Wednesday, May 18, 2005

Property Flipping Scams In Baltimore City

This blog has pointed out that in todays' RE market, fraud is almost indistinguishable from everyday conditions. Inman News, "The perpetrators of a real estate flipping ring in Maryland will be held liable for penalties and restitution, Attorney General J. Joseph Curran Jr. said Monday."

Which raises the question, if RE is such a great investment, why do crooks have to resort to scams? "The court upheld a finding that Lee Shpritz, Lee P. Woody III, and John M. Morgan Jr., had engaged in a flipping scheme to sell and finance properties at inflated values. Additionally, the court upheld a finding that Michael Almony misled home buyers by submitting misleading inflated appraisals."

"Property flipping hurts home buyers and creates significant problems for the neighborhoods in which the homes are located."


At 9:43 AM, Anonymous historybugg said...

(if RE is such a great investment, why do crooks have to resort to scams?)

Because that is what crooks do. As Hannibal Lecter would say, "That is their nature."

It is only natural that criminals and fraudster would be attracted to real estate right now. To quote another sage, "Why do criminals rob banks? Because that's where the money is."

The RE market today is brimming with neophytes, newbies, naifs, easy marks, you name it. If I were of a criminal bent, I would be all over real estate like flies on smelly stuff.

Separating fools from their money is a time-honored road to easy riches. The key is in finding the fools. Ideally you look for them to congregate in one place, sort of the "fish in a barrel" strategy. That place today is real estate.

Taking advantage of people requires that you play on their greed or their fear. You can make more money playing on their greed because greedy people tend to open up their wallets more easily.

Let the games begin!

At 9:47 AM, Anonymous Anonymous said...

I take home about $3600/mo after taxes/healthins/payroll-taxes/401k.

Give the 30% affordability rule, does this mean I should not spend more than 30%*$3600=$1080/mo on a mortgage or rent?

I already spend $1250 on rent for a huge home, so I'm already overspending.

If I were to buy a modest home in my area for $450K, with 20% down ($90K...which I do not have, since all my savings goes to my 401k), then my monthly mortgage payment for a 30yr fixed mortgage would be about $2100.

I'm assuming the interest tax dedudction might cancel out property taxes, but upkeep might add an extra $100 or so per month.

So the total monthly cost would be $2200, which is 60% of my take home pay!!!

How the heck are people doing it?

I make a good salary of $85, which is about the average household income in my area?

Please explain, I'm confused as to who is buying these homes??

At 9:49 AM, Anonymous Anonymous said...


Salary of $85K/year.

At 9:59 AM, Anonymous nostradamus said...

(How the heck are people doing it?)

Good question. Most of my friends who have bought in Calif over the past two years were selling another home, so they were rolling their equity into the new home. In many cases, their monthly costs were lower because they had a very large down payment.

But for these first-timers or folks putting down 3%, 5%, 10%, I don't have a clue how they make it work. Obviously, using 1-yr teaser rates, interest-only, etc, lowers the monthly substantially. But at these prices, even with creative finance, many still wind up paying 35-45-55% of their take-home pay for housing.

I guess as long as home prices keep going up, there's no problem. But if home prices stagnate or decline, lots of these folks will be in big trouble. And over the next few years, as teaser rates expire and I/O loans convert to principal-amort, we could see a cascading effect.

We are setting up for a very, very long flat or declining period for real estate, given all of the above. But that period has not yet begun.

At 10:01 AM, Blogger Ben Jones said...

9:47 anon,
(who is buying these homes?)

See the latest post from Business Week for an answer.

At 10:01 AM, Anonymous Anonymous said...

Homes in your area (currently $450K) would need to drop to $85K*3=$255K to be affordable for someone making $85K/year.

Use the multiple of 3 times household income to quickly determine affordablity. That why the entire US is in a housing bubble.

Medain salary nationwide is like about $35K, so that means medain home prices nationwide should be about $100K, but they are currenly $200K.

Basically, prices need to drop by 50% in almost all areas.

At 10:02 AM, Anonymous Anonymous said...

Little digression...yesterday on Larry King Live, Donald Trump (asked about Las Vegas ventures and real estate) said :"real estate is booming and I HOPE IT CONTINUES"

I have never heard of Trump say "i hope" about real estate, he is always a " buy buy buy" kinda guy.

At 10:06 AM, Anonymous Anonymous said...

9:47 Anon, I think the rule is for gross income. BUT, this is more of a limit than a guideline.

Regarding "who is buying these homes?". Good question. I ask that every day. Probably one of those "creative" people.

At 10:08 AM, Anonymous Anonymous said...

Donald Trump should be fired. I rather listen to David LeReah.

At 10:31 AM, Anonymous Anonymous said...

"I think the rule is for gross income"

Somewhat stupid rule, since gross can change depending on new taxes, 401k, health insurance, etc.

Irrespective, $85K*30%/12=$2100/mo.

But my take home each month is $3600, so that would only leave $1500/mo for my living expenses of food/utilities/car expenses/etc.

That would not cover my expenses which are typically around $2000/mo.

So it woudl seem that 30% of gross is NOT a good rule. I think 30% of net is realitic. Even 40% of net might work.

At 10:38 AM, Blogger The Original Anon said...

"Give the 30% affordability rule, does this mean I should not spend more than 30%*$3600=$1080/mo on a mortgage or rent?"

The bank loan-to-income ratios use gross income, not take home pay. So, if you make $85k/year, your monthly payment for a 30% ratio is 30%*$7000=$2100. Banks allow up to 45% of gross income (assuming no other debt service), which is well over 50% of take home pay. For your salary, that means they'd allow a PITI of $3200/month, which corresponds to a loan balance in the neighborhood of 500k or more, depending on the mortgage structure. The mortgage interest deduction would make your take-home pay bigger, since you'd pay less in income tax, although the income tax savings are partly offset by property taxes, insurance and maintenance. It doesn't mean you should do it--this is what the banks allow, and this is what people are signing up to.

At 11:05 AM, Anonymous Anonymous said...

"that means they'd allow a PITI of $3200/month"

No wonder we have a housing bubble...

That would be 88% of my take home pay!

That is crazy. Interest deduction would be a non-factor, since property taxes and upkeep would gobble that up.

I suppose those buyers are not maxing out thier 401k, or doing anything else other than paying for their home.

At 11:11 AM, Blogger deb said...

Any if they can't make ends meet, they just take a little out on the equity line. See how easy it is to balance a budget?

At 11:21 AM, Anonymous Rob said...

It works for Uncle Sam.

At 12:34 PM, Anonymous Anonymous said...

9:47 --

I think you should be happy you have a nice large rental home that you can afford on your take-home pay. You don't have to worry about maintenance and repair issues, nor property tax. Stay there; do not buy now. Buy in couple of years, when prices are once again reasonable, and your salary still assured, or just continue to rent and invest any excess cash. Renting isn't the worst thinig that can happen to you.

At 11:57 PM, Anonymous Anonymous said...

I'll tell you how they are doing it in California. Almost everyone we know has refinanced multiple times, taking lots of cash (equity) out and/or HELOCs. They claim they need to do this to "pay off credit card balances and other debts" each time. This means they are living WAY beyond their means, and not worrying about it! (At least that's what I get from them.) They are all stressed out in between because they run out of money and can't pay the minimum balance on their credit cards. Then, they refinance and buy new cars (I'm not kidding), big-screen T.V.s and go on expensive vacations as if they had just won the lottery. They act as if they are suddenly rich. Then, when the cash runs low, they do it all over again. UNBELIEVABLE!!!!

This is why I am not even tempted to buy into this market. Not in the least!


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