Be very careful when acting as a foreclosure consultant. Several states are implementing new laws. For instance, in Illinois you can be in real trouble if you don’t offer the seller at least 82% LTV.
Here’s what happened recently in Michigan: Here is a recent case:
The London v. Gregory Decision
In an unpublished decision, the Michigan Court of Appeals upheld a trial court decision declaring that a deed given by an owner in foreclosure would be treated as an equitable mortgage, where the facts indicated the parties had unequal bargaining power and there was inadequate consideration for the conveyance. The case is London v. Gregory, No. 216473 (Mich. Ct. App., Feb. 23, 2001).
Here’s what happened. Virginia Gregory was the owner of real property against which a mortgage-foreclosure action had been filed. Two days before foreclosure would be final and the owner’s equity of redemption period would expire, Ms. Gregory entered into an agreement (without the assistance of counsel) whereby she conveyed the property to Leslie London by a warranty deed for $1. In consideration for this transfer, Ms. London agreed to redeem the property (for the redemption price of $38,231) and lease it back to Ms. Gregory for eighteen months at a rental of $400 per month. The agreement also provided Ms. Gregory with an option to repurchase the property at the end of the eighteen months for $48,239. This purchase option could be exercised only if Ms. Gregory made all rent payments on a timely basis. As it turned out, Ms. Gregory made only one rent payment, which was late. At the end of the lease term, Ms. London served Ms. Gregory with a thirty-day notice to quit, and commenced eviction proceedings.
But the trial court (the district court) declined to evict Ms. Gregory, instead ruling that Ms. Gregory could remain in possession of the property and that the deed would be treated as an equitable mortgage – presumably requiring Ms. London to enforce her rights via a new foreclosure action. In so holding, the court noted potential inequity in allowing Ms. London to acquire this property, which was worth (according to the court) approximately $120,000, for an outlay of only $38,231 (the amount paid to redeem).
Ms. London appealed, and the circuit court upheld the trial-court decision. Ms. London appealed again. On appeal, Ms. London argued that the lower courts erred by refusing to hear testimony about the intention of the parties in entering into their agreement. Specifically, Ms. London claimed that she was not a mortgage lender, that there had been no loan application or discussion of a “loan,” and that there had been no discussion of Ms. Gregory’s financial condition or ability to repay.
The Court of Appeals affirmed, again. Acknowledging that “(t)he controlling factor in determining whether a deed absolute on its face should be deemed a mortgage is the intention of the parties,” the Court nevertheless said that “(s)uch intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale. Under Michigan law, it is well settled that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price for the property, is sufficient to establish a deed absolute on its face to be a mortgage (internal citations and quotations omitted).” Id. at *4-5. Commenting that “(t)he facts of Koenig are remarkably similar to those of the instant case,” the Court found that in this case there was inadequacy of consideration, unequal bargaining positions, and an apparent intention on the part of Ms. Gregory to obtain “a loan that would enable her to redeem her property and extend the debt for eighteen months.” Id. at *5. With that, the Court held the deed would be treated as an equitable mortgage.
Just make sure you cover all your bases. You’re taking a real chance allowing the seller to remain in the property in a pre-foreclosure situation.