Are we getting the whole story about this condo purchase gone bad?

In the Feb 20th Seattle Times edition there is a story about 6 immigrants that are suing because of what they believe to be bad behavior on the part of the preferred lender and the developer of a Bellevue condo project. Just reading the headline got me on edge. Here’s why…

We start out with being notified this immigrant buyer was attempting to purchase a $1.5M condo on a $20k a year annual salary. WHAT? You’ve got to be kidding me. Even just hearing those two numbers in the same sentence regarding a purchase already smacks of seemingly ridiculous hopes of someone thinking they won the Lotto. There is NO WAY that someone at that income level would be able to afford or qualify for a condo or home at that price point. I’m annoyed that an agent was involved in recommending (or say they say) that this person buy a condo – not because I don’t believe in people having the joy of homeownership – but because the agent most likely is aware that this person was putting in an offer on a property that they could not afford. In my initial consults with new clients we discuss their income levels and seek out pre-approval status prior to looking at any properties.

Here are some of the additional items of concern for me about how the buyer behaved:

Borrowing $75,000 for earnest money – was the lender made aware that this was his source of funds? Most lenders I know REQUIRE knowing where the funds are coming from, especially if they are borrowed, and there is usually a seasoning requirement of up to 60 days, if not longer. In this scenario it is very likely the friend is expecting an interest return when the money is repaid so this must be evaluated by the lender as well. The lender must assess all debt-to-income ratios and borrowed EM or down payment funds would qualify under this definition. They didn’t say this money was a “gift” but that it was borrowed. HUGE red flag.

There are over 400 posts of comments on this story and several of them reference publicly found information about these so called targeted and taken advantage of immigrants. Some of those items found are that the individuals in this story have been party to several purchases of property over the past 5-7 years and that they have also been the subject of at least 2 foreclosure processes on recent purchases. Hmmmmm…. smells like speculative investing to me.

My business partner and I walked away from a whole lot of these in the past several years because in many cases outright fraud was happening. Did you know that lying on a mortgage application is mortgage fraud and is a felony? Many people we spoke to in first consults would tell us that they’d be letting their lender know that they intended to purchase as owner-occupied while knowing that they had no intention of ever residing on the premises. You wouldn’t believe how many people were amazed to hear they were committing a felony by doing this. I would tell them that we weren’t interested in doing business with anyone who would be involved in this kind of practice and if they were set on this being their method of writing up contracts they’d have to find another agent to do it as I wasn’t interested in losing my business (which is what would happen because I’d lose my license permanently if involved in this kind of fraud) just to help them make an additional $5k on a single deal. Many people went and found other agents to work with, so I can sleep at night knowing I work with ethical clients. The thing is, these people who were lying were just hoping to save a 1/4 to 1/2 percentage point on the loan’s interest rate or to by-pass the investor ceiling limit put in place by the developer.

Most builders were putting in anywhere from 5-20% maximum investor purchases in their projects. Why would a builder put in these restrictions? Numerous reasons.

1. to keep from having to compete against investors in the resale of product.

2. to keep the values of the development up.

3. limit risk of the project.

4. to meet lending guidelines for the development.

In fact, some builders went so far as to start putting into their contracts language that limited the ability of purchasers to sell their properties within the first 1-3 years of ownership or they’d have to forfeit any gain on the property. Kudos to those that did and some of these developers actually had to take some sellers to court – and won. The agent’s involved in those transactions also had to give back their commissions earned as those funds came from the gain on the property value.

You see, most developments have phases built in to them and builders don’t want to see investors buying up in the lower cost early phases only to turn around and be reselling as they are continuing to try and sell their additional phases. If the investor has reasonable gain then they might be willing to sacrifice pricing to turn around the property and that hurts the overall neighborhood values. Much like what bank owned and short sale homes are doing to neighborhoods all over the country right now – depressing values.

It’s a shame that the Seattle Times didn’t do better research on the supposed “victims” in this story. My guess is that it was a strong headline grabber and it followed closely on the heels of Danny Westneat’s story of a man who lost his $14,000 earnest money to VEER Lofts. But in that case, I do feel somewhat sorry for that man as lending standards changed and he was most likely a realistic candidate for purchasing back then. VEER is one of the least expensive developments that Vulcan is building so I know that the prices aren’t that high. Most are around $250k – $400k and I’ve looked at them for clients of mine that qualify for that kind of lending amount. Follow up on his story showed many feeling sorry for the man and believing the developer should return the lost earnest money.

It seems that the comments for the $1.5M condo story are weighting much more on the side of people realizing that there is likely greed at play in this scenario and no one is feeling sorry for these folks. Many still blame the business people involved and I also believe that they’ve done a shoddy job, but when you have a buyer who is likely lying to start out with, no one is going to get it right. Methinks the couple shown in the story and their friends may want to be aware that it’s possible they will have legal action taken against them for mortgage fraud or at least that will be the defense of the developer if this goes to court.

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Are we getting the whole story about this condo purchase gone bad?

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Are we getting the whole story about this condo purchase gone bad?

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