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Equity Stripping in Minnesota

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					In recent years, this practice has become more commonplace due to rapidly
increasing housing prices combined with high foreclosure levels. These
factors create the perfect environment for equity strippers –
unsuspecting homeowners who have unknowingly built a large amount of
equity in their property and many homeowners going into foreclosure.While
equity stripping schemes come in many forms, all schemes are centered
around the equity stripper obtaining the title to the property at well
below market value. Typically, equity stripping schemes begin in the same
fashion. The equity stripper combs publicly available information for
property that is in foreclosure or is going into foreclosure. The equity
stripper will directly or indirectly contact the owner of the property,
offering to “help save the home” or to “help stop the
foreclosure.”Once an interested homeowner is located, the equity
stripper will commonly acquire ownership of the property in one of two
ways. The first way this scheme is carried out is by employing simple
fraud upon the homeowner. Typically, the equity stripper will have the
distressed homeowner provide a warranty deed to the property under some
false representation. Commonly, the representation is something to the
effect that the deed is necessary to begin a refinancing process. As soon
as the deed is obtained, with the equity stripper paying substantially
less than the value of the property, the equity stripper files the deed
and then proceeds to evict the homeowner. Once the former homeowner is
evicted, the equity stripper is free to sell the property at market value
and pocket the difference from what was expended to obtain the
property.More commonly used in the equity stripping process is a
reconveyance-type of a scheme. Essentially, this type of scheme is set up
so that the equity stripper acquires title to the home with a promise of
putting title back to the homeowner sometime in the future. Typically, in
this type of scheme, the homeowner is aware that they have transferred
title and they believe that they will eventually reacquire title to the
property.Commonly, the initial transfer of the property to the equity
stripper is done by way of a purchase agreement and deed whereby the
equity stripper pays the homeowner (or the sheriff or mortgage company) a
value roughly equivalent to the amount needed to recover the property
from foreclosure or to prevent the property from going into foreclosure.
Once the initial transfer is completed, the recoveyance typically occurs
sometime shortly after the initial conveyance and many times this
reconveyance is done at the same closing of the initial conveyance. Most
often, the recoveyance is in the form of a Contract for Deed or a lease
with a purchase option back to the homeowner. These forms of recoveyance
are favored by equity strippers because they allow the equity stripper to
rapidly rid themselves of any interest the homeowner may have in the
property upon a default of the Contract for Deed or the lease provision
by the homeowner.Typically, the homeowner pays a repurchase price that
substantially exceeds the costs of the equity stripper in acquiring the
property but still may be below market value. The homeowner usually pays
rent or Contract for Deed payments that exceed the equity
stripper’s monthly expenses to own the property and commonly, the
repayment on the Contract for Deed or the monthly rental payments are
structured with an expectation by the stripper that the homeowner will
default.Once a default has occurred, the equity stripper proceeds to
cancel the Contract for Deed and evict the homeowner. Thereafter, the
equity stripper obtains the right to sell the property at market value
and pocket the difference between the sale price and the amount expended
to obtain the initial transfer.There are numerous legal theories upon
which a homeowner may combat the equity stripper. In Minnesota, state law
regulates these transactions and the homeowner should first check to see
if the transaction which was entered into complies with state law.Another
legal theory commonly employed by the effected homeowner is the theory of
“equitable mortgage.” This theory allows courts to look past
formal sale/reconveyance documents and, in certain circumstance,
recharacterize the transaction as mortgage refinancing rather than an
outright sale of the property. Essentially, the court will look at the
substance of the transaction over the form.If the transaction as a whole
appears more like the equity stripper has loaned the homeowner money
secured by an interest in the property, the courts may find that an
equitable mortgage exists. The advantage in establishing an equitable
mortgage is that the homeowner will be held to retain title to the
property and gains the right to the foreclosure procedure. The homeowner
will also retain the right of redemption upon foreclosure.Additionally,
by successfully having this type of transaction recharacterized as an
equitable mortgage, the homeowner may also be able to assert that the
“loan” made by the equity stripper violates usury laws. As a
result, the debt may be abolished in certain circumstances.Because equity
stripping takes many forms, there are other legal theories besides
equitable mortgage that may help the homeowner combat the equity
stripper. A violation of the Homeowner Equity Protection Act (HOEPA) and
a violation of state unfair and deceptive acts and practices are also
common legal arguments that may be employed.Because the schemes used by
equity strippers vary tremendously, a victim of equity stripping should
immediately consult an attorney to determine what legal theories, if any,
may be useful for protecting their rights.Equity stripping is a predatory
practice by unscrupulous individuals designed to identify vulnerable
homeowners.

				
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