A couple of young realtors I work with recently asked
me why, when requesting a seller take back 2nd mortgage, we have to
put a line in the agreement of purchase and sale that goes something like this,
“the seller shall provide a seller take back second charge to the buyer upon
completion in the amount of ten percent (10%) of the purchase price,
postponable to a first mortgage not to exceed eighty percent (80%) of the
Here’s why. It’s to prevent over-leveraging by the buyer and
Back in the dirty 30s, during the Great Depression
and the dust bowl era, Yankee carpetbaggers made their way to the great state
to buy up farmland from naïve Okies.
Here’s what they did:
Lucas, an Oklahoma
farmer with 300 acres and a homeplace, was down on his luck. Fierce winds were
turning the state into a dust bowl, crops were failing left and right, crop
prices had fallen way below costs… so after many generations, it looks like Lucas
and his extended family have to go down the road, west to California.
Along comes a dandy from New York who makes the following offer: “I’ll buy
your land including your homeplace for $10 an acre. That’s $3,000 for you,
Lucas knows that $10 an acre is about the right price
in these dark times so he figures, what the hay, I’ll take that $3,000 and start a
new life in the golden state.
He spits on his hand, and shakes with the New York
financier/wheeler-dealer, who winces at the touch of saliva but shakes anywho.
Next, the financial engineer pulls out a pre-prepared
contract, which Lucas can’t read because he’s illiterate, but still he takes the word of
the damn Yankee that it’s all on the up and up. So Lucas makes his mark. He has
sold his place for $3,000.
But wait a second. What Lucas doesn’t know is that
he’ll only get 10% down ($300), the rest is to come “later.”
The finance guy knows that there are three
components to every legal contract—offer, acceptance and consideration—so he
pulls out a wad of cash and peels off $300, and gives it to Lucas. That’s the
most money Lucas has ever seen at one time.
The rest will come later, the financier reassures
Lucas and his boys go buy a 1924 Model TT Ford
flatbed Three Quarter Ton Truck for $120, keeping the rest of the money for
fuel, repairs and food. Then, with three generations of people and all their
goods packed on top of a rickety suspension, they head out to California secure in the knowledge that the
balance of their money will be coming in due course…
The maximum speed and power of their truck when it
was new was 43 mph and 27 hp, but by the time these Okie sodbusters got a hold
of it, it was probably half that. So it will be a pretty slow trip across America to get to the Pacific
Meanwhile back at the ranch, the Yankee is colluding with a willing and equally corrupt appraiser to get the value of the land reassessed at $20
an acre or $6,000.
So now the financial engineer arranges a loan (a first charge,
ie, a first mortgage) with a New York-based lender at a LTV (loan to value) of
75% of appraised value or $4,500.
So this is what this transaction looks like
pp, purchase price $10/acre for 300 acres = $3,000
reappraisal $20/acre or $6,000
new first mortgage 75% LTV or $4,500
2nd charge (Lucas’ mortgage) $2,850
total mortgages on property now = $7,350 greatly
exceeding its FMV of $3,000
From the financier’s point of view, he’s out $300
in cash (the deposit he seduced Lucas with) but he pocketed $4,500 in cash when
the new first mortgage was put in place so he nets out $4,350 in cash when the
deal is done.
Of course, the guy never pays Lucas another dime. Nor does he service the first mortgage debt either.
If Lucas and his family ever return to reclaim/foreclose on the Yankee, he/they
will find that the bank is ahead of them, and wants to get paid out for its loan
(remember, it’s in first place) of $4,500 plus unpaid interest plus legal fees incurred for enforcing its security.
There is no possibility Lucas and his family can
ever come up with that kind of dough, so his seller take back mortgage is
valueless and his land is gone.
If the financier does this to 100 gullible
sodbusters, he’ll have made $435,000 in just a few months.
Converting a USD in 1935 to a 2017 value means
multiplying this number by 18.02 (source: http://www.dollartimes.com/inflation/dollars.php). That is, the financier made $7,838,700 in
today’s money by ripping off these already impoverished people.
Obviously, he skedaddled out of there shortly
thereafter never to show his weaselly face again in Oklahoma lest it get shot off the top of his
Later on, these scoundrels got more
sophisticated—they set up three way trades to disguise what they were up to.
That’s the “Wayne Newton Arabian Horse” scam… which you can read about that here, http://profbruce.tumblr.com/post/157352006089/mortgage-fraud.
Suffice it to say, what’s the number 1 thing in
So surround yourself with realtors and coaches that
you can trust. We’re available.
Bruce M Firestone, PhD
Century 21 Explorer realty broker
Real Estate Investment and Business coach
postscript: this story may also give you some clue
as to what the most profitable business on this planet is—it’s banking. What
other industry can afford to pay know-nothing 30-year old Wall Street
investment bankers average salaries of around $900,000 USD a year? What other industry
can get away with selling “triple-A” rated mortgage backed securities that are
in actuality dog meat? What other industry can bet against the very products they’re
selling to grandmothers and pension funds (by shorting them) so when they crater,
they make another boatload of money? And none of the Gold In Sacks or other
financial engineers ever went to jail, in case you are wondering about what happened after the Great Reset of 2008/09.
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