3 Tips on Avoiding 'Foreclosure Prevention' Scams

With 10+% of homeowners delinquent in their mortgages (and more projected to occur over the next year), there are many opportunists out there looking to take advantage of people who in a tough spot and motivated to sell quickly.  CNN Money came out with an article about how 3 ways to spot a foreclosure scam.  Below are their findings (in italics) and my opinions on the subject:

Asks for a fee in advance. If you pay them these fees, which can range from $1,000 to as much as $5,000, that's probably the last you'll ever hear from them. Most never even go through the motions of talking to lenders and trying to work out modifications.  

True.  There is a large risk to prepayment for a loan modification or forensic audit.  You cannot guarantee that the company will do any work or that you will receive your money back.  And it's a tough situation for the company as well because if they do not charge in advance, there is no guarantee that the homeowner will pay them either.  If outsourcing for 'subject to / loan mod' or forensic audits, Investors should look for reputable companies that offer 100% money back guarantee and also demand a list of 5-10 references from clients with whom they've worked and had to provide a refund.

Now the big question.  If you are an investor who specializes in sub to loan mods / forensic audits or short sales, should you charge the homeowner in advance for your services?  There are 2 schools of thought on the subject.  One thought is 'YES' because it's the homeowners' mess so why should the investors pay for a loan mod to make their loan more attractive for purchase, the homeowner hasn't been paying mortgage and should have funds to contribute to saving their home, and payment in advance gives homeowners 'skin in the game' and will help ensure that they don't disappear when the bank requires them to send in paperwork.  All good points.  

The second school of thought is that the homeowner is going through enough hardship and should be able to walk away without any investment.  While the investor may have expenses associated with loss mitigating a short sale or loan mod, it is the business they are in and these expenses are expected.  Since the homeowner has no ability to profit on the transaction and the investor does, then the investor should incur the expenses.   Just my opinion, but I happen to lean towards this last school of thought.

Tells you they can guarantee foreclosure will stop. Nobody can do that, especially before they find out more about your individual circumstances.

True.  I will always tell homeowners when trying to stop foreclosure that if we complete a full short sales packet / loss mitigation packet and submit by x date, then we will put ourselves in the best position to stall the auction date.  But there is no guarantee that this packets will delay foreclosure.  It is foolish to guarantee something in which you have no control.  Besides, homeowners respect honest much more than they respect people who just tell them what they think they want to hear. 

Urges you to stop paying your mortgage and pay them instead.  They're trying to add to the money they already bilked you out of by keeping up the pretense of trying for a modification. 

As the car in Monopoly states: 'Go directly to jail'.  I think that is just criminal and really doesn't require any additional commentary.

In summary, there is so much money to be made doing real estate honestly and ethically.  Why even risk doing it the wrong way?