When the newspaper ran the sensationalized story of my foreclosure investing program, my name was instantly smeared across the community. A poor woman who had grown up in her home, planting in the garden as a child, decorating her home with angels loses her home to foreclosure investor, Ryan Searle. It’s the makings of a human interest story that sells lots of papers. Many in the real estate community were more than ready to pick up rocks and start throwing. They took my real estate license.
They now had an excuse for the success I had enjoyed. It must have been accomplished by fraud they said. As a young real estate agent, in my twenties, I had been the top real estate agent in the state of Colorado and one of the top agents in the country for several years selling almost double the #2 agent. I had a successful mortgage company, a fleet of moving trucks traveling all over town with my face on the side, magnets on one hundred thousands refrigerators, owned the highest distributed real estate publication in the state, maybe the country, my advertising campaigns dwarfed my competition.
Worse, I had just sold two companies to a major real estate firm, which was an advertisement to the attorney community that I was a great target for a lawsuit. ” Good people losing their homes to a prominent business man” — that sold papers. Soon after the lawsuit was filed I became a poster child for an ambitions Colorado Attorney General who made his name as a consumer advocate.
Sometimes people just feel the need to throw rocks, especially when they find an easy target.
For certain, I have made my share of mistakes, but I did not do anything dishonest. There was no fraud. It was an extremely difficult time for my wife and I. We struggled emotionally for a long time, worrying about what people thought, trying to figure out how to fix it. It wasn’t just my immediate family, other family members had been drug through the mud who had no involvement whatsoever. My mind was filled with negativity. I would wake up in the middle of the night thinking about the individuals accusing me of fraud who themselves were knee deep in lies to serve their purposes, outright lying or using half truths to paint an untrue picture, or as the attorneys like to say, “spinning their story”.
The Denver Post took the accusations of a lawsuit, sensationalized the story and went to press. Unless you’ve been through litigation in business, you probably think whatever the papers print is true. But a lawsuit often makes accusations of everything and anything. My attorney said it’s like throwing a whole plate full of food at the wall, and hoping something will stick. From an image perspective, you are not innocent until proven guilty. The Denver Post put the accusations of the lawsuit in print and with a little drama the story would make most people think Ryan Searle is a bad person or at least wonder, maybe Ryan Searle is a bad person.
So I became determined, no matter the cost, to make the truth known. After spending most of my savings, winning huge battles in the courtroom that the newspapers refused to print, I realized that my victories did not sell newspapers, so would not be printed. After more than a year of spending I came to understand that the truth was only a small part of the equation. Who has the deeper pockets can become more important than the truth.
Then I had a major breakthrough. I realized it was none of my business what others thought of me. I had no control of what others thought of my family and I. All I could do was what I believe to be right and then let the chips fall where they may. Over the next several months I learned to let go, forgive and even understand how others justified their actions. I found that those who knew me first hand, by my actions, knew what I stood for and my character. None of my true friends ever asked me to explain what happened.
The toughest of times give us the opportunity to rise up and take action again — if we allow it.
I moved my family to Texas for a fresh start. But the internet does not allow you to completely start over. It follows you. Someone “googles” your name and that’s that. In ten years I have been asked about the “Colorado incident” less times than I can count on one hand. I’m aware that virtually everyone who knows me, knows about it, and I imagine there has been a lot of “did you hear about what happened with Ryan in Colorado”… but they don’t ask me about it, and I don’t bring it up. I assume they have come to terms with who I am.
That’s not to say I haven’t had problems. I had a major community blow up in a little league situation where I was the coach and someone who didn’t care for me thought sharing the articles in a group setting would be a good way to discredit me. But my family is blessed to have lots of great friends whom have never asked what happened. They may want to know my side or not, Im not sure. I have also recently done a mailer to about 600 high end property owners and two of these asked about the article when negotiations began. One of these individuals asked if my side of the story was on the internet so they could read it. So, I started typing this.
So what happened… It’s a long, complicated story to tell, one I have only told a few times in the last decade. There are so many details that it’s hard to decide which parts to share. It’s an impossible story to tell in a few minutes and accomplish conveying any substance.
I could start the story in several different pieces of time. But this will do… After selling my real estate and mortgage companies to Frontier Better Homes and Gardens, I considered retirement from business to spend more time with my wife and boys. But my young sister who was newly married and her husband were looking for employment, so I put him on the clock and sent him to gather information about buying houses in the foreclosure market. What he found was that by the time properties made it to the auction, much or all of the equity was gone for most properties. So he started knocking doors of those facing foreclosure and found that most had no interest in selling even though the foreclosure sale was just months away. So we researched what options were available to those in foreclosure. We obtained hundreds and hundreds of solicitations that were sent to individuals in foreclosure and found that there was really no good solution to their problem.
Home owners don’t need to destroy their credit or spend their last dollar in a gut-wrenching foreclosure.
Why is there no easy, inexpensive, risk free solution for people in foreclosure? Because the individual has become a very high credit risk. The options available are expensive one way or another. So, many people take no action, sticking their heads in the sand hoping a less painful solution will come along. Many run out of time hoping for an easy solution and lose their home and its equity to foreclosure.
When your home is in foreclosure it’s best to prioritize your goals and carefully consider the risks with each potential option, then make a decision and take action. Priorities may include staying in the home, pulling out as much cash as possible, obtaining a low payment or repairing credit. There is no solution that will allow you to achieve all these goals short of bringing the mortgage with all missed payments, interest, attorney and trustee fees, etc current. There are potential solutions that may allow you to accomplish one or some of your goals but not other important goals. One should carefully consider all the pros and cons of each solution.
While working in the foreclosure market, I found that the most common priority for people who have gotten far enough behind on their payments to be in foreclosure is to stay in the home. For many of these individuals, it’s very important that the children don’t have to change schools or that the family does not want to move away from neighbors and friends or move from the home they have grown attached to. Some owners will do whatever they can to stay in their home, even if the solution requires giving up their equity such as the common solicitation to sell their home to an investor and then rent it back. The next most important priority is usually to keep their payments low, followed by maximizing equity or cash out and lastly to restore their credit.
Individuals whose highest priority is to maximize the equity pulled out of their home usually list the home for sale with a realtor at or near the first signs of financial trouble, long before the foreclosure would be filed. If you lose your job, you might use your savings or borrow from a relative over the next couple months while looking for new employment without thinking seriously about putting the home up for sale. But if one has good equity in their home and they want to preserve it, at some point they hire a realtor, price the home to sell and in a good or average market are able to sell the home before the bank ever files for foreclosure as most foreclosure filings are when the owner is at least 5 or 6 months behind on payments.
Once a property owner has had a foreclosure filed against their home, the choices become more limited because of time. Traditional options that will accomplish some of the goals discussed above and stop the foreclosure include trying to sell the home with a real estate agent before the foreclosure is final, a quick sale to a cash investor, bankruptcy or attempting a refinance.
There are always options for a home owner if they fall on hard financial times.
If someone is willing to move out of their home, selling with a real estate agent may be the best solution to maximize the profits from your home sale. The financial costs are only the commission, maybe 6%, and about 2% in closing costs for a total of 8%. It’s also better for your credit to sell the home before it is lost to foreclosure. The obvious problem with a traditional home sale is that it takes time. With a pending foreclosure, time is not on your side.
The problem with real estate is that it is not a liquid asset. It’s not like owning a stock where you call your broker, know exactly what buyers are willing to pay and sell in just a few seconds. Investors are able to buy homes cheap because they make a not liquid asset liquid or able to sell quickly in exchange for a discount on the price. So while a traditional home sale may be the best solutions to maximize cash out, it also is risky if you are running out of time and a foreclosure sale date is looming.
Even if you find a buyer for your home, the buyer will likely perform inspections that could require repairs be made to the home, or the buyer can change their mind and cancel the purchase. Appraisers may require repairs to be made in order for the buyers mortgage company to loan money to the buyer or the appraisal could come in at a lower price than the buyer has offered to pay. A buyers loan may be declined just days before the sale and leave little time for other options. Many homes that are in foreclosure have deferred maintenance and lenders may not be willing to loan on the home until the repairs are made. More likely is that homes with deferred maintenance may receive no offers at all.
Often buyers will not consider these properties because there are plenty of other homes on the market in better condition. If a seller has the money for the repairs, they are more likely to use the money to bring the mortgage current rather than making the repairs. If they do use the money to repair the home in hopes that it will sell, they risk losing that money in addition to the house if they are not able to sell the home in time. Many homes are tough to sell because of other circumstances such as a location next to a busy street or in an less desirable area than other homes for sale. Problem properties such as these, may not be able to sell quick enough and have to consider selling at a steep discount to a cash investor.
What if I sell to an investor? How does that work, and what will happen to my house?
A quick sale to a cash investor eliminates the risk of not solving the problem in time at the expense of equity. Most cash investors of real estate will pay no more than 70-75% of ARV (after repaired value) for a property especially if the investor will be paying all the closing costs. So if an investor believes a house should be priced on the open market at $100,000 after making $8,000 worth of repairs, they will likely pay only $62,000 to $67,000. Is this a fair price? Consider the following: Investor buys the property for cash paying all closing costs giving the seller a net price of $62,000. The investor pays the closing cost for themselves and seller which total about $2,400 assuming there are no real estate commissions.
Then the investor makes repairs of $8,000 if there are no extra surprise repairs. The repairs take 60 days to complete. Most investors, including myself, use a line of credit as their source of cash to buy properties. If they use their own cash to buy the property, there is still an opportunity cost, because they could have been doing something else with that money for income or appreciation.
During this time, a monthly payment on the line of credit may be around $800. If it was the investors cash then the opportunity cost of being in an investment may be the same $800 per month for two months equals $1,600. The investor lists the home with a realtor for $100,000 who markets the home for sale. Fortunately, the market does not go down during the time since the home was purchased and within 90 days a buyer is found and the home goes under contract at $97,000. The buyer performs an inspection that requires $1,000 worth of seller paid repairs to the home.
This is common and could cost much more. It could be a new roof, furnace, air conditioner, electric box upgrade etc. Even new homes usually have inspection repairs required. Fortunately the home appraises for the sale price and the buyers loan is approved. The sale closes 30 days later from the day it went under contract. That’s four more months payments on the line of credit or opportunity cost of $800 per month since the home was listed for sale totaling $3,200. The realtor fees of 6% total $6,000 and there are $2,600 of normal closing costs paid by seller. So…
| Final Sales Price | $97,000 |
|
Less Purchase price
|
$62,000 |
| Closing cost going in | $2,400 |
| Repairs | $8000 |
| Line of credit payments or opportunity cost on $ during repairs | $1,600 |
| Buyer inspection repairs | $1,000 |
| Realtor fees | $6,000 |
| Closing cost going out | $2,600 |
| Net Profit | $10,200 |
You may think $10,200 is a lot of money, and it is, but what about the time put in by the investor during the 6 months from start to finish on this deal. What about the risk of the market going down or that the property was incorrectly valued. What if there are more repairs (there always are) than he planned on? What if the seller doesn’t move out and the investor has the costs and wasted time of eviction? What if the seller leaves a ton of junk at the property etc. etc. The investor had to spend money and/or time in advertising or prospecting to find the deal. What’s the cost of finding a deal? He may have marketing expenses for mailing or telemarketing, running ads in papers, or hiring individuals or herself personally knocking on doors of people in foreclosure.
How many doors were slammed in his face before someone wanted to talk? This may involve spending her evenings from 4:00 to 8:00 going door to door. Then they spend some amount of time from the day the paperwork is signed, researching property values, hiring real estate professionals, meeting all the people to do the repairs, inspections, appraisals and finally close several months later. Subtract the value of their time invested from the $10,200 and what do you have left. Subtract from that the value or cost of the risk of doing the transaction and then what is left. The foreclosure business is extremely litigious, so there is risk that the investor will spend much more in attorney fees if a deal goes south than they stand to make if everything goes perfectly. Many investors make mistakes and end up losing money to sell the property.
My experience is that a large percentage of would be foreclosure investors lose all their savings because of a mistake while they are learning the business. In any case, I believe the profit margin outlined above is reasonable. With this solution, the seller gives up a chunk of equity (maybe 30%) for the sure thing that they will get some amount of cash and the foreclosure will stop which in turn stops the possibility of the credit damage from a foreclosure.
Refinancing can be tricky, and rarely works out for a homeowner nearing foreclosure.
Bankruptcy may be a good choice for those that want to stay in their home. Many people in foreclosure care far more about staying in their home than getting as much equity as possible out of their home by selling it. As we will discuss next, refinancing is not a very likely option, so filing bankruptcy may be one of the few options available to stop the foreclosure and stay in your home. However, many people are determined that they will not file bankruptcy. Some don’t have the money available to pay the attorney. Others refuse to file bankruptcy because they know the damage it will do to their credit.
If someone can stop the foreclosure without having to file a bankruptcy, they will still have several late payments on their credit report. But if stopping the foreclosure requires filing bankruptcy, that action will hang over their credit worthiness for many years. They may not be able to obtain credit for other purchases. They might think it is embarrassing. And some people are just not willing to file bankruptcy as a matter of pride. For those that do choose to file bankruptcy, it will stop the foreclosure immediately. Then all the back payments, attorney fees, trustee fees, interest in arrears, mortgage company costs, penalties and principal will need to be paid back in monthly payments on top of the regular mortgage payment.
Now the homeowner goes back to paying their regular mortgage payment, plus another payment to the bankruptcy for these costs for the next 3 to 5 years. And if the new payment is too difficult to cover, and the payments are missed again, the property may go right back into foreclosure. (I have seen this happen over and over again.) If the house is subsequently lost to foreclosure then the homeowner will lose the property, have a foreclosure and a bankruptcy on their credit, plus still owe the extra fees from the bankruptcy, what could be worse? The cost of the bankruptcy is the up front amount paid to the attorney, maybe $1,000-$1,500, the extra interest, fees and costs to the mortgage company, but more importantly the cost in damage to credit that results in the inability to borrow or the requirement to pay very high interest rates if you are able to borrow for the years that follow. If staying in the home is important and you can make the payments, this might be as good a solution as your going to find.
Tough times and hard knocks can happen to anyone at any time, and unfortunately they do.
Many people have a temporary problem that causes them to go into foreclosure. Let me provide an example. An individual loses their employment and are not able to find a new job for 7 months. During this time their mortgage payment of $1,350 goes unpaid. The mortgage company files for foreclosure in the sixth month and starts incurring attorney and other expenses or fees that are chargeable to the mortgagor.
After securing employment, the homeowner sends in a double payment on the mortgage but the mortgage company returns the payment with a letter stating that they will not accept anything less than a full payment of all past mortgage payments, default interest, attorney and trustee fees and all other expenses and fees such as property “drive by” inspections etc to stop the foreclosure. The individual tries unsuccessfully to come up with the total payment required for about a month. The total now due to the mortgage company is 8 monthly missed payments of $10,800 and all other expenses and fees of $1,950 for a grand total of $12,750.
Based on the income from her new job, this individual is not able to come up with the total, but would be able to pay her old monthly payment plus up to $1,000 more each month. This homeowner has about 45% equity in their home. The homeowner does not want to sell or file bankruptcy. In this case, the owner may qualify for a refinance. The reality is that lenders do not want to loan money to someone who is currently in foreclosure. They are a very poor credit risk. But they may be willing to loan to someone if they are sure the loan will be secure and if they can make a very high return on the loan.
In this case, if the market is flat or going up, with 45% equity the lender may be willing to lien the house and make the loan. This is a D paper loan. The interest rate will be very, very high. It will likely require an adjustable interest rate that increases by maybe 2% per year or per 6 months and will have very steep points and closing costs. The lender will make the closing cost and points less painful by just adding these costs to the loan amount, but now the homeowner will owe a greater amount on their loan and the payments will be high, very high.
The risk is that the payments are so high that the homeowner is not able to make them, goes right back into foreclosure and now also has less equity in the home. The owner might also be giving up a very low interest rate loan just to come up with the money to bring that loan current and replace it with a very high interest rate loan. Most people are not able to refinance while a foreclosure is pending or even prior because of the number of mortgage late payments. But for those that want to stay in their home and don’t want to file bankruptcy it’s very tempting to try a refinance.
The person in foreclosure will receive dozens of letters promising they are pre-qualified for a loan. So many will trust those letters and rely on the refinance. A large percentage of those who try to refinance wait out the approval process and are then declined, not surprisingly, only days before the foreclosure sale. But don’t worry their lender says, we have an investor who can pay cash for your home and stop the sale. As you can imagine, the price is steeply discounted with few or no options left for the homeowner with such little time.
Another very common solution as stated above is to sell the property cheep to an investor and then rent back the property from the investor. The problem with this solution for the investor is that they will have to wait to get their money back out of the property. The longer they have to hold the property, the greater the risk to the investor. Depending how much available funds the investor has, they may be out of business quickly when they run out of money to buy houses. The cost to the homeowner is that investors will want a steeper discount if they are going to tie up their money renting the house back to the person in foreclosure. The benefit to the homeowner whose most important priority is to stay in the home, is that they can do so, usually at an affordable rental rate. The cost is steep as they give up a lot of equity to stay.
Research showed that most homeowners at risk of losing their home wanted to stay in their home rather than sell or move.
Following our research, we determined that the largest segment of those in foreclosure consisted of individuals that wanted to stay in their homes. So we chose to focus on the members of this group who had suffered a temporary setback and though they did not have the money to bring their loan current, could make their old payment plus a little more if given a second chance. These were people who were behind approximately 6 to 10 months. They were individuals who had lost employment or had a large expense that set them back such as a medical bill.
The program was called the “Cure Program”. The program is simple on its face, but somewhat complex in execution. The simple, easy to understand side of the program… I purchase the home and immediately stop the foreclosure by paying all missed mortgage payments, taxes, default interest, attorney fees, trustee fees and other foreclosure expenses and then make all necessary repairs to keep the property from deteriorating. I make all payments on the mortgage for twelve months while the seller pays rent to my company. The tenant signs a lease purchase option agreement allowing them to stay in their home with a reasonable rent payment and a guarantee that they can repurchase the property by making their rent payments on time for twelve months. The purchase price would include a 10% markup plus my out of pocket expenses.
This risk of the Cure Program is that if the seller doesn’t make their promised rent payments, they are subject to eviction. When a home owner misses a mortgage payment, the foreclosure process allows the mortgage company to take title and physical possession of the property through the foreclosure process. This process takes several months. When a tenant fails to pay rent, the owner only has to obtain possession and the process takes usually only a couple months. If the tenant is evicted, they violate the terms showing they are capable of making the monthly payments and will not qualify to repurchase the property.
Some people might think it is too harsh to evict the person not paying their rent. After all, they were the owners of the home. It is a very hard thing to do, but it’s necessary to protect the homes of all those other Cure Program participants who are making their payments.
Consider this business from a cash flow perspective. Each month there are approximately ten new Cure Program participants. The average cost to Cure a mortgage (bring all missed mortgage payments, taxes, default interest, attorney fees, trustee fees and other foreclosure expenses current) is about $12,000. I pay this cost out of a line of credit. So that’s $120,000 going out each month to save ten houses, plus the interest on my line of credit for all the previous loans I have taken to cure other mortgages.
In addition, I support employees and salespeople including office staff, an individual to knock doors of people in foreclosure to find participants, another to present the program and contracts to sellers and financial coach (I will tell you more about that later.) Then of course there is office space etc. Let’s say there are already 50 individuals currently on the program. Each month I pay the mortgage on each of these houses. The tenant in turn pays me their rent. The rent amount was calculated by taking the old mortgage payment plus 10% on the amount it cost me to reinstate the mortgage. So if someone had a mortgage payment of $1,000 prior to foreclosure, and it cost me $10,000 to reinstate their loan, their new rent payment would be $1,100.
Foreclosure investing can be a cash-poor business that requires long-term management and goals.
So if you add up all the cash coming in and subtract all the money going out, this is a losing business until the end of the year when people reacquire their houses. Each month the company will go further and further into debt for at least the first 18 months of business. Rents cover payments on mortgages and line of credit for cures, but all other expenses to run this company equals the debt racking up each month. So if there are 50 people on the program and I allow 5 to not pay their rent, how do I make the mortgage payments. I am committed to paying everyone’s mortgage and they must be committed to the rent. The harsh reality is that if they don’t pay, they can’t stay.
For those that are successful, the family gets to stay in their home, have the lowest payment of all the options available, regain ownership of the home if they prove they will make the monthly payments and, most importantly, re-establish their credit. While re-establishing credit is a lower priority for individuals in foreclosure because it is less of an immediate need than having a home to live in with a reasonable payment, it is a major part of having long-term financial success which will allow them to keep their home and finances in balance.
How does the person in foreclosure re-establish their credit? This is the part that is complex and the key to making the program work. It’s the details behind late night infomercials you may see on television selling Real Estate systems for little money down real estate transactions. When you sell your house to a new buyer, traditionally you sign a contract to sell, then at closing when the seller deeds the title of the property to the buyer, the sellers loan is paid off and the buyer obtains a new loan. There are basically two closings.
The closing of the sale of the house and the closing on the buyers new loan. I did not pay off the sellers loan when I bought the house. With full disclosure to the seller, I reinstated the owners loan by paying the sellers missed mortgage payments, taxes, default interest, attorney fees, trustee fees and other foreclosure expenses to bring the loan back into good standing. At closing, the seller deeded the property over to my business and signed all the rest of the documents to close the transaction. But there was no new loan.
With a deed of trust you can close on the purchase of a home without having to get a new loan.
Some of you might be saying, well you can’t do that. Yes you can. When an individual buys a house with a new loan the buyer signs a note promising to pay the debt. Then the buyer signs a deed of trust which attaches the debt to the house. By signing the deed of trust, the bank owns the house up to the amount of the loan and the buyer has the remaining equity. So when someone in foreclosure sells me their house without paying off their loan, the bank still has a lien on the house that comes ahead of my ownership. For example, lets say someone owns a house worth $100,000 and they have a first mortgage against the house of $70,000. This person dies leaving the property to their child.
Ownership of the property can transfer to the child without paying off the mortgage. Did the mortgage company lose anything when the property title transferred to the child? No, because they hold the first lien on the house no matter who has title. The only way to remove that lien is to pay off the mortgage.
An individual in foreclosure can sign a contract to sell, close the sale by deeding the house to the buyer and not pay off the mortgage. The new buyer owns the house “subject to” meaning they own the house, but the mortgage remains against the house in first position. When title to the property is transferred, the bank has the right to call the loan due. Meaning they could say, you have violated a provision of the deed of trust by transferring the property without paying off the loan. Therefore we have the right to call the note due, which means they could foreclose the home.
But banks do not call notes due for transferring ownership, it would be extremely rare. I have bought hundreds of homes without paying off the underlying mortgage and have never had a first mortgage call the note due. There is a huge benefit to buying a home “subject to” the mortgage for both the buyer and the Cure Program participant. The buyer only has the out of pocket expenses to bring all missed mortgage payments, taxes, default interest, attorney fees, trustee fees and other foreclosure expenses plus repairs to the house. The seller is able to re-establish their credit because their loan is brought current and stays in their name during the twelve month period we are making their mortgage payment. And the person in foreclosure is able to repurchase the property using their old mortgage as part of the purchase price if they so choose.
Imagine you get behind on your mortgage. Your credit report shows 8 late payments. You take no action and your house is lost to foreclosure. Now your credit report shows likely 8-11 late payments and a foreclosure. You now have one of the worst marks your credit report could show. Your credit looks really bad. The next person is behind on their mortgage payments and prior to the foreclosure sale sells the property traditionally or to an investor on a quick sale at a discounted price. This persons credit report shows a bunch of late payments but no final foreclosure. Another person has the same number of late payments and then a bankruptcy.
Obviously a bankruptcy on your credit report is also one of the worst marks you could have on your credit report. Another individual shows the same number of late payments, but is able to refinance their home mortgage to stop the foreclosure and then makes their new mortgage payments on time for the next 12 months. This persons credit report shows they had some trouble, but they were able to take care of it and have since shown they are able to make payments on time. This person has a much better looking credit report.
A Cure Program participant would also show the same late payments on their credit report. But then the credit report would show the loan payments were brought current and made on time for twelve months. This credit report tells a story. The person had a temporary set back, but they recovered and have made all their payments on time for a year. They are a much better credit risk and will be able to obtain credit and at much lower rates than the other individuals listed above. At the end of 12 months, they may be able to obtain new financing, if not, they have shown me they are a good credit risk and I will sell the property back and take the portion due me in a second mortgage. So they have title to the property again and are now making payments on the same original loan.
The paperwork: The person in foreclosure signed the following documents:
Disclosure stating that other options were available to people in foreclosure such as a Traditional Home Sale with a Realtor, Quick Sale Buy Out, Bankruptcy or Refinance and that we could help them with the Traditional Home Sale with a Realtor, Quick Sale Buy Out or the Cure Program.
Traditional Real Estate Commission Approved Contract to Sell their house.
Addendum to the contract explaining the “subject to” provision.
Closing paperwork including a Warranty Deed transferring title.
Lease to rent the house with Purchase Option Agreement.
Disclosures that the attorneys thought were important.
After the Denver Post article printed we added a form of one line disclosures with statements such as “I understand I am Selling my House”___, I understand I am signing a lease____, I understand if I don’t pay my rent I am subject to eviction____.
I had contacted an attorney before starting this business and with his assistance felt confident that we had all the paperwork necessary and had completely disclosed everything. I also contacted the Real Estate Commission who govern the licensing of real estate agents and explained the program. They didn’t see a conflict as long as I disclosed I was an agent in the contract to buy the house, which I always did. This same Real Estate Commission had little choice but to revoke my license after the newspaper article.
From the very beginning, the business was a huge success. We made up a flyer and my brother in law would knock the door and present the flyer to the individual in foreclosure. If they were interested he would set an appointment and I would go to the property to meet with the individual. I wold thoroughly explain the process. Every single person completely understood that they were selling their house, renting it back with a lease purchase option, the costs and the risks. Every person definitely understood that if they did not make their rent payments they would be evicted and lose the right to repurchase the house.
A homeowner doesn’t go through a foreclosure everyday, so they need to know their options and direction regarding available options.
After only a month we needed office staff and within a few months I hired my brother to do the in home appointments in my place. There was huge demand for the Cure Program and we were able to take on as many new transactions as we could handle. But within the first few months we had a couple tenants who were not paying their rent. It was inevitable that some would fail, but I was discouraged and considered shutting down the business. I discussed this with an advisor who suggested that the business was a huge success for many. He stated that the contracts created “leverage” to help homeowners learn new habits. “They just need someone to show them how,” he said. “You’re creating kind of a teachable moment here.” So we co-authored a book and created what we called Success Connection.
This individual was paid a salary to meet with each program participant once each month plus a bonus if they succeeded on the program. But still there were individuals who failed in the program. One of these individuals, a single woman, was the nicest woman you ever met. When she signed on with us, she had told us that the reason she fell behind was that she had lost her job and health insurance. She had very expensive medication and after paying for her other necessitates had no money left to cover the mortgage. But she had found new employment and now had really good insurance. She loved her home and wanted to stay. She seemed like a prime candidate for the program. Her first month she did not pay her rent. We called numerous times and sent letters but she would not respond. After two months, as required by law before beginning an eviction, we posted a 3 day notice to pay or vacate. She still did not respond so we filed the eviction with the court.
When the court day came I was there with a member of my staff who had handled all the attempts of communication. She told the judge that she didn’t want to lose her home but could not pay the rent. She had numerous letters that we had sent her sitting on the table in front of her still in the unopened envelopes. She was one of those that stuck her head in the sand, hoping things would work out. The judge gave her a phone number for legal aid and told her to get legal council.
Days later I received a phone call from David Olinger from the Denver Post. He stated that the paper would be doing a series in the paper focusing on foreclosures in the Denver area and would focus on foreclosure investors. I thought this would be a great opportunity to showcase our program. I invited the reporter into the office, allowed him to talk with my staff and review transactions. I explained the growth of our company and the success we were having along with the problems we were experiencing. He was surprised that people would sign their houses over.
I explained our program and compared it to other programs available. He thought there ought to be a program for homeowners in foreclosure that was much less risky and expensive. I compared other options to my program which he agreed were even less attractive but he thought people should just not lose their homes. I said maybe you should consider loaning your personal money to people in foreclosure. Then we went out on appointments together so he could see the demand for the program first hand.
Not long thereafter the first article was printed. The newspaper took the accusations of the lawsuit and stories of unsuccessful participants and dramatized it all. Someone who knows business or has an understanding of how the press can spin a story to a particular point of view may have thought well… Of course, they didn’t pay their mortgage, then they didn’t pay their rent, then they were evicted. That’s how it works when you don’t uphold your end of the deal.
The article made otherwise happy program participant who were succeeding on the program very nervous. Several of them and those who had failed on the program called the attorneys that lead to the article.
A few weeks later we went to deposition for the tenant being evicted above. My attorney asked her about the accusations made in her lawsuit and the newspaper article. As the attorney went through each one of the accusations, one by one, to our amazement, she told the truth all the way through. The accusations of the lawsuit were all together different from her testimony at the deposition. The only things we couldn’t outright agree on, she admitted she wasn’t paying attention or could not remember. But the major issues of the case, the accusations of fraud etc were no longer an issue.
After covering the major elements of the case, virtually everything going my way, we came to an agreement very similar to the terms of the initial contract except that we accelerated the transaction to the end of the twelve months. I hoped the newspaper would retract false accusations brought out in the deposition, but the newspaper had only printed the accusations and opinions. Retracting the mistakes didn’t sell newspapers.
The accusations her attorney made in the lawsuit, which were then printed in the paper, could not be taken back. During this time, business went on as usual. We continued signing new participants up for the Cure Program. About a month later, I learned that those who had called the legal aid attorney after the newspaper article had been referred to another attorney. The new attorney wanted a big check or he threatened he was going to file a class action lawsuit where he would be suing me representing every individual who had participated in the “Cure Program”.
People who were completely happy with the program, who thought I had saved their bacon, would be represented by an attorney they had never met or talked to unless I would write a six figure check to this attorney and sign over the houses. If not, he would attempt to sue for triple damages, exemplary damages, each person would basically get their house back free and clear and it would cost me everything. They had already tarnished my name and now they would be taking everything I had if I wasn’t willing to give them a big chunk. I flatly refused, but in retrospect, it would have been cheaper to pay him off.
So the class action was filed. The lawsuit alleged all kinds of fraud and dishonest dealing, but we weren’t worried about that. I had done nothing dishonest. My paperwork was strong and most people I felt would tell the truth. The concern was the accusation of “Equitable Mortgage” or “Equitable title”, which was something I had never heard of before, and could because of penalties wipe me out. The accusation was that I used documents that showed a sale, lease and re-purchase option, to disguise a loan as a sale. Then I went out to each of these individuals houses, offered to LOAN them money to stop the foreclosure and then used real estate sale documents to disguise the loan as a sale.
There was no case law in Colorado except a couple cases which dated back over 100 years. The decision of Equitable Mortgage came down to the intent of the parties. If the parties thought it was a loan then the papers would not matter. My attorney explained that the precedent cases were where an individual was about to lose his farm to foreclosure. A family member offered to loan the money, but required a deed for the property until being paid back. In this case the parties intended the transaction to be a loan but used sale documents to secure the loan.
If the courts thought the transaction was a loan disguised as a sale then the transaction would be considered a loan. If the courts considered the transaction a loan then I would have been obligated by laws that require loan disclosures and documents signed such as a good faith estimate of the loan costs and a truth in lending disclosures. If these transactions were loans and I did not make these disclosures the loans would be undone and I would have steep financial penalties. Worse, what undoing the loans would mean is that I would have no security for the loan.
Title would be given back to the people in foreclosure and I would have no security for the money I had paid to bring their homes out of foreclosure or repairs. In other words, I would have spent all that money and not received it back. Then all the triple damages and exemplary damages would be given to the individuals and their attorney. Effectively taking everything I had ever worked for and saved and redistributing my money to these individuals and their attorneys. So not settling was a major risk. But I knew I was in the right and aside of the money I wanted to make the truth known.
So we went to battle. The expenses for my attorneys for the first couple months were $40,000 to $60,000 per month as we fought to prohibit the attorneys from freezing my assets. We won the initial battles. Our strategy was to convince the judge that the attorney did not represent a class, meaning that their could be no class of people to sue since the accusations were not commonly shared. Our decision was to go out to each of the individuals houses and disclose the accusations of the lawsuits.
Then we would ask each of the individuals to sign an affidavit (included here and here). that could be used in court to refute the claims of the class action, while being taped with a notary present that the accusations were false, that they knew they were selling their house, they knew they were becoming a tenant, that they knew they had only an option to repurchase the house which they were not required to exercise and that we had never offered to make a loan of any kind. I was reluctant to believe that people would sign such a document because all they had to do was wait, let the attorney represent them and there was a chance they would go from being in financial trouble to possibly having a home free and clear.
They thought our option was so much better than the alternatives and were singing our praises as their home was removed from the foreclosure list.
When we signed papers with people who were about to lose their home, they were so grateful. They thought our option was so much better than the alternatives and were singing our praises as their home was removed from the foreclosure list. But things change when the home has been saved and now they are paying the price. I was very concerned that many would be happy to participated in the class action. For the next several months my attorney bills were over $100,000 per month as we went through this process. When we were done, I was very pleased that 54 agreed to sign the affidavit. Approximately 10 joined forces with the opposing attorney, most of whom had failed on the program and the rest refused to sign the affidavit but were also not adversarial. They just wanted to sit back and see what happened.
About a month later we were handed a victory from the judge. The victory was not that we had won the trial but that there would be no trial. Because most of the people involved directly denied that the accusations were true, the judge threw it out. My attorney told me to go out and celebrate. I thought for sure with 54 people directly denying the accusations by affidavit I would be able to get a little support from the Denver Post. Nope, it didn’t sell papers.
A few weeks later my attorney called to relay that the attorney from the class action was demanding a new check. Much smaller than the first, but he wanted a check to cover all his hours and expense put into the lawsuit. You see, he had taken the case on a contingency, meaning he received no money from his clients, but if he won or the case settled with a pay out, he would get a split of the loot. I told him where to go. He then filed about ten individual lawsuits representing each of these people and sent them into the Attorney Generals office to file complaints who also then filed suit.
We determined that I did not have enough money to make it to trial.
Several months more went by and the A.G. was filing motion after motion. The A.G. tried to freeze my assets. Then they tried to freeze the proceeds and income from the business. We won each of these motions, but I had now spent upwards of a million dollars defending myself. My attorneys called me into their office and we budgeted what the lawsuits would take to make it to the end. We determined that I did not have enough money to make it to trial. The A.G. on the other hand had bottomless pockets. There would never be a trial.
We went to see a bankruptcy attorney to plan for the inevitable. We paid him a retainer and he explained the process we would go through. He also told us about exemptions available in other states. We learned that in Florida and Texas they could not take your home through bankruptcy. We imagined Texas as dusty plains and tumbleweeds and we weren’t thrilled about Florida either. But the idea of getting out of the negativity and starting over was appealing. We had a friend that said Austin was beautiful, so we planned a trip. When we arrived in Austin we absolutely loved it. There were beautiful lakes and trees and rolling hills, great weather, restaurants, music, but we were most impressed by the people. It was an easy decision to move to Austin. In the meantime the lawsuits drug on in Denver. We let the other attorneys know that we were running out of money but would fight to the end.
I formed Irrevocable trusts for each of my five children and started a new company owned by the kids trusts. We funded the business with only $2,000 so that the attorneys in Denver could not touch the income or assets from that business.
After about a year in Austin we came to a settlement agreement on the pending lawsuits. The Colorado newspapers made it appear that the A.G. had won. The press release from the A.G. manipulated the truth to sound much worse than it was. We were never found guilty of anything. A judge never stated we had done anything wrong. The reason for the settlement was strictly financial. Once I realized I would never make the truth know through the papers, and that financially, I could not make it to the end, settling or running out of money were the only options. So I settled for a portion of what I had left.
It’s interesting that the Attorney General who is supposed to be protecting people from misleading and false advertising will bend the truth to serve their own political agendas. I never met the Attorney General for Colorado, but his attorneys that worked for him certainly were more concerned with press releases promoting the A.G. than printing the truth. Anyone reading the article by the Denver Business Journal would assume that the A.G. proved their case and were handed their judgment by a judge who determined they were correct.
They stated in their press release “The Colorado Attorney General’s Office obtained a $1.1 million judgment against Ryan Searle of Searle Homes Inc. on Aug. 6, culminating a 19-month-old lawsuit against the Denver real estate agent. In fact we came to a settlement agreement. No judge was involved. It was an agreement to give them about 1/4 of what I would spend fighting them. The biggest part of the settlement agreement was not cash, it was deeding properties that had loans against them so that there was little or no equity.
So approximately $750,000 of their judgment had no value. We also canceled notes and gave some cash totaling about $350,000. But it wouldn’t sell as many papers to say “Ryan Searle and the Attorney Generals office have reached a settlement agreement whereby Ryan Searle will deed $800,000 worth of real estate that has liens of $750,000, plus $350,000 in cash. Ryan Searle stands by his Cure Program, but determined it was better to settle for $350,000 than spend another $1,000,000 fighting the A.G.
The experience may be one of the best and worst events of my life. I made many mistakes, but have learned from them. I am happy to have had the experience. In the end, I learned a few things.
First, family is what matters most. My relationship with my dear wife and wonderful children are the most important thing to me. No matter what happens during my day, coming home to a loving wife and kids is the greatest thing in the world. Enduring this together only strengthened our relationships.
I learned that you can’t change others and it is wasted effort to try. I can only change myself and I am a work in progress. I learned to do what I think is right and then let go of the outcome.
I learned to forgive. Night after night I lay in bed feeling the anger flow through my body. It was eating me up. The class action attorney’s faces and accusations replaying in my head as they twisted the truth to make their case. Once I frankly forgave them I felt all the better.
I learned patience. I spent years wanting to get to a trial day that never would arrive.
From a business perspective, I gained many risk reducing lessons. The foreclosure business is inherently litigious. And if you have significant real estate holdings you are a major target for lawsuits. Attorneys can easily calculate your wealth in real estate. A portion of the grateful sellers in foreclosure may be singing your praises for buying their home out of foreclosure, for the equity they were able to pull out and for allowing them to avoid a foreclosure on their credit report. But once the seller moves out, they quickly forget about all that and their focus turns to the profit you made reselling their house. You become a villain who stole equity from them.
It may not matter if your contract and disclosures are perfectly written. If the seller sues, you are instantly the evil investor who profited from a family that was about to lose their home. The odds are against you. Even if the court doesn’t show unfair favoritism to the seller in foreclosure, you may spend a fortune. The seller on the other hand will likely spend no money on the lawsuit. If you have substantial assets, hungry attorneys will take the case on a contingency, meaning they get paid a portion of what they are able to squeeze out of you. Only a fraction of lawsuits make it to trial.
It will be much cheaper for you to just write a check and settle, no matter how right you are.
The other attorney will probably offer to settle for just less than the lawsuit will cost you. It doesn’t matter who is right and wrong. If you are short on money to defend yourself, the seller will likely win as the attorney on contingency will have almost no cost other than his time. If you run out of cash they will likely get the house. It will be much cheaper for you to just write a check and settle, no matter how right you are.
But there are steps you can take to avoid lawsuits. While my lawsuit was very expensive, I learned important lessons to significantly reduce my risk of litigation. First, just buy the property. Do not under any circumstance offer to lease the property back to the seller or help them in any other way. Require that they move out on the day of closing. Unfortunately, helping the seller, beyond purchasing the house, increases your risks of lawsuit dramatically.
Second, require that the seller have an attorney review the documents. No matter how perfectly you disclose everything in your contracts, and even if you read the entire contract to the seller, the attorney will likely accuse you of fraud, of saying something contrary to your contract. When I buy a house, if its not at an auction, I require the seller to review the documents with an attorney prior to closing. The choose the attorney and I agree to pay up to $395 of the cost to ensure it gets done.
Lastly, the most important thing you can do to avoid litigation is to set up your assets in such a way that the attorneys will have no desire to take a case against you on a contingency. Set up your assets so that you personally own nothing.
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