In recent years, this practice has become more commonplace due to rapidly increasing housing prices combined with high foreclosure levels. These factors create the perfect environment for equity strippers unsuspecting homeowners who have unknowingly built a large amount of equity in their property and many homeowners going into foreclosure.
While equity stripping schemes come in many forms, all schemes are centered around the equity stripper obtaining the title to the property at well below market value. Typically, equity stripping schemes begin in the same fashion. The equity stripper combs publicly available information for property that is in foreclosure or is going into foreclosure. The equity stripper will directly or indirectly contact the owner of the property, offering to help save the home or to help stop the foreclosure.
Once an interested homeowner is located, the equity stripper will commonly acquire ownership of the property in one of two ways. The first way this scheme is carried out is by employing simple fraud upon the homeowner. Typically, the equity stripper will have the distressed homeowner provide a warranty deed to the property under some false representation. Commonly, the representation is something to the effect that the deed is necessary to begin a refinancing process. As soon as the deed is obtained, with the equity stripper paying substantially less than the value of the property, the equity stripper files the deed and then proceeds to evict the homeowner. Once the former homeowner is evicted, the equity stripper is free to sell the property at market value and pocket the difference from what was expended to obtain the property.
More commonly used in the equity stripping process is a reconveyance-type of a scheme. Essentially, this type of scheme is set up so that the equity stripper acquires title to the home with a promise of putting title back to the homeowner sometime in the future. Typically, in this type of scheme, the homeowner is aware that they have transferred title and they believe that they will eventually reacquire title to the property.
Commonly, the initial transfer of the property to the equity stripper is done by way of a purchase agreement and deed whereby the equity stripper pays the homeowner (or the sheriff or mortgage company) a value roughly equivalent to the amount needed to recover the property from foreclosure or to prevent the property from going into foreclosure. Once the initial transfer is completed, the recoveyance typically occurs sometime shortly after the initial conveyance and many times this reconveyance is done at the same closing of the initial conveyance. Most often, the recoveyance is in the form of a Contract for Deed or a lease with a purchase option back to the homeowner. These forms of recoveyance are favored by equity strippers because they allow the equity stripper to rapidly rid themselves of any interest the homeowner may have in the property upon a default of the Contract for Deed or the lease provision by the homeowner.
Typically, the homeowner pays a repurchase price that substantially exceeds the costs of the equity stripper in acquiring the property but still may be below market value. The homeowner usually pays rent or Contract for Deed payments that exceed the equity strippers monthly expenses to own the property and commonly, the repayment on the Contract for Deed or the monthly rental payments are structured with an expectation by the stripper that the homeowner will default.
Once a default has occurred, the equity stripper proceeds to cancel the Contract for Deed and evict the homeowner. Thereafter, the equity stripper obtains the right to sell the property at market value and pocket the difference between the sale price and the amount expended to obtain the initial transfer.
There are numerous legal theories upon which a homeowner may combat the equity stripper. In Minnesota, state law regulates these transactions and the homeowner should first check to see if the transaction which was entered into complies with state law.
Another legal theory commonly employed by the effected homeowner is the theory of equitable mortgage. This theory allows courts to look past formal sale/reconveyance documents and, in certain circumstance, recharacterize the transaction as mortgage refinancing rather than an outright sale of the property. Essentially, the court will look at the substance of the transaction over the form.
If the transaction as a whole appears more like the equity stripper has loaned the homeowner money secured by an interest in the property, the courts may find that an equitable mortgage exists. The advantage in establishing an equitable mortgage is that the homeowner will be held to retain title to the property and gains the right to the foreclosure procedure. The homeowner will also retain the right of redemption upon foreclosure.
Additionally, by successfully having this type of transaction recharacterized as an equitable mortgage, the homeowner may also be able to assert that the loan made by the equity stripper violates usury laws. As a result, the debt may be abolished in certain circumstances.
Because equity stripping takes many forms, there are other legal theories besides equitable mortgage that may help the homeowner combat the equity stripper. A violation of the Homeowner Equity Protection Act (HOEPA) and a violation of state unfair and deceptive acts and practices are also common legal arguments that may be employed.
Because the schemes used by equity strippers vary tremendously, a victim of equity stripping should immediately consult an attorney to determine what legal theories, if any, may be useful for protecting their rights. |
