience in the real estate space and really excited to kind of get into it. So I kind of had three, just different little hacks that I've seen investors want to use over the years that are in a definite gray area. And I wanted to just ask you about these today. So the first one, and I think this one's pretty obvious, so we'll start with the easy ones, is occupancy fraud or actually, before I ask you this question, let's just talk about what is mortgage fraud. Can you kind of just give us like a layman's definition?
[00:03:18] Speaker B: Sure. According to the bank, mortgage fraud is anytime you make a representation to the bank about yourself or the property or your financial wherewithal, that is not strictly true. It's a very broad definition. And if anybody, if you've ever actually looked at the small print on those loan documents that you sign when you buy the property, which most people don't, but lawyers do, you make a series of representations in there. You say things like, everything I've told you is true. When I filled out the mortgage application, everything I said is absolutely true. And many pages of that mortgage or loan agreement and promissory note, and most importantly, the. If you signed a guarantee, go through all the things the bank can do if they determine that any of those things that you said in the application are untrue.
So that is, in the broadest sense, I think that what you probably, and your listeners probably run into is there is all kinds of stuff in the marketplace of people who think that, you know, well, FHA will give me, you know, 10 mortgages on my primary residence. And so that's fine if, you know, if I don't get, if they let me, it must be legal, it must be okay. The thing about mortgage fraud is it's a really broad definition. And when everything's going great, a lot of stuff sort of gets ignored or sort of. Nobody asks too many questions. And then the minute things start going sideways, whether you personally a property, the larger economy, well, then they, then they start looking at everything with a magnifying glass. And mortgage fraud is actually a federal crime because you banks are insured by the fdic, you have wired money in or a bank has wired money in for your purchase. So you've used the federal wire system.
If you sent your loan application in online, you used interstate commerce. So you're not just dealing with whatever the laws are in the state or county where your property is located. You're also dealing with federal laws. And you know, the federal government does investigate mortgage mortgage fraud. But lying to the bank in a nutshell is mortgage fraud.
[00:05:28] Speaker A: Ladies and gentlemen, Smarter Short Term Rentals is now available.
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[00:06:04] Speaker C: So how do you get caught committing mortgage fraud in most cases? Because the, the thing I hear among the investor community, well, as long as I'm making the payments, then nobody's going to look into anything. Is that true? How do you get caught?
[00:06:16] Speaker B: A couple ways.
You have a property that isn't performing and you miss a payment, you do a deed in lieu, something gets foreclosed, you need to do a short sale, they start looking because they'll look at all your other assets. You have an escrow company that's doing all kinds of deals and it flags regulators. Banks are regulated, quote unquote, right? That means regulators, that is accountants and auditors come in every year or every couple of years depending on the bank's history. And they just randomly pick files and if they get yours and something looks not right, they'll go ahead and take a look at it. People also get caught because if there's an escrow company that gets into trouble on one deal or maybe they inadvertently, you know, it was a, it was not a syndication, it was actually a Ponzi scheme or something goes sideways on their, their side, then the authorities come in and they start looking and they don't just stop with the deal. That's the problem. They always look a little deeper, a little wider. And if they start seeing patterns, then they follow them up. Another way that people get caught is I'm going to say like a dirty word. 2008, 2009 financial crisis.
When you start having trouble in the economy, interest rates spike, you know, properties start showing signs of distress. Lenders start looking more carefully. Especially if you're dealing with like a large institutional lender or if you have like a Fannie or Freddie loan and they may have farmed it out, you know, sold the loan to a servicer who's in, in charge of processing payments and keeping an eye on things, they want to get ahead of things so they'll start looking that, that's how people get caught.
[00:08:05] Speaker C: Gotcha. So you could, if you are in a gray area and you have done all the things to cross all your dot, all your eyes so that you don't get looked at. Even if just somebody else who is using the same loan servicer as you does something stupid, you could get looked at and still get caught. So it's not a matter of how Good. Quote unquote, you are at hiding things or making things look good to the bank. It can be triggered by something with nothing to do with you.
[00:08:32] Speaker B: That's absolutely right. Yes.
[00:08:34] Speaker C: Gotcha. All right, so the first one that, that I've seen people try to do and we always, I mean, we've had clients leave us and go use another agent because we said, we know what you're doing and we're not going to be a part of this. Where they'll say, okay, I want to use a primary home loan to buy a short term rental. I work remotely in California. But let's say I'm going to buy a short term rental in Orlando, Florida and I'm going to, that's going to be my primary. I'm going to be there, you know, some of the time, but they aren't. So for me, that's a pretty clear cut. Like it's either an investment property or like a vacation home, which is a different type of loan or a primary home. It's not, it's not both of those things that you're renting it out when you're getting a primary home loan. So you have a lower down payment, 3 to 5% and lower interest rate than if you're getting a vacation home loan or an investment loan. So that's why people try to do this. They say, oh, well, I'm going to be there part of the time and then I'm going to rent it out. When I'm not there, I'm going to use a primary home loan. So is that a gray area or is that like straight up fraud? Well, or it's all a gray area until somebody starts looking into it.
[00:09:42] Speaker B: I mean, it's, it's both because, you know, you can only have one primary residence, right? And so you're going to be filing taxes and that's going to show where you made most of your money.
And chances are like, I love the example of Florida versus California because you picked two ends of the residential income tax spectrum. Florida doesn't tax you on your, on your, on your earned income and California wants all of it. And so it's great. That's a great example because you're going to file your taxes and, and you're going to show where you earned your money and that WT2 is going to essentially show where, where you are primarily located. So when you say to the bank, well, this place in Florida is my primary residence and you're there 90 days out of the year and you're somewhere else for the rest of the year that's not a primary residence. Right. And then when something happens like there's a hurricane and you make an insurance claim and you know the property is a total loss and you have to deal with your lender now that's obvious and they're going to be rather upset and they can call the loan or you rent it to someone. And I mean, I'm sure that you've had these experiences with short term rentals. Sometimes things happen and you end up having to make insurance claims or there are problems on the property and all of a sudden, you know, you've got this homeowner's insurance policy and the homeowner's insurance, you file the claim and they say, well, you know, no, this wasn't covered under the insurance. You're using this as an income generating property.
So those things go sideways and now the lender's looking back and you've made all these representations and so they have the right to call the loan. So to the extent that it's a gray area, you know, yes, a personal vacation home sometimes qualifies for favorable mortgage terms, but you know that a personal vacation home and a short term rental look like very different things in terms of how long you're there. And you know, a general rule is if you're spending more of the year renting it out to third parties than you are living in it, it's hard to call that your, your personal vacation home.
And it's certainly not your primary residence.
[00:11:58] Speaker C: Right?
[00:11:58] Speaker B: Yeah.
[00:11:59] Speaker C: And the primary residence is, is the big one. So with the, with the vacation home loans, it's my understanding that Fannie Mae and Freddie Mac have said as long as you're spending two weeks of the year there, then you're free to rent it out the rest of the time. And that's no problem. But the primary home, like you're not living there and probably not something that you need to be trying to do. And I've seen it happen a couple of times. We had, I can't remember exactly what it was. It was in Scottsdale, I think, and maybe it was, they wanted us to help them buy something. And anyway, they had like seven or eight primary home loans. And we were like, guys, like, we don't really want to get involved in this. So that kind of thing I would say is a little more of a red area than a gray area.
[00:12:44] Speaker B: Great, great. Cool.
[00:12:46] Speaker C: All right, guys. So make sure you're getting the right type of loan. You're being honest with your lender about, hey, I. And it's okay. Ask, ask them, ask questions. Hey, I plan to vacation here sometimes I do plan to rent it out when I'm not there. What type of loan should I get? Don't just straight up lie and say this is going to be my primary home because I only want to put down 3% instead of 10% or 15 or 20. Just save up that money and do it the right way. It's a lot harder to undo something once you've done it than to do it the right way the first time.
[00:13:17] Speaker B: Absolutely.
[00:13:19] Speaker C: Okay. Second one. Now, this has been a big back and forth in the real estate investing industry for several years now. It's really gotten a lot of popularity and I would say the past three years since mortgage rates went up and that is subject to financing. Now, I don't have an opinion on this myself. I think that there are situations where subject to can be great for a seller who's potentially going to go into foreclosure, who just needs to get out from under making that payment, who, who's distressed. I think there's definitely a time and a place where it can work for everyone. But as a real estate investing strategy where you're doing this over and over and over again, I've seen a lot of things happen. So for those of you who don't know what subject to financing is, it's like if I'm going to buy a property from Carrie, and rather than going and getting my own loan to buy the property, I'm just taking over Carrie's payments. The loan's still in Carrie's name, but the deed is coming over to me and I'm just making the payments for Carrie on that house, even though I own it, the debt is still in her name. Now, legally, what problems or lack of problems do you see with that strategy?
[00:14:31] Speaker B: A number of them. So years ago, back in the day, home loans were assignable and you could take over somebody's loan and there'd be an assignment and you'd be the borrower under the mortgage and fine.
But banks got smart because a lot of the people that were taking over loans were either not credit worthy or like, didn't meet the bank's underwriting criteria or it was a much lower rate interest rate, and the bank was like, you know, no, if we got a new borrower, this is an opportunity to increase the interest rate, we're going to take it. So in every institutional mortgage loan document that I've, I've ever seen, there's a provision that says this Loan is not assignable or transferable except with the written authorization of the lender.
Also, every mortgage deed of trust loan agreement out there has another provision in it that says that the borrower is not permitted to transfer the property without the lender's prior written consent. And if they do, they'll, they can call the loan, they can accelerate it and, and call it. And if you can't pay it off, they can foreclose.
So it's not strictly illegal to enter into a subject to property contract and buy property subject to someone else's mortgage. But you have to understand that it does violate several very important provisions of the mortgage. Banks don't like it and you are, you do not become the debtor. You don't, you might be paying their mortgage, but you're not their borrower. And so you do this in the bank doesn't, you aren't credit worthy. They don't, they don't like it, they'll call the loan. And your choice then is you can pay the entire amount off with penalties and fees and keep the property. Or you go into default, they'll foreclose, you lose the property.
[00:16:27] Speaker C: Wait a minute. I have a, I have one question I want to like jump in there. I, as the buyer of your property, lose the property or Carrie gets foreclosed on because you're, the loan is in your name. Even though I've bought the property, the deeds in my name, loans in yours.
[00:16:45] Speaker B: Right. But the collateral for the loan.
[00:16:47] Speaker C: Gotcha.
[00:16:48] Speaker B: Is the property that you own and you took subject to that loan. Meaning that your, the, the, the ownership interest you bought is subject to the terms of that loan.
You didn't get clear title, you got title encumbered by somebody else.
[00:17:07] Speaker C: Okay, so that makes sense. And I think that a lot of people, their questions about subject to is like, well, what if this buyer stops paying the mortgage and the loans in my name, does that go on my credit? Is my credit ruined because of this buyer? Yes, very factual. Yeah.
[00:17:24] Speaker B: Yes. Everyone loses in that situation. The borrower under the loan has violated their mortgage terms. They're technically in default. And then the bank goes and they for to foreclose on the property because you know the seller's not paying them, gonna have the money to pay them back. Right, right. And so they'll take the property and in foreclosure. So your sellers credit is going to take a huge hit and they're going to have a lot of problems with their credit and the buyer is going to lose the property. So that, that's a no win.
[00:17:55] Speaker C: Let's say they call, they call the loan on me and I have to pay it off plus penalties and fees is an, if I don't have the full cash amount to pay that off, can I just go finance this with another bank? Or are they going to see that I just did this and I have this kind of black cloud and not finance me on this property?
[00:18:15] Speaker B: I mean that depends on the lender, the larger economy and your personal credit history.
I think let's say this is the first time you've done this and you're otherwise credit worthy and you don't have a lot of, you know, failed projects or what may a couple blemishes on your credit history.
Your bank will probably, you know, the new bank will probably roll their eyes and say, okay, well I guess we've all learned something, don't do that again.
And they'll probably refinance it. You will have to negotiate with the existing, the current bank to get the time because the new lender is going to need, you know, they're not going to close that loan in two weeks. Right. So you're going to have to beg and plead and buy yourself some time.
And you're going to have to assure the new bank that this was a momentary lapse of judgment and not a pattern.
But you could, I would think that under, under, in normal market conditions you could, you could refinance it.
[00:19:14] Speaker C: Gotcha. So what I think I'm hearing you say here is that this really is like a true gray area. You do run the risk of the loan getting called. But we're not in like necessarily red area. Like we were on the, buying a house as a primary but not living there.
[00:19:31] Speaker B: Right. I mean it's a clear violation of all the, all of the mortgage documents. So the seller is violating all of their mortgage documents. From the minute they close on that property, they're in default. A buyer is doing a very risky transaction. The other issue is, let's say this goes along just fine. Buyers making payments, bank hasn't put together. I think that's highly unlikely that they wouldn't put it together. But let's say the bank doesn't, doesn't pick up on it. They don't have an issue with it. If you went to sell it or refinance it, there would be a lot of questions from a new buyer or a new lender about why there's a mortgage on the property with a borrower who isn't you. And then when you went to get a payoff letter, the bank can't talk to you. You're not their borrower. You'd have to track down your seller. It would be very complicated. It would create a lot of hurdles for you. The other thing is that banks put trackers on all the property that they have taken as collateral for loans. So when there is a new lien filed, anything recorded on the title of that property, it flags the bank. So it might take six or nine months. But if once that property is conveyed to you, like that old lender is going to know that.
[00:20:43] Speaker C: Oh, okay, I didn't know that it alerts lenders when you do that because I've just always been under the impression of like, well, as long as you're making the payments, nobody's going to ask any questions. But. So it does flag them.
[00:20:56] Speaker B: It does flag them.
[00:20:57] Speaker C: Okay. Yep, interesting.
[00:20:58] Speaker B: And a conveyance does, does get attention.
And also so if you're, for example, you're paying into the mortgage, often the mortgage includes an escrow for insurance and property taxes that you pay in that monthly mortgage.
Well, so then you, when you buy the new property, the escrow company or the buyer notifies the, the assessor's office that you have a new tax bill goes to. It's usually going to a new address. If it's an investment property and it's got a new owner on it, well, so then the bank sees that because often the bank is trying to pay the taxes with the money that they're escrowing. So it doesn't go on for very long before, before the bank becomes aware of it.
[00:21:44] Speaker A: Are you worried about your market being saturated?
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[00:23:00] Speaker C: Recommended to me, I guess like if a seller is really in dire trouble, they can choose to violate the terms of their mortgage, which is an evil. Or they can get a foreclosure, which is also an Evil. And they kind of have to just pick which evil they prefer.
[00:23:14] Speaker B: Well, and there's another. There's also an option number three here, which is you've got a lender who's got a borrower in default. And, you know, while we'll tell you, those loan documents give the banks all the rights to do all the things. Banks are in the business of loaning money, not owning real estate. So they never really want to foreclose. That's not their first choice. If you call up your seller's bank or you have your seller call up their bank and say, look, I have an opportunity to sell the property to this buyer and they want to take over my loan, can I assign my loan? If you talk to the lender and get their permission, you're all good.
And, you know, you might have some fees to the bank for them to prepare the launch to the promissory note substituting the borrower. You may have to give them your, you know, you'll have to give them your personal information so that they can underwrite you. But if you would otherwise qualify, chances are, you know, you often have more room to negotiate with banks than you realize, which is always to the point that you don't have to keep everything from the lender. If you call them up, you can probably take over the mortgage. Right. Or they may be, they may say, well, we're not set up to do that. Maybe we sold the paper already. Like, we don't hold it, but we'll, we'll finance you. We already know the asset.
And that is, that is a win. And the bank's incentive also is that, as I said, I mentioned regulators, if banks have too many bad loans in their portfolio, that's a ding against them. And then they get a harder look from regulators. So they are also incentivized to keep loans from entering the distressed and then default category. So if they can do this, a lot of banks are very open to that.
[00:25:01] Speaker C: If you're in true, like, distress.
[00:25:04] Speaker B: Yeah.
[00:25:05] Speaker C: Yes. Okay. I don't think it's occurred to anybody to just ask.
[00:25:10] Speaker B: Yeah, no, they, I mean, you know, the bank, they don't want to foreclose, they don't want to take the property. And also if you are bringing them a potential new customer, like, that's a win for them. Right. And if you are credit worthy and this is like, you could, you could get a loan, this can be a much easier and more streamlined process.
[00:25:31] Speaker C: Well, I think that's the rub is that a lot of people who want to employ this strategy, it's because they can't get the financing on their own. Maybe they're, you know, max out on their DTI or what, whatever the situation may be. So anyway, all right, I think we, we have found a true gray area. But you do have options. If you are like a distressed seller who's looking, selling this way, you have, you do have some options. So very, very interesting. I am going to ask you one that I did not send you before, but it occurred to me while we've been chatting. So let's go back to the vacation or second home loan. So we've established you got to stay there for two weeks out of the year. Fannie Mae is totally fine with you renting it out the rest of the time. But there are some rules, some very clear rules about vacation home loans. And one of them is that you can only have one of those per market. So. So I can't go buy five vacation homes in Aspen because those are only one of them would be a vacation home. The rest are clearly, you know, investment properties. Or I can't buy the house next door to me as a vacation home. It has to be a certain distance from your primary home. But mainly I want to talk about the having multiple vacation homes in one market. So years ago I heard of some investors who, what they would do is they wanted to get by multiple properties in a market and they only wanted to put 10% down vacation home loan because if they wanted it to be conventional, they'd have to put 15 or 20. And what they would do was get under contract on three different properties, use three different lenders, and try to close all of them at the exact same time. So that the other lenders, when they're looking at credit, they just think that the other two lenders that are in the mix, that this buyer was just shopping rates. And so that's what these credit hits were. And it's not that they're actually buying three properties at one time to try and pay 10% three times instead of the one time that's allowed. So what's your, what are your thoughts there?
[00:27:33] Speaker B: This is another one of those years when you sign that loan application and when you sign those loan documents, you've made all kinds of statements that this is your only home in the vacation home in this market. You know that everything you said is, is true and correct, etc. It doesn't violate the terms you've, you've already told them you're not doing that. Whether you realize it or not, when you sign the documents. So they might not catch on right away because it's all happening, happening simultaneously.
But it is a violation of those documents. It is, it is mortgage fraud, depending on the amounts of money involved. You know, I mean, you're taking out mortgage loans, so this adds up pretty quickly, right? This is one of those situations where it's all good until you get caught. And then once you get caught, you have a problem. And if you're talking about, you know, depending on the market, if you're talking about several hundred thousand dollars, the federal government is going to look into that. That is going to be investigated. And you know, those are, that's not a position you want to be in. You will have trouble borrowing money again. If you are convicted of mortgage fraud. You can't raise money again. You can't be a real estate broker, you can't be a mortgage broker, you can't work in a bank. So it's, it would make it hard to continue in the real estate world.
[00:28:59] Speaker C: Gotcha. So one vacation home per market, guys.
And don't try to get a bunch of loans with a bunch of different lenders and so that they can't see each other happening simultaneously because that was pretty, pretty bad. So we're red area there, right? That's red area. That's not just calling your loan, that's federal prosecution.
[00:29:19] Speaker B: Yeah.
[00:29:20] Speaker C: All right. We want to avoid that for sure.
[00:29:22] Speaker B: Yes.
[00:29:22] Speaker C: Avoid federal prosecution at all costs.
[00:29:25] Speaker B: Absolutely.
[00:29:28] Speaker C: And guys, I think this is a good time for me to let you know we do have a part B of this podcast coming out next week and we are going to interview a regular suburban mom who was convicted and went to jail for seven years or prison. Seven years for mortgage fraud. So stay tuned for that one next week. All right, the last, last instance that I wanted to ask you about, the last hack that is questionable to me. It's kind of not questionable. I have very black and white feelings on that. This is not something that needs to be being done. So when you go to get a loan, whether it's a vacation home, second home, conventional loan, or DSCR loan, there's a certain percentage of seller concessions or money, a certain amount of money the seller is allowed to give you to go towards closing costs, prepaids, things like that, the numbers are 2%, 3% or 6%, depending on which of those three types of loans you get. But the max amount you can get, which is on a DSCR is 6% of the purchase price towards your. Contributed back to you by the seller towards your closing costs. And Prepaids. So something I've seen a lot of investors ask about lately is asking sellers for an exorbitant amount of cash back, much more than the banks would allow. So let's say to make it easy, like a 10% or like, let's say we got a $500,000 house and we want $100,000 back, well, we can't put that on the contract because the contract goes to the lender. So what these investors have asked or are what I'm seeing going around the marketplace of questions and discussions is what they're doing is they are making the offer of 500,000, let's say, asking price 500. And they're not putting that hundred thousand worth of seller concessions or seller credits on the contract because they know the bank will tell them no. So they are purposely putting it on a separate contract that they are keeping from the lender. And what they're doing, the way they're wording things, is they're not saying seller to pay buyer $100,000 at closing.
They're saying they're creating an LLC that looks like a separate entity. So if you're not paying Avery Carl, the buyer, you might be paying, you know, Texas soccer number 19, LLC at closing, and the title company, the seller, these people, they don't know what that LLC is. They don't know that LLC is you. So essentially, here's where I have a big problem with it is you are inflating the price of the property in order to get a bunch of cash back. Which, this will be more your department than mine, but from what I understand, that kind of thing is what caused a big contributor to 2008. And banks really don't like that. Okay, you paid X amount for a property, but what the seller got was significantly less. So, you know, over overinflating the value of the property in order to just get cash. What are your thoughts?
[00:32:40] Speaker B: We are. This is so not a gray area.
This is clear mortgage fraud. That's right. What you're, what you're doing is you're. You're artificially inflating the value of the property so that the, the amount of the loan isn't decreased because lenders have a loan to value ratio that they need to, to maintain.
And typically, lenders also want to know what that invoice is for. Right. So you have this new LLC that submits an invoice. What I've seen is a lot of the times there's also some like, there are services that have been put on there. Which, you know, the farther you go down documenting this, the farther, like the worse, the worse it is. But let's say there's nothing on there and the escrow company doesn't, it doesn't question it. It's still wrong. Like it is still a clear violation of the mortgage documents. You have a, if you have a purchase agreement that you aren't showing the lender. Well, again you've represented that they've seen the purchase agreement, that it's the only purchase agreement affecting the property. The full, all the terms of the deal the lender has seen.
You're saying that you're paying this, you know the purchase price is what you're paying for the property. You're representing that this invoice for this credit back is presumably for some sort of credit to fix something on the property or capex or something along those lines. When it's not, you're just pocketing money.
That is, that is a very clear mortgage fraud.
It's also, you're violating like you also make similar representations to the escrow company.
You violated those terms as well. And again we're talking like these are federal crimes. In addition to being state crimes, they're also federal crimes.
These are the kinds of things the government investigates and you don't want to be in that position. It's a really bad idea.
[00:34:28] Speaker C: That's very scary.
I am intimidated by that.
So what you're saying is the reason that the banks don't like it and why the federal government doesn't like it because we had an entire recession over things like this is because now the bank is running around. Let's say if you do this 10 times on $500,000 properties, the bank has 10 $500,000 loans out on what are essentially $400,000 properties. And that's not good.
[00:34:57] Speaker B: Exactly. Now you're over leveraged. They do not have sufficient collateral to secure the loan. If you stop paying and they take that property, they aren't going to be made whole. Right. And having a bunch of loans that are bad that are not sufficient to maintain their collateral. Like the ratio that the federal, the Fed has decided is a safe ratio of collateral that a bank needs to have compared to the amount of money it's loaned out. Well, that's why banks fail. So yeah, I don't think anybody's interested in going back to, to 2008.
[00:35:31] Speaker C: No, I, you know, yeah, I was 20, I graduated college that year and I could not get a job, not that I particularly wanted one when I was 20. I wanted a party. But yeah, I don't think anybody wants to go back to, to that time. So this is a red area. This is not just a banks calling your loan. This is the government is knocking on your door, federal prosecution type situation.
[00:35:57] Speaker B: Yeah. Yep.
[00:35:59] Speaker C: And you know, I think a lot of people, they just don't realize when they're signing mortgage. I mean I, I do this exact same thing. I buy a lot of houses and I just sign documents and take the house and we go rent it and we do whatever the apartment building, whatever. They don't read a lot of the things that they are signing of, things that they're attesting to and things that they could be prosecuted for in these mortgage documents.
So what, what advice do you have for people who you know, or actually let me back up a little bit too.
A lot of these hacks are because the people are seeking out to do and getting into these gray areas are coming from what I think is an altruistic place. People aren't running around trying to like defraud everybody. Everybody just wants to make a better life for their families usually. And a lot of times people just don't quite have the money to do, you know, to invest in the real estate. They decided I want to invest in real estate. So they're doing the subject to's. They want to do that 3% down primary home loan on an investment property because you don't have, you have to save three times less if you're getting than if you're getting a vacation home or X amount. I'm not doing any further math than that. Less than if you're putting down 20%. So I feel like people are coming from or you know, they want to shop a little bit outside their budget. But if they get all this cash back, then they can, they can go to a little bit higher budget than they would have, which might allow them to get into the real estate game when they couldn't have. So I think a lot of people are coming from an altruistic place when they go down this road and they're like listening to influencers and kind of like, oh, wink, wink, this guy got really, really rich doing this kind of thing. And they just started like a regular person like me. And maybe if I do these few things and do these cool hacks, then I can take that next step for my family and then coming from that good place, make bad decisions in order to get there. Would you say that's a fair assessment or that most people running around trying to, trying to defraud people, look, there's.
[00:38:04] Speaker B: Bad actors in every industry and there's always, sure, there's a few people who are out to, you know, pulling over on the banks or whatever, but now most people, they heard someone else do it. They don't think they're going to get caught. They don't think it's a problem you write. They're not reading the documents and they're just trying to get ahead. People are just trying to, you know, they're trying to get into the market. And, and it's tough. I mean, you know, it's. And if someone is saying, well, no, I did this, and you can, you know, you don't have to put down 20% or 10%, you can just put down 3%, it's very seductive.
And a general rule of thumb is the banks have seen it all and every time something happens, they call up people like me and say, we need a provision in our loan document. You know, there's a reason that that mortgage is like 0.6, you know, font and all those pages, right? It's. It's covering everything you've thought of, they've thought of too. And, and it's covering it. And it's one of those, like, if we find out that you do this, we can take the property, we can go after you. Like you, it's a litany of bad things.
But most people aren't thinking about that when they're doing it. They're really just trying to get their foot in the door, get it off the ground and grow a business.
And my advice is, if you think you've figured something out before you sign on the dogline and you put yourself at risk, call a lawyer, pay him for an hour, time a consultation, ask him the question.
I know we're an expense and we're a pain, and we often say no to things that sound like a good idea. But most of us are just there to make sure that people stay out of trouble. And, you know, spending the time and asking the question first is going to be a lot less expensive and a lot less heartache than in the long run than doing something that you think is. Is a hack. And coming to find out after the fact that it's actually mortgage fraud.
[00:40:09] Speaker C: Yeah, I think in this case it is better to ask permission. Just start with your loan officer, say, hey, this is what I want to do. You see how much money I have and what I'm able to do is this thing allowed. And then also, if you don't know how to find an attorney who can answer these questions. Call the title company of the, the deal that you're closing and just ask them if their title attorney has experience enough, if they feel comfortable answering this or if they can recommend an attorney who might consult with you on it just because you just want to make sure you're not doing anything like dumb. And one thing that I want to ask you now, Carrie, so if there's anybody listening to this and they're like, oh crap, I did one of those things. What, what do I do? What should they do if they realize after the fact, well, I did one of these, one of these mortgage fraud things. What do I do now?
[00:41:02] Speaker B: Okay, I'm going to give you a very lawyerly answer that depends a lot on, on what thing they did and how often, how many times.
But regardless, the first thing you do is take a breath, get a lawyer, call, call a lawyer. And if you don't know one, if you have a mentor, as you said, you can call, you know, a title company's a good referral space and talk to, to an attorney in that market and come up with a plan. And that plan is typically going to be understanding. Like it's, it's going to be, it's going to be a situation of understanding what the financials are, figuring out, how economically you can, you can correct it. And then, you know, if it's like a subject to situation, you can call the lender and you know, you can either get a refi lined up or call the lender about being underwritten and getting an assignment of the loan.
But you know, take a breath, don't panic and then, and then go about putting together a plan about how to deal with it.
[00:42:10] Speaker C: Gotcha. Good advice, Very good advice. So guys, be sure to stay tuned next week where we are going to interview someone who has been convicted of mortgage fraud. That's going to be super interesting, but you've got a really great primer here of some of the more common things out there in the real estate investing world that may come up as a potential hack. And now you have the knowledge to make good decisions about that. Carrie, is there anything that maybe we haven't covered about this topic that you feel like our listeners would benefit from hearing?
[00:42:41] Speaker B: Sure. One thing in connection with the subject to contract concept, I often hear like, well, I'm going to hold it in a trust so it's not a change of ownership, so the bank won't know. I'll just take over somebody's trust. I'll have the seller put it in an llc and then I'll just buy the LLC from them. And then it's not a, it's not a violation. And those are not workarounds because the bank.
And under the law, anytime you have a change of control or something's in a trust and you have a change of beneficiary like the. It's to them, it's the same thing. So don't think that you can get around it by just throwing the property into a land trust. If it's in a jurisdiction that recognizes them or you can throw it in an llc, it's still a change of ownership.
[00:43:28] Speaker C: Oh, you know, that does actually spark one more question surrounding that not related to subject to, but to the LLC thing. So I used to do a lot of business in Nashville where the rules and regulations about short term rentals and what's permittable change all the time. And so what we see people doing in. I shut down my Nashville office. This is not me. But what I've heard and seen people doing is they. The listing agents always suggest this. Well, they're not giving out any more permits. And if the property changes ownership, then the permit terminates. The new owner will have to get in line for a permit. But what you can do is this property is conveniently in an llc. So you just buy the whole LLC and everything in it and then it's not a change of ownership and the permit situation goes away. The change of ownership, terminating the permit and the new owner having to get in line. Is that something to be a little bit careful doing?
[00:44:22] Speaker B: Yes. So what you have to do is you have to look at the local ordinances. In Nashville, almost 100% of the time, most jurisdictions will say that if you have a change of the control of the llc, new members, a new manager, that is considered a transfer. We get to charge transfer taxes, we get to reassess for property taxes, we get to pull permits and require you to get new ones. So I know that Nashville does enjoy constantly refreshing the rules in this area. So. But you can. The title company can give you the. They usually have a printout of like the statute that shows what is a change of ownership. And you need to take a look at it because historically like changing the members and or the managers, the person who has control or owns a majority of an LLC is considered a change of ownership and it triggers all of those things. So again, not usually a workaround.
[00:45:22] Speaker C: Yeah, you'd rather know this stuff up front than, you know, get halfway or all the way into an $800,000 million dollar property and, oh, crap, I can't rent this thing. So go about things the right way. Don't try to force. What, is it a round peg and a square hole or is it a square peg and a round hole? Whatever the saying is, don't do it.
[00:45:41] Speaker B: I would do it. Yep.
[00:45:43] Speaker C: All right, Carrie, you have been so, so helpful. I hope that. Well, I feel that many of our listeners will now avoid a lot of mistakes because you came on our podcast. So I really appreciate that. And if anybody wants to follow you on social media. Are we that kind of attorney that has social media or are we not doing social media?
[00:46:04] Speaker B: I am not doing social media yet.
That is.
Yeah, that is something that we've been allowed to do under some of the states I'm licensed in. But hopefully in the new year, I will be able to. We're waiting for a couple bar rules to change, so I'm hoping in the summer that I'll have a channel for you.
[00:46:22] Speaker C: Well, we hope we never have to call Carrie or any attorney. But anyway, thank you so much for coming on. I'd love to have you on again sometime in the future. That was amazing. Thank you.
[00:46:34] Speaker B: Thank you. Take care.
