Caveat Emptor, Baloney, and Thou
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Editor’s Note: This article first appeared in the October 1972 issue of the Real Estate News Observer.
In response to inquiries about the dangers of over-creating paper above the reasonable market value of a property, I would like to outline danger areas from a broker’s point of view.
If your client owns a property with a reasonable market value of $30,000 to $33,000 with a $20,000 first loan on it and creates a $16,000 second trust deed with which you acquire a second property for him, then you are a participant in an over-creation situation.
If the payments on the created second are made until paid, then perhaps no one would ever know. But if the beneficiary had to foreclose and then found he only had a $30,000 property after foreclosing his $15,000 to $16,000 note, you and your client would have problems, which could result in any of the following:
1. “At best,” your name and reputation would be MUD with that client.
2. Attorneys tend to feel that created paper carries personal liability, and a lawsuit is therefore probable.
3. As the broker in the deal, you very well might be involved because a favorite pastime of some attorneys is called “Hang the Broker.”
4. There have been some cases of over-creation in which brokers have been prosecuted. If a suit against the broker is successful, it will probably mean that the broker will lose his or her license. Should this problem reach any degree of magnitude, I predict you will see repressive legislation passed, either prohibiting activity of this nature or requiring a formal appraisal along with other limitations on the creation of paper.
Caveat Emptor — “Let the Buyer Beware” — you say? BALONEY!
Tell that to the judge—and remember that the types of experts he usually sees in court are appraisers, bankers, etc. who think in strictly conventional real estate terms.
The so-called “Creation of Wealth” formula, if properly applied by using good business practice and common sense, is one of the finest formulas available in creative real estate. The name can be deceptive because we are really unlocking some equity by creating an OBLIGATION that should have “legitimate equity” behind it at the time of its creation.
Just like a knife, this tool can be used for good or evil. Use it carefully and wisely for the benefit of all.
The Arizona Association of Real Estate Exchangors has adopted within the roundtable sessions a table for broker-owned packages. This allows brokers the often-needed opportunity to change their personal inventories.
